‘Tis the season to be giving. And why not? When we make a donation to a registered charity, we not only get the satisfaction of helping a good cause now, but a reward later in the form of a tax credit on our income tax.
But to protect yourself from fraud and to make sure that you get all the tax credits you’re entitled to, there are several things you need to know before you give.
1) Make sure you’re giving to a real, registered charity.
First of all, there are many unscrupulous crooks out there trying to prey on people’s generosity. The Canadian Anti-Fraud Centre warns that this is the peak time of year for fake charity scams. Such bogus charities often use names that are very similar to those of legitimate respected charities. Here are the Canada Revenue Agency’s (CRA’s) tips to avoid fraud.
Second, only Canadian registered charities or other qualified donees may issue official donation receipts that qualify for charitable tax credits – and no receipt means no tax credit.
So do your homework first and make sure the organization you want to give to is legitimate and registered. Go to the Canada Revenue Agency’s Charities Listings to confirm that a charity is registered under the Income Tax Act.
2) You can give to qualified donees as well as charities.
Qualified donees are organizations that, like registered charities, are empowered under the Income Tax Act to issue official donation receipts. They include registered Canadian amateur athletic associations, registered national arts services organizations, and listed Canadian Municipalities. View the complete list.
3) Be aware that although qualified donees can issue official donation receipts, they aren’t required to do so.
So if being able to claim the donation is important to you, make sure you ask about getting an official receipt that you can use for income tax purposes at the time you make your donation.
4) Cash isn’t the only thing you can give and get a tax credit for.
You can’t get charitable tax credits for giving your time or volunteering your skills. But you can gift the charity or qualified donee with personal property, shares, stocks or land.
Note that while there is no capital gains tax on the eligible amount of publicly traded securities donated to registered Canadian charities, that isn’t the case with property where any capital gain you have made on the property since you acquired it may be subject to tax.
If you’re interested in donating property, see the CRA’s Pamphlet P113, Gifts and Income Tax.
If you’re interested in donating securities, see the CRA’s Capital gains realized on gifts of certain capital property.
5) Donation schemes are a bad idea.
Donation schemes promise that you will get tax refunds greater than the amount of money or gifts you give to a charity through funneling your donation(s) through a tax shelter arrangement. Don’t be drawn in!
The CRA warns that they audit all gifting tax shelter schemes and have not found any that comply with Canadian law. They also warn that the CRA will put on hold the assessment of returns for individuals where a taxpayer is claiming a credit by participating in a gifting tax shelter scheme, and that assessments and refunds will not proceed until the completion of the audit of the tax shelter, which may take up to two years. And besides having all your donations disallowed as tax credits, you can also be charged penalties and high interest on your now unpaid tax that you didn’t expect to be paying.
But Do Give!
Don’t let any of this information put you off – there are so many worthy charities that need your help to do what they do and the glow of giving is not to be missed. You just have to be a little careful if you want that warm glow to return in April come tax time.
With little more than a month before December 31st and the end of the tax year, you may think the only thing you can do now to lower your income tax bill next April is make charitable donations.
But while giving to charity is on our list of tax strategies below (and just a great thing to do!), it’s certainly not the only thing you can do to reduce your payable income tax before the year is out. Checking off the strategies on this list can take you to a whole new level of holiday cheeriness.
1) Contribute to your Registered Retirement Savings Plan (RRSP).
If you’re not over your contribution limit yet, this is the best possible way to reduce your income tax because it’s a dollar for dollar straight-off-the-top tax deduction. Check your Notice of Assessment or Notice of Reassessment from the Canada Revenue Agency for 2012 to find your RRSP deduction limit for 2013. The RRSP Deduction – Should You Use It This Year or Carry It Forward? will help you make the most of your RRSP contribution.
2) Put money into a Tax Free Savings Account (TFSA).
Tax Free Savings Accounts are a great way save money. Interest earned on the money invested is tax-free; that means no tax bill when you withdraw your funds.
