By Fin MacDonald
Fin MacDonald has over 20 years’ experience providing retirement and Income tax planning advice. Readers are however cautioned that responsibility falls on the taxpayer to ensure that all information is adequate and correct.
In this article I will discuss some year end tax planning ideas.
Registered Retirement Savings Plans (RRSP)
RRSPs are a great tool to save for retirement; they can also be used to save for post-secondary education – the Life Long Learning Plan (LLP), and for a down payment for a home – Home Buyers Plan (HBP).
RRSPs offer a reduction in your taxable income when the contributions are made, but are taken into taxable income when they are withdrawn. Some basics on RRSPs:
The higher the taxable income one has, the higher the per dollar deduction, for example: with taxable income of $50,000, the tax savings on a $5,000 contribution are $1,506 or $301/$1,000 contribution. Because of the higher marginal tax rates, the tax savings on the same $5,000 for a person with a taxable income of $89,000 would be $2,068 OR $413.60/$1,000 contributed.
The deadline for 2017 tax year contributions is February 28, 2018. Your 2016 Notice of Assessment will have your contribution room in it.
The money invested in an RRSP grows tax-free until it is withdrawn.
By the end of the year the owner turns 71 the RRSP must be wound down. There are three options: 1/ take all of the proceeds into income 2/ buy an annuity with it and 3/ transfer it to a Registered Retirement Income Fund (RIF). If the amount in the RRSP is small, it may make sense to bring it into income. If a guaranteed return for a fixed number of years is desired, the annuity route may be best. However, most people now chose the RIF route. This enables the amount to grow tax-free until it is withdrawn, either by the age-set minimum percentage or a straight withdrawl.
Tax Free Savings Accounts (TFSA)
A TFSA is an account that lets you contribute money, upto your limit, to an account that grows tax free. There are no tax savings when a contribution is made; and when a withdrawal is made there are no taxes payable. If no contributions have been made to a TFSA, and the contributor was at least 18 years of age, and living in Canada, since 2008, the unused contribution room for 2017 would be $52,000. This will increase by another $5,500 on January 1, 2018.
If over-contributions are made, there is a 1% per month penalty on the over-contribution. Care must be exercised when returning money that had been withdrawn from a TFSA. An example: you have $5,000 in contribution room and withdraw $10,000 on June 1, 2017. If you want to return the money to the TFSA, the following applies: You may re-deposit $5,000 (your contribution room) in 2017. You must wait to 2018 to re-deposit the remaining $5,000.
RRSP vs TFSA
Which is best for you? Many factors come into play. Have you maxed out your RRSP contributions? If you have, then a TFSA will shelter some of your investments that would be taxable in a non-registered account. Do you have a workplace pension plan? If you do, your RRSP contribution room will be much less than for folks without a pension plan. Maxing out your RRSP and TFSA would make sense. Will you qualify for income-tested benefits such as the Guaranteed Income Supplement (GIS) or Shelter Aid For Elderly Residents (SAFER)? If you will, it makes sense to keep your taxable/net income as low as possible. Maxing out the TFSA will help achieve this goal.
Besides the warm fuzzies that supporting a registered charity invoke, there are also potential tax savings. Donations must be made by the end of the year. To see if the organization you want to contribute to is registered, use this link: https://www.canada.ca/en/revenue-agency/services/charities-giving/charities-listings.html?wbdisable=true.
Charitable donations attract a Non-Refundable Tax Credit. This means that the credit may only be used to reduce the amount of taxes payable to zero. If no taxes were deducted off your income, charitable donations can not produce a refund. The first $200 in donations have a 15% federal credit, above $200 the credit is 29%. Donations may be carried forward for up to five years. So, if your donations are less than $200, consider carrying them forward to qualify for the larger tax credit. If you are not taxable, but want to support, for example: your church, have a friend who is taxable make the donation (and receive the tax credit). The friend can take you to lunch!
Medical expenses (ME) are usually a non-refundable tax credit (serving only to potentially reduce tax payable to zero); see below for the Refundable Medical Expense Supplement (RMES). ME are subject to a 3% of net income deductible. Example: your net income is $30,000; your ME are $1,500. The net medical expenses will be $1,500- ($30,000 x 3% = $900) = $600. Medical expenses may be claimed on a calendar year basis, or, if it helps you get over the deductible, by taking any day in the year and going back 365 days. An example: you have a lot of dental work done in November and December of 2017 and more in January of 2018. Saving the claim for your 2018 tax return (which will be filed in 2019) would make sense. If you have had a lot of ME this year, consider scheduling more this month, to be able to claim on your 2017 return.
What expenses are deductible? An easy way to determine if a provider’s fees qualify is to ask if they are regulated by a provincially chartered college. Everyone from nurses to doctors to dentists to social workers to massage therapists to acupuncturists have a college. One example of providers who do not are the Registered Clinical Counsellors. Prescriptions and medical devices also qualify; this link shows the rules for medical devices and other fees: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-330-331-eligible-medical-expenses-you-claim-on-your-tax-return.html#mdcl_xpns
Refundable Medical Expense Supplement
This refundable credit is still designed to exclude those who could most use it, i.e. seniors and persons with disabilities. To qualify a person needs to have at least $3,465 of employment or self employment income, and the family net income has to be less than $50,017. If you do qualify, the refund is 25% of your allowable medical expenses to a maximum of $1,187.
I’d like to wish all my readers the best of the season, using my lens of Helping You to Keep More of YOUR Money! The next Beacon is the February 2018 issue. I will be looking at changes for the 2017 tax return and preparing to file. I will be at the James Bay New Horizons Friday Forum on March 2, 2018.