Smart Tax Tips - Amazon S3s3.amazonaws.com/files.inetusa.com/18701/megafiles/SmartTaxTip… · Smart Tax Tips by Sangita Tulsiani 4 Filing Tips Our first filing tip is the most important

SmartTaxTips

SangitaTulsiani,PayLessTaxes

SmartTaxTipsbySangitaTulsiani

2

TableofContents

Introduction 3

FilingTips 4

EmploymentIncome 5

Deductions&Credits 6

ClaimingYourDeductions&Credits 7

ShouldIIncorporate 9

OfficeExpenses 10

VehicleExpenses 11

BusinessIncome 12

CPPfortheSelf‐Employed 13

NewEmploymentInsuranceRules 14

IncomeSplitting 15

RRSPs 17

TFSAs 19

YouNeedaWill 21

Conclusion 22

AbouttheAuthor 23


3

Introduction

Thisbookwaswrittentohelpyougetreadyfortaxseasonand

tohelpyousavetaxes.Istartoffwithimportanttipsabout

filingyourtaxes.

Thenwediscussissuesimportanttoemployeeswhohave

employmentincomewithdeductionsandtaxcredits.Wewill

lookathowtouseataxdeductionwaivertoincreaseyour

monthlyincome.

Nextwelookatselfemployedpeopleandsmallbusiness

owners.Theyhavedeductionswhichmustbehandled

correctlyinordertomaximizetheirbenefit.

Togetherwe’llexaminesomecommoninvestmentpitfallsand

reviewthebestwaytomaximizeyourassetswhileminimizing

yourtaxes.

Finallywewilllookatsomequestionsthatareimportantto

yourfinancialplanandhowtheyaffectyourtaxsituation.

Remember–althoughit’sillegaltoavoidorevadetaxes,it’s

perfectlyokaytominimizetheamountyoumustpay.


4

FilingTips

Ourfirstfilingtipisthemostimportant.Fileearly.

Individualsdon’thavetofileuntilApril30th,andifyouare

registeredasasmallbusiness,youhaveuntilJune15thto

completeyourtaxes.Youwillgetafasterrefundfasterifyou

haveoverpaid,andthegovernmentowesyou.Avoid

penalties’andinterestbyplanningaheadandpayingbefore

thedeadline.

Secondly,haveallyourpaperworkinorder.Separateyour

personalandbusinessexpenses.Youmightbechargedextra

bookkeepingfeesifyoudumpabigenvelopeofunsorted

receiptsonyourtaxpreparer’sdesk.

Thirdly,ifyouwillbetransferringcertaincreditsbetween

spousesorchildren,bringeveryone’staxpackagesintobe

completedatthesametime.Ifyouusebookkeepingsoftware,

giveyourtaxpreparerbothanelectroniccopyandaprintout.

Don’tforgettobringalonglastyear’snoticeofassessmentto

helpinpickingupdeductionscarriedforwards.


5

EmploymentIncome

Makeyouremploymentincometaxefficientbynegotiating

non‐taxablebenefitsfromyouremployer.Someofthese

benefitscouldbe:educationcost(foremployer’sbenefit),

premiumforprivatehealthservicesplan,loansfrom

employers(interestbenefittaxed),incity/outofcitytravel

mealallowance,recreational,sportingordiningclubfees(for

employer’sbenefit),homecomputerandinternetservices,

personalcounselling(foryouandyourfamily),contributions

toaregisteredpensionplan,inhousedaycarefacilities,

parkingspace(carneededforemployment),$10000.00death

benefit.Useloyaltyprogrambenefitsearnedthrough

employmentforpersonaluse.

Ifyouareoneofthosepeoplewhogetahugetaxrefund

everyyear,it’spossiblethatyouhavemoredeductionsthan

theaverage.

Alotofpeopleliketogetthatbigrefund,butit’snot

necessarilyagoodthing.Ataxrefundisyourmoneywhichthe

governmentgivesback.Insteadofgivingthegovernmentan


6

interestfreeloaneveryyear,youmaybebetterofftokeep

thatmoney,andgetabiggerpaychequeeverymonth.

Ifthereasonforyourbigrefundisaregulardeductionthat

reducesyourtaxes,likeacompanypensionplan,uniondues

ormonthlyRRSPcontributions,thenyoumightbeeligibleto

completeaformT1213SourceDeductionWaiver,andhave

theamountoftaxdeductedfromyourpaychequereduced.

Deductions&Credits

Mostpeopleconfusethedifferencebetweenataxdeduction

andataxcredit.Alotofthingsyoumightthinkarea

deductionareactuallyacredit.