The TFSA limit for 20132 is $5,500 – plus any unused TFSA contribution room left over from the previous year, taking into account any withdrawals you made from your TFSA in the previous year. Read Eleven Things You Need to Know About Tax-Free Savings Accounts to learn all the details.
Can’t do both, and wonder which one you should contribute to? See What’s Best? A TFSA or an RRSP?
3) Give to charity.
While only donations to charities and other organizations that have the Canada Revenue Agency’s (CRA’s) seal of approval will earn you tax deductions, the list is long. And up to seventy-five percent of your net income can be claimed as donations!
Maximize your charitable giving by donating more than a total of $200, as you get more of a deduction for donations over this amount. A good idea is to have one spouse claim all the charitable donations for your household on his or her tax return to truly maximize the tax credit.
4) Register your child(ren) in physical and/or artistic activity programs.
If you do, you’ll then be able to claim the Children’s Fitness Tax Credit and/or the Children’s Arts Tax Credit. Both of these allow you to claim up to $500 per child to help you recover the cost of registering a child in such a program.
Be sure to check that the program is eligible for the appropriate tax credit before you enroll your child, however, and make sure that you keep your program registration receipt.
5) Hire your spouse or child in your business.
The salaries of employees are always a tax deduction, which means that if you have a business and hire your spouse or child to work for you, you can deduct their salary, too. This can work very effectively as income splitting, reducing your family’s total tax bill by moving income from one family member with a higher income to one with a lower income. But of course there are rules that must be followed.
November is Financial Literacy Month in Canada, the perfect time to hone your financial know-how. Here are six suggestions for empowering your little grey cells so you can make the most of your money.
1) Review your budget or start using one. The first step in good money management is knowing where the money goes! This section of the Canadian Foundation for Economic Education (CFEE) website provides helpful information and links that will lead you through the process.
2) Comparison shopping isn’t just for iPads and strollers; it’s a good thing to do with financial services too. Check out the fees of different banks and other financial institutions for different accounts and services – you may be surprised at how much variation there is and how much money you could save.
4) Educate yourself about the different kinds of investments available so you can learn which ones are the most suitable for your financial goals. The Investor Education Fund website is a great starting point.
5) One of the best ways to enhance your own knowledge is to teach someone else – and it’s never too early to teach kids about money.
That’s just three examples; this Parent’s Guide to Money and Youth offers many more.
6) Attend one or more of the many Financial Literacy events being held across Canada to help people get smarter about money. From 75 Ways to Save on Household Expenses through presentations by top financial experts such as Kelley Keehn and Bruce Sellery, you’re sure to find something that will teach you something you don’t already know. Different events are offered across Canada as well as online and most are free.
We still mark the date and time of that momentous day, holding special Cenotaph and church services and observing two minutes of silence at 11 a.m.
That’s what Remembrance Day is all about – a day set aside to honor and remember all the Canadians who have given their lives in the two World Wars and subsequent armed conflicts.
Things You May Not Know About Remembrance Day
“In Flanders fields the poppies blow
Between the crosses, row on row…”
Poppies grow very well in ground that has been disturbed.
Did You Serve in the Military or Police Overseas Last Year?
If you did, you qualify to file your income tax for free using TurboTax Standard or TurboTax Premier online editions. The spouses of people who qualify are eligible, too, as long as they’re filing their tax returns along with the qualifying member.
Scary because some of these will make you slap yourself and yell, “What were they thinking?”
But as most of these are cases where you pay more tax, not less, you know exactly what the lawmakers were thinking – bringing more money into government coffers. Still, you have to wonder how they came up with some of these.
Another Reason Crime Doesn’t Pay
Taxes on illegal activities have to be among the strangest. Tennessee, for instance, taxes the possession of illegal drugs. Once you purchase any illegal substance in that State, you have 48 hours to report to the Department of Revenue and pay your tax. (You have to wonder if any state police habitually hang out at the tax office just to see who shows up.)
