Here are some pointers to keep in mind as you prepare to file your tax return on personal income from 2012 by the deadline of April 30, 2013.
1. Be sure to take advantage of all income-splitting and pension-sharing opportunities.
Taxpayers can apply to share their Canada Pension Plan (CPP) retirement income with their partners if both are 60 or over. While pension sharing is not considered to be the same as pension income splitting, CPP pension sharing accomplishes much the same thing — putting more income into the hands of the lower-income partner. You can find out more about CPP retirement pension sharing here. The post-retirement CPP benefit, new in the 2012 tax year, is not eligible for pension sharing.
Those 65 and over can split several kinds of pension income, such as life annuity payments from a company pension plan, RRIF payments and annuity payments from an RRSP or deferred profit sharing plan. This is also possible for those under 65, when the spouse has died.
Income splitting can save thousands of dollars in tax as income is shifted from someone in a higher tax bracket to someone in a lower bracket. Sometimes, splitting can succeed in reducing or eliminating the clawback on Old Age Security payments or the age credit for the higher-income spouse.
Pension income splitting can also allow both partners to claim the $2,000 pension income tax credit.
2. Don’t assume that you don’t need to bother filing a tax return because you have no income.
Some low- or zero-income earners still think there’s no need to file a return. This misunderstanding can cost thousands of dollars in lost benefits and credits like the GST/HST credit and the Canada Child Tax Benefit. More and more benefits are being distributed through the tax system these days. So if no return is filed … no benefits get sent.
For some benefits, like the Guaranteed Income Supplement and the Working Income Tax Benefit, recipients need to apply every year.
Provinces also offer sales tax credits and property tax credits for low income earners. But again — no tax return, no credit.
Teenagers who earn a few thousand dollars should also consider filing. That creates RRSP room that can be carried forward indefinitely to use at a time when they will owe tax.
3. Be sure to transfer any unused credits.
A variety of tax credits — such as the Child Tax Credit — can be transferred between spouses.
Several credits for students — such as the tuition, education and textbook credits — can be transferred to a spouse, a parent, or even a grandparent once the credits are used to reduce the student’s tax payable to zero.
The credits can also be carried forward indefinitely so the student can use them later when he or she starts earning money.
4. Know the limits of using tax software or online tax-filing programs.
Once you tell most of the well-known tax software programs that you’re a student, or a senior, or a parent, or have medical expenses, or have a spouse or equivalent, they’ll prompt you with relevant questions and automatically make sure you end up applying for any relevant credits. You can also avoid those pesky math errors.
Many of these programs will also offer suggestions to transfer credits and optimize deductions between spouses and family members.
They’re also great for performing some of those "what-if" scenarios.
But for those with a more complicated tax life, such as those with rental properties or self-employment income, it may be a good idea to call in a pro.
5. Be sure to claim all eligible medical expenses.
Tax experts say missed medical expenses are one of the most overlooked tax breaks.
Many people don’t bother to add everything up because of the income-related threshold: only expenses that exceed the lesser of $2,109 or three per cent of net income can be claimed.
But what they don't realize is that there’s a long list of expenses that qualify, so it’s often not too difficult to reach that threshold.
Travel expenses even qualify when people need to go more than 40 kilometres (one way) to get medical treatment that isn’t available closer to home.
Medical expenses can be claimed by either spouse or partner.
6. Take advantage of the new tax credits.
Last year's federal budget introduced new tax credits.
You may be able to claim up to an additional $2,000 in tax credits under the family caregiver amount if you have a dependent with a physical or mental impairment, including, under certain conditions, a spouse or common-law partner.
And if you have an investment in a mining operation that allocates certain exploration expenditures to you, the eligibility for the mineral exploration tax credit has been extended to flow-through share agreements entered into before April 1, 2013.
7. Keep good records.
Receipts are necessary to claim medical expenses or to file for a wide range of other tax credits. While they don’t need to be sent along if a taxpayer is Netfiling, the paperwork must be kept for at least six years.
For a small business owner, good receipts are an absolute necessity.
Be aware, too, that the Canada Revenue Agency carries out spot checks on tax returns. Extraordinary child care expense or moving expense claims can be red flags for CRA auditors. So can big interest deduction claims.
If you’re not hiring a pro to do your taxes, know what you can and can’t deduct.
8. Be proactive with your taxes.
The experts point out that there’s only so much you can do to minimize taxes once you’re actually at the point of filing your return. Once you’ve made your tax-related transactions, it’s not easy to revisit them at tax time.
So now’s the time to plan strategically if you’re thinking of selling or acquiring investments or exercising stock options in 2012.
9. Be sure to report all T-slips.
Here's a possible scenario: You file your 2012 return and later discover that you've failed to include a T-slip reporting income or a dividend payment. No problem, you think, because you know the slip’s issuer also sends the same information to the Canada Revenue Agency. You think you don’t need to bother forwarding this late slip to the tax department because the CRA will know about it.
That turns out to be a big mistake.
If you fail to report income in 2012 and also failed to report income just once in any of the three previous years, you can be nailed with what’s called a "repeated failure to report income penalty."
The penalty, which is automatically generated by the CRA's computers, is 20 per cent of the amount you fail to report in 2012.