Ataxdeductionissomethingwhichisdeductedfromyour

grossincomebeforetheamountoftaxyouoweiscalculated

includinguniondues,childcareexpenses,RRSPs(Registered

RetirementSavingsPlan),RPPs(RegisteredPensionPlan),etc

aredeductionsfromyourtotalincome.Theyhavedollarto

dollarvalue.


7

Ataxcreditisanamountwhichisdeductedfromthetaxyou

owe.Liketheeducationtaxcreditorthepoliticalcontribution

credit.Theyworklikeyouareapplyingagiftcardforacertain

amounttoreducehowmuchyouneedtopay.Taxcreditsare

sameforeveryone,whereastaxdeductionsarenotsamefor

everyone.

Youusethedeductionstogetyourincomedowntoit’slowest

taxbracket,perhapsbymakingalargeRRSPcontribution.

Thenyoureducetheamountoftaxyouowebyapplyingthe

creditsavailablefromyourcharitablecontributions.

Therearemanytaxcreditsthatyoucantransfertoyour

spouseorfamilymemberifyoudon’tneedthem.

ClaimingyourDeductions&Credits

Whichdeductionsandcreditsyoucanclaimwilldependon

yourownpersonalsituation.Doyouhavechildren?Arethey

inschool?OrUniversity?Areyouresponsibleforadisabled

person?Doyouoryourspousehavemedicalbills?Doyou


8

makepoliticalcontributions?Ordonatetoyourchurchor

charity?

Childcareexpensesareusuallyclaimedbythelowerincome

spouse.Don’tforgettoclaimtheChildren’sFitnesstaxcredit.

Ifyouhaveadisabledchild,askaboutthevariousdisability

creditsandbenefitsyoumightbeabletoclaim.Universityand

collegestudentscantransferextracreditstotheirparents.

Medicalexpensescanbecombinedbetweentwospousesand

claimedonthetaxreturnofthelowerincomeearnerasthey

havetobeover3%ofnetyournetincome.Maximizeyour

charitabletaxcreditbycombiningyourdonationswithyour

spouse’sorcombining2yearsworthofdonationstogeta

biggercredit.

Ifyoumovedclosertoworkthisyear,claimthattoo.


9

ShouldIIncorporate?

Incorporationisahottopic.Andtheansweris–Itdepends.

Ifyouhaveacompanywithanumberofemployees,buildings

andequipment,allofwhichneedtobekeptseparatefrom

yourpersonalproperty,thenyes,youprobablyshould

incorporate.

Ifyouareinabusinessthatmightleaveyouopentotherisk

ofbeingsuedbyacustomer,yes,youshouldincorporate.

Ifyourbusinessismakinglotsofmoney,andyouwouldprefer

toleaveitinthecompanywhereitistaxedatalowerrate,or

payitoutasdividendstaxedatalowerrate,yes,youshould

incorporate.

Ifyouplantobuildupyourbusinessandsellitasasingle

entitytosomeoneelseinthefuture,yes,byallmeans,you

maywanttoincorporate.

Ifyouareasmallbusiness,andalltheincomegoestoyouand

yourspouse,andyoucandeductabunchofpersonalthings


10

likeyourhomeoffice,orcars,thenitmaynotbetoyour

benefitto(no,don’t)incorporate.

OfficeExpenses

Ahomeofficeisonlydeductibleifitisyourprincipalplaceof

businessandisused“regularlyandcontinuously”exclusively

foryourbusiness.

CommissionedSalesPeople–Ifyouarerequiredtopaya

shareofthecommonofficeexpenses,supplies,andthecost

ofanassistant,youcandeductallofthese.

Ifyouremployerrequiresyoutomaintainahomeoffice,they

willhavetofilloutaT2200foryou.Thehomeofficewillneed

tobewhereyoucompletethemajorityofyourwork.

IncorporatedorSmallBusinesses–Inadditiontotheusual

suppliesandequipmentexpenses,youcanclaimhomeoffice

expensesequaltothepercentageofyourhomethatisused

forbusiness.Ifyouuse15%ofthesquarefootageofyour

home,thenyoucanclaim15%oftheheat,hydro,cellphone,


11

businessphone(nothomephone),propertytaxesand15%of

theinterestonyourmortgage.*Note;thisistheinterestonly,

nottheprincipal.Youwillhavetogetanannualstatementof

interestfromyourmortgageprovidereveryyear.

