Be proactive, review your personal tax situation near the end of the year to learn how to make your 2019 personal tax planning easier.
Just because your 2019 personal tax return isn’t due until April 30, 2020 (or June 15, 2020 if you’re self-employed), that doesn’t mean there’s no good reasons to think about it now. In fact, there are several tax planning opportunities to consider now, before it’s too late.
Here are some strategies to help you manage your tax costs:
Personal Income Tax Deductions
Do you know about what deductions and tax credits you can claim to reduce the amount of tax you’ll have to pay? These deductions are subtracted from your gross income to determine your taxable income. The more deductions you have by the end of the year, the less tax you will be required to pay. Keep in mind what you can deduct in advance, or else you won’t be able to collect receipts for your deduction. Have an accountant mindset in order to reap the 2019 personal tax planning rewards.
If you’re self-employed, you can deduct expenses that you obtain to earn business, as long as they’re reasonable. Some expenses, like meals, you can only claim 50% of the actual spent, or an amount that is reasonable in the circumstances, whichever is less. You can also deduct expenses for the business use of a home work space if it’s your main place of business, and/or you use it to meet clients on a regular basis.
Have any children? What amount have you paid this year to have someone look after any eligible child while you and your spouse/partner were working?
Keep receipts from all payments made to:
- child caregivers
- daycare centre
- day nursery school
- childcare day camps and day sports schools
- sleepover camps
Is there a portion of a medical bill that you or your spouse/partner have not been and will not be reimbursed for? Keep all medical expense receipts for yourself, your spouse/partner, and any dependent children under the age of 18.
If you don’t have insurance, put receipts into the medical expenses schedule. Certain medical expenses are deductible for personal income tax purposes as a Medical Expense Tax Credit (METC), a non-refundable tax credit. If your medical expenses for 2019 are above a certain threshold of net income (3% or $2,302), you can claim additional medical expenses. For example, for an average income of $50,000, you would have to spend more than $1,500 in eligible medical expenses to see a credit. If you have a spouse/common law partner, add up both of your expenses and claim it against the person with the smaller income, as 3% of a lower number is easier to become eligible for.
The receipt date is what matters, so if you are going to buy something, buy it before the end of the year. This is where the benefits of a Health Spending Account comes into play.
Health Spending Accounts (HSA) make for a great employee benefits package. They provide a way that small businesses can provide tax-free health and dental benefits to their employees and their family members. We find it an appealing and cost‑effective way of getting and providing health and dental benefits. The employer gets to choose how much and to who they designate these allowances to. This saves money and helps retain loyal employees. Employees can choose how, when, and where to spend their 100% tax free healthcare allowance. Small business owners who provide HSAs can also deduct all their eligible medical and dental expenses from their gross business income, instead of making them a personal expense. There are no premiums, hidden fees, deductibles, copay, or complex policies. But when the business is an unincorporated sole proprietor with no employees, CRA rules do not permit an HSA.
Eligible medical expenses you can claim include:
- air conditioner
- air filter or purifier
- dental services
- insulin pens
- laser eye surgery
- Orthodontic work
- Water filters
- Prescription medication
Your pharmacist will be able to give you a statement of all your prescription medication costs. Remember, any expenditure must have been incurred by December 31, 2019, but the service or goods do not need to have been delivered by then. This is a way to prepay some medical expenses, and claim them when filing your taxes in the spring.
Do you pay spousal support? You can claim those payments as personal deductions. The person who receives these payments must declare them as income when they file their taxes. Please note that child support payments are not deductible.
Have you moved to run your business in a new location? You can deduct moving expenses if your new home is at least 40 kilometres closer to your place of work than your old home. Eligible expenses include transportation, movers,storage, meals and incidental fees, including replacing your driver’s license.
Donations to registered charities are tax deductible, as long as they are made on or before December 31 in the same tax year. Making donations before the end of the year allows you to claim them much sooner and take advantage of the tax credit. Up to 75% of your net income can be claimed as donations, just make sure you obtain a receipt! The Canada Revenue Agency has a searchable online database that allows you to confirm whether a charity is registered and able to issue official donation receipts.
If you have a spouse or common-law partner, you can combine your donations and claim them on one tax return, if you need, to push you above the $200 threshold. You can also claim any donation amounts not claimed by you or your spouse or common-law partner in the past five years. Be sure to have the higher-income partner claim the charitable donations tax credit, as that will help reduce surtaxes on federal and provincial taxes.
