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20 Items not to miss for your Income Tax Return this year
For this article on Tax Season 2011, we asked members of our RBC Wealth Management Services team who work with Investment Advisors to provide advice and suggest tax-effective strategies relating to financial and estate planning. You are invited to share this article with your accountant or ask for more detail from your Investment Advisor. We will follow this article in March with “2012 strategies to enjoy even more savings next tax year”.
Below, are key deadlines, deductions and savings available this year which you may consider when filing your taxes.
1. Hope you didn't miss – January 30 was the annual deadline to pay interest on Prescribed-rate Loans. If you set up a spousal loan or loaned money to a family trust, this is the last day that interest on prescribed loans needs to have been paid. Not paying the interest results in the whole loan structure collapsing and losing the tax benefits of setting up the loan in the first place. This means that the attribution rules will make all the income earned in the spouse's hands taxable in the lender's hands. Please contact your accountant if you missed this deadline.
2. Leap year! February 29 – you still only have 60 days after the year end to make an RRSP contribution. Because 2012 is a leap year, that day is February 29th and not March 1st like last year.
3. March 30 deadline if you over-contribute to your RRSP – if you did over-contribute to your RRSP at any time during 2011, you will need to fill in the Canadian Revenue Agency (CRA) form T1-OVP to calculate the over-contribution penalty. March 30 is the last date to file this form and pay the penalty without incurring another penalty for not filing the T1-OVP. Please note: a T1-OVP is expected for each year that an over-contribution position occurred. You can contact the CRA directly (1-800-959-8281), or visit www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html to look up your contribution limit.
4. If you sold small business shares you may qualify for the capital gains exemption – If during 2011, you were in possession of small business shares and sold them, you may be eligible to shelter up to $750,000 of capital gains.
5. Not all inheritances are tax free – if you were named as the beneficiary of someone's RRSP or RRIF, the full fair market value is paid to you and the tax is paid by the estate. The income earned on a RRIF from the time of death could be taxable to you if you are not the deceased's spouse. Also, if the estate does not have enough money to pay the tax on the amount you received, CRA can come to the named beneficiaries for the tax owed.
6. If you borrowed money to buy income-producing investments in 2011 – you may be able to write off the interest you paid on the loan. There are restrictions, so please contact your accountant to determine whether this applies to you.
7. Charitable Donation Tax credit – donations you made in the current year plus any made and not deducted in the past five years can be deducted on your 2011 tax return. As well, donations made by both spouses can be claimed by one spouse (usually the higher-income earner) to lower overall taxation for the family.
8. Medical expenses – you may be entitled to a non-refundable tax credit on your medical expenses. Expenses above 3% of your net income or $2,052 - whichever is less - qualify for this credit. It may be more advantageous for the lower income spouse to claim the credit as their income threshold is lower. In some situations, the lower income spouse is already paying very little or no tax at all and the credit is better claimed by the higher income spouse.
9. Include the interest – the interest you received on your 2010 notice of assessment should be included as income on your 2011 tax return. CRA is aware you received it, so it is best to readily claim it. Although there are no specific penalties for not claiming it, CRA will simply adjust your return. See point #3, if you need to contact CRA or visit their site to look up the amount.
10. Pension income splitting – consider splitting up to 50% of your eligible pension income with your spouse (or common-law partner) to lower your overall family tax bill. It doesn't mean you physically have to give half your pension income, now or after you add this to your return, to your spouse. In fact, the decision about how much income to reallocate can be delayed until it is time to prepare your income tax returns for the year in which the income was received by the pension holder. For example, if the higher-income earning spouse is earning $75,000 of eligible pension income and the other spouse is earning $25,000 of income, the high-income earner can transfer $25,000 of their pension income to the lower-income spouse so both will have taxable income of $50,000. This will save the couple approximately $1,500 in taxes (differs by province) and the total income received remains at $100,000 for the household. By reallocating family income, not only will you be likely to reduce the overall family tax bill owing to CRA, you may also avoid having your Old Age Security (OAS) or other income-tested government benefits reduced.
11. Unpaid tax installments – if you owed $3,000 or more in 2010, you were likely requested by CRA to pay tax by installments in 2011. Installments were due by the 15th of March, June, September and December. If any of your installment payments were late over the year, you will be subject to interest and possible penalties.
12. Tax-Free Savings Account (TFSA) – if you had an excess TFSA amount (meaning you over-contributed), you are liable to a tax of 1% on your highest excess TFSA amount for each month where this was the case. This 1% may be in addition to other penalty taxes owing. If penalty taxes on the TFSA are payable, an RC243, Tax Free Savings Account (TFSA) return must be filed by June 30, 2012.
13. Pension tax credit – make sure you claim the pension tax credit on eligible pension income received in 2011 (mostly pension incomes received after age 65) to receive up to $300 in federal tax savings. There will also be a provincial tax savings which varies by province.
15. Tax savings when caring for parents
16. Other tax credits – there are many tax credits for individuals in Canada. Some vary by province. For a list of credits available in your province, click on the following link for CRA's “Provincial and territorial tax and credits for individuals”: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/prvncl/menu-eng.html?=slnk.
17. Capital gains, interest and dividends – in Canada, dividends are taxed more favourably than interest. If you have no other types of income, there is the ability in Canada to receive a substantial amount of dividend income (up to approximately $50,000 in some provinces) without paying taxes due to the dividend tax credit and basic personal exemptions available.
Capital gains also receive favourable tax treatment as only 50% of capital gains are taxable. Interest income is taxed least favourably. Your T5 package from RBC will include a number of reports to assist you in calculating total interest, dividends and capital gains, including"Important Information Regarding Outstanding Tax Documents". Please use this as a checklist for T3s arriving over March. Please note: The report includes information on the possibility for T3 slips to be amended.
Amended T3s are generally associated with income trusts. For example, last year, our Tax Group received 60 amendments from trust issuers, with the latest received at the end of March. This resulted in amended T3s for their investors. The CRA's legislated deadline for issuers to file their disclosures is the end of February, but there are no penalties for issuers who file disclosures or amendments past this deadline. We will continue to advocate for adherence to this deadline. With any questions about a late T3 or the likelihood of an amendment related to an income trust, please contact your Investment Advisor.
18. April 30 – the last day for an individual to file and pay taxes.
If you expect a refund, it is more beneficial to file earlier than the deadline and put the refund to work for you sooner. If you or your spouse (or common-law partner) have self-employment income and will owe taxes for tax year 2011, April 30 is the deadline to pay taxes owing (though the deadline for filing the return is June 15).
19. June 15 – if you or your spouse (or common-law partner) have self-employment income, you can delay filing your return until June 15. If you owe tax, as stated above, you must pay it by April 30th.
20. June 28 (paid by 180 days after a December 31 year end) – if you are a business owner and have a December 31st corporate year end, this is the last day to have your company pay out any bonus it declared and have the company deduct it on their 2011 tax return. If you had a different corporate year end, your last day to have paid bonuses will be 180 days after that year end date.
Please discuss any of the ideas that are of interest with your Investment Advisor and your accountant, as applicable. As reflected in this article, Canada offers a number of deductions and opportunities for families, students, business owners, the elderly, and children interested in art. Although you may not be looking forward to tax season any more than when starting this article, we hope this article will assist you in having a successful tax season. In March, we will have a follow-up article: 2012 strategies to enjoy even more savings next tax year.
Top 20 things not to miss for the 2011 tax season and this publication is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under licence. © RBC Dominion Securities Inc. 2012. All rights reserved.
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