North Carolina has a similar law.
And our own Canada Revenue Agency will definitely tax illegal substances too. Just ask Marc Emery. The BC marijuana activist paid over $580,000 in provincial and federal income tax on the sale of marijuana seeds alone. Apparently, the Income Tax Act does not distinguish between income being legal or illegal. All it says is that any income that you make is reportable and subject to income tax.
Tax Tricks and Treats
With Halloween just around the corner, maybe the thought of becoming a witch has flitted across your mind. If so, you’ll envy the citizens of the Netherlands who can write off the costs of witch training. Margarita Rongen runs a school for witches there offering courses 13 weekends a year (on the weekends closest to a full moon of course). Participants practice outdoor rituals, learn healing with herbs and stones, making potions, divination and fortune telling with crystal balls and hieroglyphs. Fees for the full curriculum run to $2,210 EUR ($3,165 CAD) – a treat of a tax deduction indeed.
Or maybe you’re thinking of visiting a haunted house to get some spooky thrills. Be prepared to shell out more for the treat in New York; there you have to pay sales tax on your haunted house ticket if the admission charge is more than 10 cents. Scary!
Kentucky’s new sales tax may scare you even more – that state has decided to tax candy. The idea is to tax candy that doesn’t contain flour; candy that does contain flour is exempt. The application of the sales tax makes it even stranger, though – some healthy food is getting taxed, too, such as breakfast bars.
Ouch! That Really Hurts!
The state of Arkansas charges a six percent tax on body piercing, tattooing and electrolysis. Fortunately if you are a person wanting to have one of these services done in that state, paying the tax is the responsibility of the seller, not the buyer.
But at first hearing, perhaps the strangest tax of all is the European cow flatulence tax. Cows are gassy creatures. In fact, according to the U.N. Food and Agriculture Organization, livestock accounts for approximately 18 percent of the world’s greenhouse gasses. So the powers-that-be in some countries such as Ireland and Denmark have proposed taxes on farmers and ranchers based on their livestock’s’ output. In Denmark the levy is as high as $110 per cow.
Well tax strategies are like that too and if you’re nearing retirement, it’s time to take a sharp look at what you’ve been doing and try out some strategies that will fit your tax and retirement goals better.
It’s not just about reducing the amount of income tax you have to pay as much as possible anymore; it’s also about amassing as large a pot of money for retirement as you can. See how many of these retirement tax strategies you can use.
1) Fully contribute to your Registered Retirement Savings Plan (RRSP).
RRSPs are the workhorses for reducing the amount of tax we have to pay on our incomes. The money we put into our RRSPs is protected from tax! And we get to subtract our RRSP contributions for the year directly from our incomes which can lead to substantial tax savings!
But according to Statistics Canada, only 24% of eligible tax filers contributed to an RRSP in 2011 (the latest year for which Statistics Canada numbers are available) and the median contribution was only $2,830, meaning half the people contributed more than that and half less. That’s a lot of potential RRSP contribution room going to waste.
So one obvious tax strategy for people nearing retirement age is to be sure to use all the contribution room available to them.
2) Consider putting off claiming your RRSP deductions.
A not so obvious tax strategy involving RRSPs that can be very effective is not claiming the tax deductions on your RRSP contributions for several years before you retire. Because you can carry RRSP contributions forward, you can use those potential tax deductions in later years instead.
There are two different situations where you might want to use this strategy.
The first is to prevent you from having your income heavily taxed when you turn 71 and you have to start withdrawing money from your RRSP. This commonly happens when people don’t take money out of their RRSPs until they hit 71 because they didn’t have to, thanks to having good pension plans and successful investments. “Banking” your RRSP contributions and then using them to offset your suddenly increased income could significantly lower your tax rate.
Another scenario where you might want to apply this strategy is if you are almost 65 and think you may be eligible for Guaranteed Income Supplement (GIS) payments. Because RRSP deductions reduce your net income for tax purposes, claiming your RRSP deductions for several years at once when you turn 65 could reduce your income to the level required to prevent having your GIS benefits clawed back.
