Personal Year-end Tax Tips
December 31st is not that far away, so
take steps before the year is over to reduce your tax load for next year.
"To qualify for tax savings, plan ahead and review your personal finances before
the end of 2006," explains Chartered Accountant Dianne McMullen, Tax Partner
with BDO Dunwoody LLP in Toronto.
Here are her top 10 tips for saving taxes and making the most of your money.
Pay your
income tax installments by the due dates to avoid non-deductible interest
charges and penalties.
If you fail to pay the required amounts on time, the Canada Revenue Agency will
charge interest on your overdue payments at their prescribed rate (which is
currently nine per cent). A penalty may also apply.
Make
your contribution to a Registered Education Savings Plan.
The first $2,000 of your annual contribution is eligible for a 20 per cent
grant, to a maximum of $400 per child, per year. For lower and middle-income
families, the grant may be 30 or even 40 per cent. Because a limited
carry-forward is available, it's wise to contribute each year to receive the
maximum grant.
If you have
investments with accrued losses, consider selling them before the end of the
year.
This will offset any capital gains you have in this calendar year as well as in
the three preceding years (to the extent that current year losses exceed current
year gains).
Delay
purchasing mutual funds until late December.
Most equity mutual funds and many other funds, distribute income and capital
gains for the entire year in late December. If you buy a fund in mid-December,
before the fund distributes income and gains, you will pay tax on earnings that
aren't yours.
Review your
outstanding debt to make any interest expenses deductible to the maximum amount.
While you cannot deduct interest on personal debts, such as a mortgage used to
buy a personal residence, you can deduct the interest on loans incurred for
investment purposes.
Contribute
to your RRSP. For 2006, the maximum limit is $18,000 less your 2005 pension
adjustment if you are a member of a pension plan. Your contribution limit for
2006 is set out in your Notice of Assessment for 2005.
Ensure that
your earned income allows for the maximum RRSP contribution for the following
year. You will need earned income of $105,556 in 2006 in order to make the
maximum contribution of $19,000 in 2007.
Remember to
make your repayment to the Home Buyers' Plan.
Under the Home Buyers' Plan, you can withdraw up to $20,000 from your RRSP to
purchase a home if you are considered a "first-time" homebuyer under the rules.
Generally, you will have to repay your withdrawal to your RRSP within a period
of no more than 15 years. To the extent a required repayment is not made, it
will be included in your income for that year.
Save your
medical expenses and claim them in one year.
You can claim a tax credit if your medical expenses exceed a threshold equal to
the lesser of three per cent of your net income or approximately $1,900. This
threshold applies to both your own medical expenses, as well as those of your
spouse and your minor children. You can also claim expenses for other family
members you support such as an adult child, a grandchild, a parent or a
grandparent as long as you paid the expense. The total expenses for a particular
dependant cannot exceed the threshold described above and the three per cent
amount is based on the dependant's income. There may be some discretion in the
timing of expense payments of orthodontics, glasses and contact lenses.
Pay before
December 31st for a tax deduction or a tax credit.
By paying certain expenses – including childcare, charitable donations,
political donations and professional dues – before December 31st, you can claim
them on your tax return and reduce your taxes.
For more information contact a Chartered Accountant
Brought to you by the Institute of Chartered Accountants of Ontario.