VehicleExpenses

Youmustkeepavehiclelog.Thisshouldincludebusiness

miles(kilometres)driven,dates,namesandeventsattended.

Includealllicencesandinsurance,gasreceipts,oilchanges,

carwashes,maintenanceandrepairs.

Thepercentageofautomobileexpensesyoucandeductis

basedonthepercentageofkmsyoudriveforbusiness

purposes,comparedtothekmsforpersonaluse.Forexample,

ifyoudrive20,000kmsperyearandyoudrove10,000for

yourbusiness,youmaybeabletodeducthalfofyourtotal

expenses.

CanadaRevenueAgencyhasseta$30,000dollarlimitonthe

deductiblepriceofavehicle.Ifyouaredrivingacompanycar


12

worthmorethan$30,000youcanbeonthehookforanextra

taxablebenefit.Ifyouwantafanciercar,youmightactually

bebetterofftopurchaseorleasethecaryourself,andthen

directlydeductthepercentagewhichyouuseforbusiness

purposes.

Ifyouhavepurchasedorleasedanewcarinthepastyear,

makesurethatyougiveyourtaxpreparerthepurchaseor

leasedocumentssothattheycancalculateyourCapitalCost

Allowance(depreciation),orleaseexpense.

BusinessIncome

Oneoftheadvantagesofhavinganincorporatedbusinessis

thatyouhaveanumberofchoicesinhowyoupayyourself.Of

coursethefirstoptionistopayyourselfasalary.Butyoudon’t

wanttopayyourselfsomuchthatyoubumpyourselfintothe

toptaxbracket.

Payingoutcorporateprofitsintheformofadividendcanlet

youpaylesstax.Itisalsoagoodwaytosplitincomeby


13

makingyourspouse,childrenandotherfamilymembers

shareholderswhowillalsoreceivedividendpayments.

Ifyouputalotofcapitalintothebusinesstogetitstarted,

youmightconsidertakingarepaymentofcapital,whichcould

betaxfree.

CPPfortheSelfEmployed

SelfemployedpeopledohavetopayCanadaPensionPlan

(CPP),contributionsonemploymentincomefromtheir

business,notincludinginvestmentincomepaidoutas

dividendsorreturnofcapital.It’sabitmorecomplicatedthan

forotheremployees,becauseyoupayitout,andthenclaimit

backasacredit.

Youhavetopaybothemployerandemployeeportionsof

CPP.Thenyoucanclaimbackadeductionequaltothe

employer’sshareonthetaxreturn.Youarealsoentitledto

claimthestandard15%creditontheemployee’sshare.


14

Thebenefitofcourse,isthatyouwillbeabletoclaimCanada

PensionPlanbenefitswhenyouretire.Youwillalsobeableto

claimCPPdisabilitybenefitsifyouqualifyatsometimeinthe

future.

NewEmploymentInsuranceRules

Itusedtobethatselfemployedpeoplecouldn’tclaim

EmploymentInsurance,andthereforeweren’tsupposedto

payEI.

However–BeginninginJanuary2011,selfemployedpeople

willbeabletopayintoEmploymentInsuranceiftheywish,

andwillbeentitledtoclaimlimitedspecialbenefits.

YoumustpayintoEIforafull12monthsbeforeyouwillbe

eligibletomakeaclaimformaternity,paternal,sicknessand

compassionatecarebenefits.

Sinceyouwillnotbeeligibletoclaimforbeingunemployed,it

isuptoyoutodecideifitisworthwhiletopayintothe

system.


15

IncomeSplitting

Incomesplittingcanbeaveryeffectivemethodofreducing

taxesinafamilywhereonepersonearnssignificantlymore

moneythantheother.Inorderforittowork,youhaveto

followtherulesverycarefully,andmakesurethatyouwatch

outforacoupleofpitfalls.

TheAttributionRulesaysthatifyoutransferanincome

producingassettoafamilymemberinordertoavoidtaxes

youcangetstuckwiththeirtaxbill.Toavoidthis,theasset

mustbetransferredatfairmarketvalue.Inotherwords,you

can’tjustputarentalpropertyinyourwife’sorchild’sname.

Youmustbecompensatedbyeitheradirectpaymentoraby

aloansecuredbyapromissorynoteonwhichinterestispaid.

Beforeyoudoanyofthis,youshouldtalktoyourtaxadvisor

aboutwhetherthiswilltriggeracapitalgainorlossorother

taxableevent.TherearealsoanumberofAntiavoidanceRules

theycantellyouabout,theseaffectthecorrectwayto

transferassetstoFamilyTrusts,ormakeloanstofamily

memberstobuyincomeproducingpropertyorassets.