3) Join a Pooled Registered Pension Plan (PRPP).
Pooled Registered Pension Plans are new retired investment vehicles created so working people who don’t have workplace pensions can participate in a registered pension plan. If you are employed by a business that doesn’t offer its own pension plan, or self-employed, and PRPPs are available to you*, joining one can boost your retirement nest egg.
4) Use a spousal plan so you can continue to contribute.
Everyone knows that when you hit 71, you have to convert your RRSP to an RRIF (Registered Retirement Income Fund) and can no longer add any money to it. But you can still contribute to your spouse’s RRSP as long as he or she is less than 71. And the beautiful thing about this strategy is that you can still claim tax deductions on the amount you’ve contributed. See How to Take Advantage of Spousal RRSPs.
5) Keep your Tax-Free Savings Account (TFSA) topped up.
A TFSA can be another very handy way to put money away for retirement. The best thing about it, though, is that when you put money into one, that money generally continues to be tax-free –even when you withdraw it.
The money you withdraw from your RRSP, on the other hand, is taxed. Read more about how contributing to a TFSA or an RRSP compare in What’s Best? A TFSA or an RRSP?
(And if you are very close to the age when you have to close your RRSP, convert it into a RRIF and start withdrawing money from it (age 71), note that there are no age limits on making contributions to a TFSA. You can contribute to one when you’re 91 if you want.)
*Note that at time of writing, PPRPs are not available in all provinces.
Thanksgiving officially kicked off the season of spending. Halloween, Black Friday and Christmas are just around the corner! To avoid shock on your next credit card bill, there’s an easy way to save money: leftovers. Approximately 60 per cent of Canadians buy at least one lunch per workweek and that adds up quickly. So, if you’ve been bringing in turkey sandwiches for the last few days, you’re ahead of the game. During the most expensive time of year, getting the best value for your dollar is paramount. With that in mind, the following tips will help you shop smart from now until the end of the year.
Halloween: Recycle, Reuse, and Rummage for your Costume
With Thanksgiving in the books, the next big event is fast approaching. A 2012 Retail Council of Canada poll suggested that Canadians spend an average of $75 on Halloween. As you know, you don’t have much wiggle room when it comes to what you hand out – sure, you want to be healthy, albeit you don’t want to see your property toilet-papered; it’s a fine line. Remember: buying in bulk is essential. How else can you save money?
If you’re not a packrat, you still likely have the makings of a good Halloween costume hidden in your closet, so get creative. Otherwise, hit your local vintage or discount store and do it early, because the competition is fierce.
Black Friday: American Thanksgiving Equals Canadian Savings
Following American Thanksgiving in November, Black Friday is a retail extravaganza that typically shatters sales records. In the past, it was largely reserved for bargain-hunters south of the border, though it began attracting ever-greater numbers of Canadians. To counteract lost revenue, many Canadian retailers now offer their own Black Friday promotions.
Furthermore, the following Monday – Cyber Monday – is quickly becoming one of the best online shopping days of the year, with plenty of deals accessible directly from your computer or mobile device. More and more Canadians are shopping online, with a Forrester research report predicting that, over the next five years, annual sales are expected to rise from $20.6 billion to $33.8 billion. Why not take advantage when online shopping is most affordable?
Of course, neither of these days is an excuse for binge buying, yet they are fantastic chances to get deals on the things you would buy anyway.
Gift Buying and Traveling: Think Ahead
In mid-December, you will probably ask yourself, “Why didn’t I think ahead!?” Enduring a mall on December 24th is stressful and diminished options mean you will pay more. The people on your gift list don’t tend to change, so shop all year long, taking advantage of any sales or timely opportunities as they present themselves.
This approach also applies to travel. If you’re heading out of town, make arrangements early, consider car pools, and watch for changes in airfares. Also, if you can travel on December 25 or 31, you will get the same service at a better rate.
