Filing Your Taxes 2019: What You Need to KnowSubmitted by MacDev Financial Group on January 28th, 2019
Guest Post by Mike Baker, Life Insurance Broker/ Bank On Yourself Authorized Advisor with MacDev & SET Financial
CPA, CA, CPA (ILLINOIS, USA), AB
Well the holidays are over and it’s time to get back to work, school and the gym!!
You might think that it is a bit early to start thinking about your taxes as the deadline for filing is April 30th for most of us, and June 15th for certain unincorporated businesses. However, we are hoping that you might see the benefit of thinking about your taxes all year long!
At MacDev Financial Group, our main mission is to help as many Canadians as we can achieve Financial Control For Life TM. We believe you are your biggest asset, and it is our view that taxes are the single largest expenditure you will have during your lifetime. **Therefore, learning about your taxes and tax situation might be worth while and is not as difficult as you might think!
To Prepare (Or Not To Prepare) Your Own Tax Return
The decision on whether to prepare your own tax return is not easy. If you own a company, or have an unincorporated business, then you should strongly consider hiring a professional. A tax professional can identify tax-saving opportunities, are more up to date with tax rule changes, have insurance, and can provide you with additional support in case of an audit.
However, remember that there is an old saying that if you think hiring a professional is expensive, then wait until you hire an amateur! You should be satisfied with the qualifications of the individual that is preparing your taxes and you will be required to sign the final return which means ultimately, you are responsible for the information contained therein.
The Objective of Tax Planning
The opportunities to eliminate tax are getting less and less with each passing year. As some of you might know, before 1972 capital gains were not taxed in Canada and now, they are taxed at a rate of 50 percent. There are only a few assets now left that are not subject to taxation. These include life insurance, your principle residence (i.e. the family home), Tax Free Savings Accounts (TFSAs), the lifetime capital gains exemption on qualifying small business corporation shares, and qualified farm and fishing properties.
That’s why you might want to read this sentence from the Taxpayer Bill of Rights Guide: Understanding Your Rights as a Taxpayer, a few times:
“You have a right to pay no more (tax)...than is required by law.”
Yes, that is right! You can reduce your taxes to the lowest possible amount under the law. The Income Tax Act is a rule book and you can use the rules within it to legitimately reduce your taxes. The basic rules are to eliminate, reduce or defer taxes and these principles should be applied in the exact same order listed when filing your tax claim.
The Importance of Tax Reductions
Tax reductions are accomplished by claiming deductions or tax credits on your personal or business return. Many individuals and business owners pay more tax than they must, primarily because they don’t know what eligible expenses against certain types of income are. *I have provided a list of eligible expenses at the end of this article.
Potential tax reductions may also be lost due to issues with poor record keeping. With respect to record keeping, I recommend setting up separate accounts and/or using a single credit card strictly for business expenses. It is also very important to keep your receipts in case they are requested by the CRA because generally no receipts, equal no deduction/s.
The CRA recommends you keep your taxes on file for at least six years. Generally, a return becomes barred by statute three years after the notice of assessment or one year after the notice of reassessment, however there is no limit in the case of fraud. In fact, the CRA wants you to ask permission to formally destroy tax records.
Tax Credits vs Tax Deductions
Tax credits are not as valuable as tax deductions because tax credits are generally applied at the lowest marginal tax rates for an individual. I have a few helpful hints with respect to tax credits as follows:
1. If you own a business in which you receive most of your income in the form of dividends, consider issuing a T4 slip up to $3,500 to get the Canada employment amount.
2. Take advantage of pension income splitting and/or the pension tax credit of $2,000. Couples can split eligible pension income to take advantage of this credit and individuals over the age of 65 have planning opportunities as well to take advantage of this amount.
3. Carefully consider the disability amount if you or a member of your family may be considered markedly restricted in the activities of daily living which include vision, speaking, hearing, walking, eliminating, feeding, dressing, mental functions and if they are on life sustaining therapy. The CRA also can consider the cumulative effect of multiple restrictions in assessing an individual as disabled for the purposes of this credit. This credit could also be transferred to supporting individuals which is an opportunity that should not be overlooked.
4. Most of us know that there is a tax credit for medical expenses. However, many people may not be aware that eligible medical expenses may include payments made outside your province and payments made outside of Canada. Also, eligible medical expenses can include travel costs for both you and another individual if required. Travel expenses may be calculated based on prescribed rates for mileage and meals which eliminated the need to keep those receipts. Another consideration for individuals with a business is the establishment of a Private Health Services Plan which can provide a better result since the medical expense credit has a threshold of 3% of eligible expenses or $2,302 whichever is less for 2018.
5. Look towards the future, if you own a business that will generate enough taxable income over time, you should consider taking taxable income up to the point where you are paying some provincial taxes. If you are paying some provincial taxes (meaning a mere $1 in provincial tax) you will have used all your personal tax credits. Personal tax credits and most other credits are “use them or lose them”. This can be achieved by declaring a bonus or a dividend (in the case of an incorporated company) and/or looking at discretionary deductions like capital cost allowance (i.e. tax depreciation).
Tax deferral can be a complex subject. Tax deferral is to delay paying taxes to some future period, which may be indefinite and may result in the income being taxed at a lower rate.
A common tool used for tax deferral is a contribution to a Registered Retirement Savings Plan (RRSP). The theory that has been proposed for these plans is based on a few myths that are not all tax-related. RRSP’s have been traditionally marketed on the premise that you will have less income in retirement than you will during your earnings years. And given the amount of fees, the recharacterization of tax advantaged income (such as capital gains and dividends) that may be the case, but it is certainly not what most people expect!
The RRSP also relies on the fact that tax rates will either stay the same or never go up in the future! RRSPs are not well understood and accordingly, may not provide the tax benefits many of us hope to achieve.
With the availability of information today, we can become better at controlling our finances which includes the amount of tax that we pay. We can and will work with you and your tax preparer to assist you in understanding and improving your tax situation.
MacDev Financial also specializes in insurance services designed as tax-reduction strategies both for personal use and in business. These include participating whole life insurance as a financial asset and Private Health Insurance plans (also called a Health & Welfare Trust) for incorporated businesses.
To learn more, you can contact me at 403.878.3918 or firstname.lastname@example.org for a free, no-obligation 30-minute consultation.
*List of Eligible Business Expenses
· Meals and entertainment
· Bad debts
· Business taxes, licenses, and memberships
· Office expenses
· Office stationary and supplies
· Professional fees
· Management and administration fees
· Repairs and maintenance
· Salaries, wages and benefits
· Property taxes
· Travel expenses
· Fuel costs
· Delivery, freight and express
· Motor vehicle expenses
· Capital cost allowance
· Convention fees
· Private health plan fees
· Terminal loss
· Business-use-of-home expenses
**Disclaimer: The information given in this document is for educational purposes only. All financial endeavors and/or tax strategies should be vetted through a financial professional; example, life insurance broker, financial planner, accountant, and/or lawyer, as the reader sees fit. MacDev Financial Group Corp, including but not limited to its agents, staff, associates and/or partners will not assume any liability for any information printed in this article; indirectly, or assumed.