16

Sowhatisthecorrectwaytosplitincome?Youcanchoosea

numberofmethods,eachofwhichwilldependonyour

family’sspecificcircumstances.

Spouseshavethemostoptions.Ifyouownabusiness,youcan

hireyourspouseorchildren,buttheirpaymustreflectthejob

theyaredoing.Youcan’tpaya12‐year‐old$50,000ayearto

sweepoutthegarageeverySaturday.Giftstoadultchildren

toinvest,andgiftstominorchildrenorgrandchildrentoinvest

canrunafouloftheantiavoidancerules,andtriggeracapital

gaininyourname.

Businessownerscanassignsharestofamilymembers,and

paythemdividendsfromtheprofitsofthebusiness.Youcan

lendyourspouseorchildmoneytobuyanincomeproducing

assetlikestocks,bonds,rentalpropertyoranotherbusiness,

butmakesureyougetpaidinterestontheloan,noorlow

interestloanwon’twork!TheloanmustbeatCRA’s

prescribedrateofinterest,theprescribedcurrentrateof

interestis1%.Lockitinnow!!!!

YoucanalsocontributetoaSpousalRRSPwhichwillhelpeven

outyourincomeinretirement.


17

Whenyouretire,youcanassignthetaxableportionofyour

pensionincome,includingyourCPPpaymentsbetweentwo

spouse’staxreturnsinordertoloweryourtaxbracketand

paylesstax.Thepensionitselfisnotsplit,justhowitis

reportedonthetaxreturn.

RRSPs

YourRegisteredRetirementSavingsPlanisoneofyourmost

importanttaxplanningandretirementplanningtools.

HowmuchyoucanputintoanRRSPiscalculatedonhow

muchyouearnedlastyear,plusanycontributionroomyou

didn’tusefrompreviousyears.

IfyouhaveanumberofyearsworthofavailableRRSPspace,

maxingoutyourlimitcanreduceyourtaxesallthewayto

zerointheyearthecontributionismade.Ifyouhaveroomto

contributemorethantheamountwhichwillreduceyouto

zero,youcancarrythatovertothenextyear,andclaimit

againstnextyear’staxes.


18

Sometimesyouknowthatyouaregoingtoreceivealarge

bonus,orbuyoutpackage,orotherincomeinthecoming

year.YoucanmakeyourregularRRSPcontributionsthisyear

anddelayclaimingthemuntilnextyear,whentheycanhelp

reducethetaxwhichwillbedueonthatlargebonus.

Makeyourcontributionearly;youmightaswellhavethe

moneyearningyouinterest.Orarrangeformonthly

contributions.Yourbankorinvestmentadvisorcansetupa

monthlyinvestmentplanthatwillkeepyouontrack.

Someemployersmatchtheiremployee’sRRSPcontributions

orcontributesomuchperhourworked.Ifyouremployerdoes

this,youshouldparticipateintheprogram,it’slikegettinga

monthlyraiseequaltotheamounttheyputintoyour

retirementaccount.

Ifyouarebehindonyourcontributions,youcanborrow

moneytotopupyourRRSPs.Butbeverycareful,youshould

onlydothisifyouknowyoucanpayofftheloanwithinone

year.Thiscanalsobeagoodstrategyifyouknowthatyouwill

beenteringahighertaxbracketnextyear.


19

Generallyspeaking,withdrawingmoneyfromyourRRSP

beforeretirementmaybeabadidea,andyouwillbecharged

incometaxatyourhighestmarginalrateifyoutakeany

moneyout.Ifyouthinkyoumightneedsomeofthismoney

beforeretirement,youmaywanttoputitinaTaxFree

SavingsAccount(TFSA)instead.

TaxFreeSavingsAccount

TaxFreeSavingsAccounts(TFSA)arenewenoughthatalotof

peoplestilldon’tunderstandhowtheyworkandwhattheir

benefitsare.

BasicallyaTFSAisnottoodifferentfromanRRSP.InaRRSP

youputthemoneyin,andgetataxdeduction.Whenyoutake

themoneyout,youpaythetaxes.

ATFSAworkstheoppositeway.Whenyouputthemoneyin,

thereisnotaxdeduction,andwhenyoutakethemoneyout,

youpaynotaxesontheprincipalorontheinterestandgains


20

yourmoneyearned.SoforaRRSP,youpaythetaxeslater,for

aTFSAyoupaythetaxesatthebeginning.