Sure, you will spend more than usual during the holidays, but if you plan ahead and budget correctly – using online tools available from Mint.com – you can limit the damage to your bank account.
So, do you have any tips to shop smart this holiday season?
You’re just starting out and you can’t imagine what it takes to qualify for a mortgage or get an investment portfolio off the ground. Don’t be overwhelmed; even the savviest investor was once in your position. So, what should you do to start preparing for the future? Think small! Setting achievable goals can mean big savings over time. With that in mind, here are some helpful tips to cut costs by making simple changes:
1. Trust your Thermos
“For just the price of a cup of coffee,” is a phrase you’ve heard countless times, though don’t trivialize the cost. According to a 2011 study of coffee drinking, Canadians consume an average of 2.7 cups per day. That’s 985.5 cups per person, per year.
So, even if you only purchase one third of your coffee from cafes, restaurants, and donut shops and you spend about $1.60 a cup – a rather low estimate in the gourmet coffee era – that’s over $525 per year. On the other hand, coffee that you make yourself costs an average of $0.42 per cup, cutting your cost by almost 75 per cent.
2. Consider a No-Fee Bank Account
Pennies might be a thing of the past, yet every cent still counts and you can save 18,500 of them annually by switching to a no-fee bank account. A 2010 study showed that 55 per cent of Canadians incur fees when making transactions with their chequing accounts. An average of $185 per person, per year. Make the switch to a no-fee account in a matter of minutes and start saving.
3. Invest in a Bicycle or Take the Sole Train
Canadian winters can be harsh and many people face huge commutes, but if you live relatively close to work, consider using a bicycle or walking. Both are great for your health and your wallet. The current cost of a monthly transit pass in Montreal is $77. In Vancouver, it ranges from $91 to $170, while the Toronto fare is $128. Of course, driving increases your spending exponentially. No matter where you live, you can save by driving less, taking fewer cabs, and generally limiting the amount you spend on transport.
4. Stop Carrying a Credit Card Balance
Do you remember your first credit card and the possibilities it opened up? It’s likely that the most frequent piece of advice you were given after signing the back was “don’t carry a balance.” Everyone hears this, but who listens? As it turns out, a lot of people. Last year, Canadians had an average credit card debt of $3,573, however a large majority of us – 64 per cent – paid off our balance each month. Even if you have a low-interest card, this is another way to easily save a little bit of cash.
Do you have a money saving tip you’d like to share?
Pooled Registered Pension Plans (PRPPs) are meant to fill the gap in retirement investment coverage for people who don’t have workplace pensions. The intent is to provide a simple, low-cost, effective way of improving pension coverage for employees of small and medium sized businesses and the self-employed.
The two big advantages of PRPPs are that:
1) They are low-cost. Because individuals’ assets will be pooled, the PRPP will offer investment and savings opportunities at lower administration costs.
2) They are portable, as the plan is “tied” to the individual, rather than to the company. If you work for a company that offers a PRPP and then become self-employed, for instance, your PRPP moves with you.
How Do PRPPs Work?
PRPPs are defined contribution pension plans offered by banks and insurance companies. Employers can sign up and offer a PRPP to their employees or individuals who qualify can sign up themselves through a PRPP administrator (a bank or insurance company).
Once you are enrolled in such a plan, if you are employed, you choose the amount to be deducted from your paycheque. All member and employer contributions, including any lump-sum contributions, are pooled together and credited to the member’s account.
As an individual member of a PRPP, just like a Registered Retirement Pension Plan (RRSP), the total amount that you can contribute in any one year depends on your RRSP deduction limit (listed on your latest income tax Notice of Assessment).
PRPPs and Income Tax
Tax-wise, PRPPs work the same way as RRSPs, providing you with a direct income tax deduction. The only catch is that you need to remember that employer contributions count in terms of your RRSP deduction limit, too. So if, for instance, your RRSP deduction limit is $10,000 one year and you contribute $5,000 to your PRPP and your employer contributes $3,000 to your PRPP, that’s $8,000 of contribution room used up.
