Personal Tax – Some Tips and Reminders
With a $113 Billion Canadian deficit in 2021-22, we can all understand our need to pay our fair share of taxes, but it is equally important to ensure we are aware and capitalize on the deductions available to minimize our tax liability.
While much of the tax planning advice to our clients happens before the end of the calendar year (especially with private businesses and holding companies that can consider the repatriation strategies to ensure overall tax is minimized), April is still an important time to gather receipts and ensure expenses and deductions are maximized.
Here are a few timely reminders below of things you can do to help minimize your tax liability. Our team is available if you have any questions or would like any additional information. Please send any questions to info@digitaltaxCPA.ca and one of us will get back to you with the answer.
Self-employed individuals
General test of deductions is whether the expense was incurred to earn the business income. So take some time to consider the nature of costs that have been incurred and whether they relate to the business. Some expenses are directly related but others such as promotion, entertainment, travel, should be more carefully considered and the purpose of the expenditure related to business activities or personal.
Self-employed individuals working out of their homes can claim a home office expense deduction provided the workspace is the principal place of business and is used on a regular and continuous basis to meet clients. Meeting the second criteria depends on the nature of activities of the business and whether the business has an office outside the house. The expenses related to a workspace that are eligible for deduction include, for example, the prorated port of rent, property insurance, property taxes, mortgage interest, and operating costs. While it may be possible to claim tax depreciation on your home, we do not recommend this as it may impact the ability to have the gain on the sale of your principal residence tax free.
Claiming HST credits. While self-employed individuals are not required to register for HST until they have sales in excess of $30,000, the individual must be registered for HST to be entitled to claim an input tax credit on costs incurred. This is especially important for new businesses that may be incurring losses in the initial year(s).
Current vs Capital expenses. A key area of focus while considering how to maximize deductions is to consider whether the expenditure can be fully deducted in the year incurred or is on account of “capital” deductible over time. As the tax depreciation rate varies by type of asset, classification is important and needs careful review.
Employees
Often the best tax planning strategy for employees to maximize after tax cash, is actually to have your employer reimburse expenses. This is also the case even if such amount constitutes a taxable benefit. Consider an example – a home computer monitor costs the employee $200. As this cost would not be deductible to the employee, he/she/they would have to earn more than twice that amount in salary in order to have the after-tax cash to make the purchase (Employees at the top marginal rate would need $434 in salary to have $200 cash). However, if the employer owned the computer monitor and provided it to the employee, arguably there would not be a taxable benefit to the employee. This would result in savings to the employee after tax of $200.
While there are limited tax deductions for employees, during COVID, the majority of employees have been entitled to claim office in home expenses. If you are primarily working from home (at least 3 days out of 5 per week, as an example) and required to do so by your employer, you may claim certain expenses for your office in home. To claim such expenses, you are required to obtain form T2200 from your employer confirming your eligibility. The costs that can be claimed for general non-commissioned employees are the prorated portion of utilities, internet, maintenance, or rent, as applicable.
General
Find and keep your tax receipts. To claim tax deductions or credits, it is important to have support. A simple and important tip is to spend some time gathering your receipts to see what you claimed, especially donation receipts, dues, automobile, and medical expenses.
Capitalizing on the different tax rates on types of income can result in tax savings. It is important to note that dividends and capital gains are taxed at more preferential rates than ordinary income. Interest incurred to earn income should be deductible in the year incurred, irrespective of the timing of the income. There is a direct sourcing concept and therefore ensuring you are borrowing for investments that would result in tax-deductible interest is much better than borrowing that would not generate tax-deductible interest.
Remember your losses. One-half of capital gains are taxable in the year of disposition in Canada while one-half of any capital losses are only available to be carried back three years and forward indefinitely to shelter other capital gains. If you had a capital gain in the year, ensure you consider all of your historical filings so as not to forget to deduct prior year non-capital losses.