ThereareafewotherdifferencesthatmakeTFSAsagoodway

tosave.Everyonegetsa$5,000limitperyear.Thatmeans

thatpeoplewhodon’tearnanincome,orearnmorethanthe

RRSPmaximumcanstillputawaymoney.

YoucantakemoneyoutofaTFSAanytimewithoutpenalty.

Butifyoudon’tneedthemoney,itcansittherehappily

growingtaxfree.

YoucanuseaTFSAtosaveforahouse,buildupanestegg,

investforretirementorputmoneyawaytotakeayearoffto

haveababy.It’suptoyou.

OneofthemajormistakespeoplemakewithTFSAsis

assumingthattheyarejustaplainoldsavingsaccountlikeat

thebankwhichpaysatiny2%interest.Thisisn’ttrue.

YoucanhaveaTFSAGICaccount.YoucanhaveaTFSA

investmentaccountwithStocksandBonds.Youcanhavea

TFSAmutualfundaccount.


21

Sinceeveryoneovertheageof18getsa$5,000limit,evenif

theyaren’tworking,aTFSAisaperfectwayforgrandparents

tohelpouttheirgrandchildren,bygiftingthemwithupto

$5,000ayearintheiraccounts.

YouNeedaWill

Asthenamesuggests“itmustbeyouwhodecideshowyour

estateisdistributeduponyourdeath.”Ifyoudon’thaveawill,

youareallowingthegovernmenttodecidewhathappensto

yourmoney,yourpropertyandyourminorchildrenifyoudie.

Ifyoumakeawillwithoutconsultingalawyerandyourtax

advisor,youruntheriskofthegovernmentscoopingupmore

thantheirfairshareoftaxesandprobatefees.

Awillmadewithoutproperadvicealsorunstheriskofbeing

declaredinvalid.Yourwillmustbeinaccordancewiththe

FamilyLawActorbeneficiariescangotocourtandpetitionto

getitthrownout.


22

Ifyouareleavingyourprincipalresidencetosomeone,

considerhavingitmadeinjointtenancywiththem,sothatit

doesn’thavetobeincludedinprobate.Transferringassetsto

acorporation(estatefreeze)andmakingmultiplewillsalso

helpsyou“Liverichanddiepoor”.

Askifan“alterego”or“jointpartner”trustisrightforyour

personalandtaxsituation.Thiscanallowyoutotransfer

assetsoutsidethewill,againavoidinginclusioninprobate.

Conclusion

Ihopeyouenjoyedthisdigitalbook.Mygoalistoremindyou

tofileyourtaxesontime,takeadvantageofallthedeductions

thatofferedbyCRAsoyoucanpaylesstaxesandtoconsult

withyourincometaxexperttofilecorrectly.

Ifyouhaveanyquestionsorneedmyhelp,including,advice

aboutyourpreviousyearstaxes,orhelpingyoucreatea

businessortaxplan–Iwouldlovetohearfromyou.


23

AbouttheAuthor

SangitaTulsianiisanincometaxexpertwhohashelped

thousandsofherclientssavetaxessince1993.Hergoalisto

workwitheachindividualclienttoreducetheirtaxburden.

Togetherwithherclientssheplans,educatesandensuresyou

paytheleastamountoftaxes.

Sheworkswithsmallbusinesses,RealEstateInvestors,small

corporationsandregularpeople.Hertaxtipshavebeen

publishedinMississaugaNewsandacrossotherwebsites.

Herclientssaythattheyappreciatethepersonaltouch,the

honestyandtherelationshipthatisbuiltovertheyears.

ThisE‐Bookwaswrittentohelpyourealizethatyoutoocan

savetaxes(evenifyoudon’thaveabusiness)justlikemanyof

Sangita’sclientsandyoudonotneedtospendhundredsof

dollarsdoingyourtaxes.

Disclaimer:Thisbookisnotintendedasasubstituteforprofessional,

personal,taxadvice.Pleaseconsultyourtaxpreparerforadvicerelated

toyourownpersonalcircumstances.


24

Sangita Tulsiani Pay Less Taxes 38VespahillsCrescentBrampton,OntarioL6P2V2905.915.3399www.pay_less_taxes.comsangita@pay_less_taxes.com

©copyrightSangitaTulsiani2011

Documents

Smart Tax Tips - Amazon S3s3.amazonaws.com/files.inetusa.com/18701/megafiles/SmartTaxTip… · Smart Tax Tips by Sangita Tulsiani 4 Filing Tips Our first filing tip is the most important