Who Qualifies for a PRPP?
As of January 1, 2013, according to the Canada Revenue Agency, people who have valid Canadian social insurance numbers can participate in a Pooled Registered Pension Plan if they meet one of these criteria:
Coming Soon to Your Province?
Several provinces, including Alberta, Saskatchewan, Ontario and Quebec, have tabled legislation about PRPPs. Although legislation in itself doesn’t create Pooled Registered Pension Plans, (it’s up to providers to create and market their own plans), it does create a framework for their existence, so hopefully the other provinces will follow suit and working people across the country who currently don’t have pension plans in place will have access to another investment vehicle to help fund their retirement.
For more information about PRPPs, see this page from the Canada Revenue Agency.
If you have set up an RRSP (Registered Retirement Savings Plan) and made contributions to it, you’ve done one of the best things you can do in terms of employing tax strategies for reducing the amount of income tax you will have to pay.
But contributing to an RRSP (at as early an age as possible) is just the first step of this strategy; the second, and most important step, is to use your RRSP income tax deductions as effectively as you possibly can – which means “you got to know when to hold ‘em”, as Kenny Rogers sang. Carrying your RRSP deduction forward rather than using it in a particular tax year can provide you with even more income tax savings in the long run.
So how do you know when you should use your RRSP deduction or when you should carry it forward instead?
There are three basic situations where you would be better off carrying all or some of your potential RRSP deduction forward instead of using it all;
1. When you don’t have the income to justify using the deduction.
There may be years when you have a low income. You may be a student or experience a business loss. Or perhaps you move from full-time to part-time work or lose a job part-way through the year.
Whatever the reason, there’s not much point in using your RRSP deduction to bring down your income level if you don’t have much income in the first place.
2. When you know or suspect that you are going to make significantly more money the next year.
The key to using this strategy effectively is to know what increase in income is “significant” – and the answer to that question is that significant income is an increase in income that moves your income to a higher tax bracket, because the higher the tax bracket, the more income tax you pay. For 2013;
(Keep in mind that these are the federal tax rates; each province/territory adds their own tax to federal tax.)
So the most effective way to use your RRSP deduction is to use it to lower your tax bracket, so you’re reducing the percentage of tax you have to pay on your income.
For instance, suppose that in 2013 you purchased an RRSP for $12,000. That same year, your income was $48,000. Looking at the tax on different tax brackets, this would be a good year to use your RRSP tax deduction because $48,000 puts you into a “higher” tax bracket.
But you shouldn’t use all of it in this case, but should claim only $4,439 of your $12,000 RRSP contribution ($48,000 minus $43,561) – just enough to reduce your income to the next lowest tax bracket, moving you from a 22% tax rate down to 15%. The rest you should carry forward, building up your RRSP deduction room for the next time you need to use it.
Now be aware that this example is simplified. To actually use this system to maximize your RRSP deduction, you have to take into account the provincial tax rates as well to know how much income tax you’re truly paying on your income, as the income tax rates in Alberta, for example, are very different than those in Ontario.
3. When you are approaching age 65 and worried that your GIS (Guaranteed Income Supplement) benefit payments may be clawed back.
If you are nearing age 65 and think you may be eligible for Guaranteed Income Supplement (GIS) payments, you might want to put off claiming your RRSP deductions for several years and let them build up so you can claim them all at once when you’re 65.
RRSP deductions reduce your net income for tax purposes, so doing this could drop your income back down to within the GIS income level required to avoid having your GIS benefits clawed back.
Because the GIS is designed as an income supplement for people with low incomes, you are only allowed to earn $3,500 in net employment income (other than Old Age Security (OAS) and GIS payments) before GIS payments start to get clawed back – at a rate of 50 cents on the dollar.
So by “bundling” your RRSP contributions and claiming them all at once, you might be able to avoid the clawback for that year.
Image courtesy of typexnick.