This time of year, income taxes are naturally on our minds. Many of us feel we pay too much tax. There are actions we can take to help minimize these liabilities, which may be even more important in these times of high inflation. Here are some ideas:
Consider the Support of a Tax Professional
The support of accounting or tax professionals may be beneficial to ensure your tax planning accounts for the most updated rules or to help prevent costly mistakes, such as incorrectly completing tax returns or neglecting to claim tax credits. It may also be helpful in more complicated situations, such as where a divorce is involved or if you hold a significant portfolio of foreign assets. As we grow older, it can provide continuity from year to year, which may be important in the event of health issues, incapacity or the death of a spouse.
Remember that Tax Rules Continue to Evolve
The tax landscape continues to evolve. One example is the array of Covid-related benefits introduced over the past two years. Since the start of 2022, the Canada Revenue Agency (CRA) has announced tax changes that may impact certain tax positions. While these changes may not apply to personal income tax season, they are examples of the evolving landscape:
• Work-from-Home Tax Credit — As with the 2020 tax year, the CRA has again issued a simplified Form T2200 available to taxpayers for both the 2021 and 2022 tax years and has allowed a claim for up to $500 of home expenses.
• Automobile Deduction Allowance — For 2022, the limit on the deduction of tax-exempt allowances paid to employees who use personal vehicles for business purposes has increased by $0.02, to $0.61/km for the first 5,000 km driven and $0.55/km thereafter (for provinces). Mileage rates were last raised in 2020.
• Expanded Trust Reporting — Expanded annual reporting requirements for trusts were anticipated for the 2021 tax year, but in the first quarter of this year the government confirmed that this was still pending. Draft legislation is expected to be passed for trusts with taxation years ending after Dec. 30, 2022.
• A Pending Luxury Tax? — The 2021 federal budget proposed a luxury tax that did not come into effect starting 2022. Draft legislation is expected, but at the time of writing has yet to be introduced. The proposed levy is either 10 percent of the purchase value above a certain threshold ($100,000 for cars/aircraft; $250,000 for boats) or 20 percent of the full value, whichever is less.
Make Tax Planning a Year-Round Exercise
Year-round tax planning can start with maximizing tax-advantaged accounts like Tax-Free Savings Accounts (TFSAs) or Registered Retirement Savings Plans (RRSPs). It may include adjusting asset location as investment returns — bond interest, Canadian and foreign stock dividends, capital gains — may be taxed differently depending upon where they are held, i.e., RRSP, TFSA or non-registered accounts. When it comes to your wealth plan, we’re here to discuss tax-planning opportunities to help you keep more of your hard-earned dollars.
Put Your Potential Refund to Work
If you receive a tax refund, what will you do with it? Each year, 19 million Canadians receive a refund averaging $1,801. Yet, only 18 percent plan to invest it in a RRSP, RESP or TFSA. Consider the potential upside: investing this amount each year for the next 25 years at an annual rate of return of 5.5 percent would yield almost $100,000 in that time.
For assistance with tax-related matters or for an introduction to an accounting professional, please call the office.
This article was originally published in the Spring 2022 newsletter, "Challenging the Trend." Click here to view.