While individual tax returns for 2014 don’t have to be filed, at the earliest, until April 30, 2015, it’s worth taking the time now to evaluate one’s tax situation and consider possible strategies to reduce the tax bill for 2014. With the exception of RRSP contributions (in most cases) and pension income splitting, tax-planning strategies intended to reduce one’s tax payable for this year must be put in place by December 31st, 2014. And, perhaps the only thing more frustrating than finding, on filing a return, that money is owed to the government is the realization that the option of taking steps to reduce or eliminate that tax bill is no longer available.
What follows is a list of the more common tax deductions and credits which are claimed by Canadian taxpayers, and the year-end considerations that apply to each.
Consider accelerating medical expenses into 2014
While most out-of-pocket medical expenses incurred by Canadians may be claimed for purposes of the medical expense tax credit, the rules governing the computation of that credit can be confusing. The basic rule is that qualifying medical expenses (a list of which can be found on the Canada Revenue Agency (CRA) website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/llwbl-eng.html) in excess of 3% of the taxpayer’s net income, or $2,171, whichever is less, can be claimed for purposes of the medical expense tax credit.
Put in practical terms, the rule for 2014 is that any taxpayer whose net income is less than $72,370 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $72,370 will be limited to claiming expenses which exceed the $2,171 threshold.
The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending during 2014 will produce the greatest credit amount. That determination will obviously depend on when medical expenses were incurred, so there is, unfortunately, no universal rule of thumb.
Medical expenses incurred by all family members can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.
As December 31 approaches, it’s a good idea to add up the medical expenses which have been incurred during 2014, as well as those paid during 2013 and not claimed on the 2013 return. Once those totals are known, it will be easier to determine whether to make a claim for 2014 or to wait and claim 2014 expenses on the 2015 return. And, if the decision is to make a claim for calendar year 2014, knowing what medical expenses were paid when will enable the taxpayer to determine the optimal 12-month period for the claim. Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2015. It may make sense, where possible, to accelerate the payment of those expenses to December 2014, where that means that they can be included in 2014 totals and claimed on the 2014 return.
Make charitable donations for 2014
The federal and all provincial governments provide a two-level tax credit for donations made to registered charities during the year. To claim a credit in a particular tax year, donations must be made by the end of the calendar year. There is, however, another reason to ensure donations are made by December 31. For federal purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess.
As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December of 2014 will receive a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2014 and January 2015, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2015 donation can’t be claimed until the 2015 return is filed in April of 2016. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% rather than the 15% level.
It’s also possible to carry forward, for up to five years, donations which were made in a particular tax year. So, if donations made in 2014 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2009, 2010, 2011, 2012, or 2013 tax years can be carried forward and added to the total donations made in 2014, and then the aggregate amount claimed on the 2014 tax return.
When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high income surtax—Ontario, Prince Edward Island and the Yukon—it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses.
For Canadians who have not been in the habit of making charitable donations, there is now an additional incentive to make a cash donation to charity. In the 2013 budget, the federal government introduced a temporary (before 2018) charitable donations super-credit. That super-credit (which can be claimed only once) allows individuals who have not claimed a charitable donations tax credit in any of the last 5 tax years (that is, 2009, 2010, 2011, 2012, and 2013) to claim a super-credit on up to $1,000 in cash donations made during the year. The super-credit, which is additional to the regular charitable donations tax credit claimed, is equal to 40% of donations under $200 and 54% of donations over the $200 threshold.
Make spousal RRSP contributions before December 31
Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, such withdrawals from a spousal RRSP are taxed in the hands of the spouse only if the withdrawal takes place no sooner than the end of the second calendar year following the year the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2014, the spouse can withdraw that amount as of January 1, 2017, and have it taxed in his or her hands. If the contribution isn’t made until January or February of 2015, the contributor can still claim a deduction for it on the 2014 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 2018. It’s an especially important consideration for couples approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the case, making the contribution before the end of the calendar year will ensure maximum flexibility should an unanticipated withdrawal be required.
When you need to make your RRSP contribution before December 31st
As just about everyone knows, an RRSP contribution can be made up to 60 days after the end of the current year (March 1st, or, in a leap year, February 29th) and still claimed on that year’s tax return. There is, however, one important exception to that rule.
Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71—usually by converting the RRSP into a registered retirement income fund (RRIF) or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31 is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31.
Take another look at the amount of tax instalments paid this year
Millions of Canadian taxpayers (particularly the self-employed and retired Canadians) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total tax liability for the year.
The final quarterly instalment for this year will be due on Monday, December 15, 2014. By that date, almost everyone will have a reasonably good idea of what his or her income will be for 2014 and so will be in a position to estimate what the tax bill will be for the year, taking into account any tax planning strategies put in place. While the tax return forms to be used for the 2014 tax year haven’t yet been released by the CRA, it is possible to arrive at an estimate by using the 2013 form. Increases in tax credit amounts and tax brackets from 2013 to 2014 will mean that using the 2013 form will result, if anything, in a slight overestimate of tax liability for 2014.
Once one’s tax bill for 2014 has been calculated, it’s possible to compare that figure with the total of tax instalments already made for 2014 (that figure can be obtained by using the CRA’s Quick Access online service, available at http://www.cra-arc.gc.ca/quickaccess/) and determine whether the tax instalment to be paid on December 15 can be adjusted downward.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.