If you’re single and donated less than $200 in 2019, it’s worthwhile to hold off on claiming a tax credit for another tax year. If you make charitable donations in future years, you can combine donations (back five years) to help push you over $200 so that you can claim the higher tax credit.
A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing plan.
Money you invest is tax-deferred, so any money you contribute will be exempt from CRA taxes the year you make the deposit, and will only be taxed years later when you withdraw it. RRSPs are a great way to cut down your 2019 tax bill. You can contribute until the end of February, or 60 days into the new year. Note that it is far better to contribute every two weeks or monthly to your RRSP, because of dollar cost averaging, rather than buying up in February at that one price. To determine how much you are allowed to deduct, use your Notice of Assessment or the CRA’s My Account online service.
Tax Loss Selling
Tax-loss selling happens when you sell a security at a loss in order to offset capital gains.
It’s a tax strategy that only applies to investments outside the RRSP. Want to sell an investment with significant capital gains, like a rental property or family cottage? Take a look through all your investments to see if there are opportunities to sell investments at a loss. If you have investments (mutual funds or stocks) that have not done that well, you can sell them at a loss and use to loss to offset some or all of the gains on the property, so you pay a lot less tax. It’s always smart to get feedback from your accountant and financial advisor to make sure your specific strategy works.
The last trading day for tax-loss selling for publicly traded stocks, in 2019, will be Friday December 27th. If you sell at a loss on or before that date, you could deduct the loss against your 2019 capital gains. Did you have gains in the previous three years? You may be able to recoup this year if you have a stock that tanked. Sell it, carry it back and recoup some of the tax that you have already paid.
Home Buyers’ Plan
Are you thinking about buying your first home, but having a difficult time coming up with the required 5% down payment?.
The Home Buyers’ Plan allows first-time home buyers to borrow money from an RRSP to buy a home without having to pay tax on the withdrawal. In March 2019, the federal budget updated the amount that first-time home buyers can withdraw tax-free from their RRSP to $35,000 from $25,000. As well, first-time home buyers buying a home with a spouse/partner can now EACH withdraw up to $35,000 from their own RRSP under the HBP, for a total down payment of $70,000.
Consider it a short term loan, with a two year grace period before you must pay back your loan over a 15-year term. These repayments would be in equal instalments and any amount not repaid on time will be added to your income and taxed at a marginal tax rate for the year of non-repayment.
Spousal Loan Strategy
Another way to reduce your family’s overall tax bill is the spousal loan strategy. It’s a method of income-splitting that can help couples lower their overall family taxes with a prescribed rate loan. This is most helpful for couples where one spouse has a lot more taxable income than the other, such as cases where one partner is parenting full-time.
The higher income spouse would shift future investment income to the lower income spouse in order to take advantage of lower marginal tax rates. That lower income spouse would then invest the loaned funds to generate investment income. This investment income becomes taxable to the spouse at their lower tax rate, which reduces the family’s overall tax bill.
The higher income spouse must charge their interest on the loan that is at least as much as CRA’s prescribed rate, which is generally 1%. The lower income spouse would have to pay this interest on time in order to stay within the rules of a spousal loan, but there’s no requirement to pay back the principal, just the interest.
Take note, if you just give the money to your spouse to invest, any income earned on that money is subject to Attribution. This means that any income the investment generates is taxable to the giver, in the year you make the ‘gift’.
Income Tax Installments
Are you self-employed and haven’t yet incorporated your company? If you’re earning income that hasn’t had tax withheld, you may choose to pay tax by instalments, or the government will ask you to pay by installments if you have $3,000 of net tax owing. Payments are due March 15, June 15, September 15 and December 15. A quality accountant will include a reminder of upcoming installment payments that are due for the upcoming year, in your 2019 tax return.
Invest some time to review your personal tax situation near the end of the year to make your 2019 personal tax planning easier. You still have time to get everything in order and be ready for tax season. Tax planning shouldn’t something that only happens when you file your tax return.
If you’re interested in learning about business tax payments, read our article CRA: Business Tax Payments Explained
Want to find out how your business can help save you money? Read our article Tax Deductible Expenses for Small Business Owners.