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By Clayton Brown
(Sponsor Content)
The CRA might not exactly be falling over themselves to help you get a nice tax refund. A recent audit showed the agency blocked more than half the calls it was getting (that’s 29 million calls out of 53.5 million) because … well, it just could not handle all of the call volume.
And even when Canadians did get through, agents gave the wrong information about 30 per cent of the time. So, Canadians might need a little help in figuring out how to file their taxes the right way; ideally, so they get the maximum refund they deserve.
Here are some things you can do around tax time to make sure you get the money that should be coming to you:
Take your deductions and claim your credits
The CRA likes its revenue but successive governments have created various options to give the taxpayer some breathing room. Deductions are one of the few variables in your favour, lowering your taxable income, so make the most of them.
Probably one of the best known ones comes from RRSP contributions.
You can contribute up to 18 per cent of your previous tax year’s earned income, plus unused room carried forward from previous years. This helps you pay less tax now, and assuming your income is lower in retirement, also helps you pay less tax later on. By now, you should have all your RRSP receipt slips from your financial institution. (Make sure you keep those receipts, in case auditors come calling).
Another tactic: claiming deductions for child care costs. The government wants to encourage parents to buff up their skills and improve their job prospects. For instance, you can deduct up to $8,000 per child who is under 7 years old. For children aged 7 to 16, you can deduct up to $5,000 for those eligible child care expenses.
Canadians can also claim the interest on certain student loans as a credit. This credit is not like a deduction (where a $1 deduction translates into $1 less taxable income, up to a limit). However, it can still significantly lower a tax bill for those struggling to finally pay off student debt after they’ve finished school.
There are many more deductions and credits available, so don’t leave money on the table!
Love those Spousal RRSPs
Marriage is a beautiful thing. Being with the person you love, sharing memories … and don’t forget about those tax advantages! (Technically, they also apply to common-law spouses, so you don’t have to get hitched to reap the rewards).
These tips generally apply where one spouse earns quite a bit more than the other. In that case, it can make sense for the higher-earning partner to contribute to a Spousal RRSP.
So, let’s say Ned makes $80,000 in salary at his engineering job. Meanwhile, Ned’s wife, Claire, earns just over $50,000 as a manager in an electronics store.
They are both contributing to their own individual RRSPs (Ned saved $6,000 in his. Claire saved $4,000). But Ned also puts $5,000 into a Spousal RRSP. Since Claire’s income is lower, she is the holder of the Spousal RRSP and she will be the one withdrawing income from it. The ideal result, if they’re doing it right: when she makes a withdrawal, it will be taxed at a lower rate than if Ned withdrew it from his own RRSP.
It’s also possible to split income from a government pension, non-registered investments and CPP, but doing all of it might be more complicated than it’s worth. Check in with a financial adviser to understand the right strategy for you.
Reinvest your tax refund
Now, you already know that you can increase the chances of saving on taxes, or getting a tax refund by making the most of deductions. When you get that refund, if you reinvest it every year, you’re getting some serious bang for your buck.
Let’s say you’re getting a tax refund of $1,620 a year, which is close to the actual average tax refund that Canadians got in 2016. Let’s assume you get this refund by contributing $5,400 into your RRSPs (30% marginal tax rate). If you reinvest that $1,620 figure every year, with a rate of return of 5.5%, you could be looking at an RRSP worth nearly $600,000 in 30 years. That compares nicely to roughly what you would have saved up otherwise, a difference of roughly $173,262!
If your income is going to be lower in retirement than while you’re making the contributions, then this makes is another way to grow your wealth and optimize your tax savings.
Stop giving the tax man more than he deserves, and maximize your nest egg over the long term.
Clayton Brown is a Financial Adviser for WealthBar, a robo-adviser. WealthBar provides unlimited financial planning with lower-fee ETF portfolios and actively managed Private Investment Portfolios. Through their financial advisers, easy-to-use online dashboard and financial tools, they make investing more accessible to all Canadians.
