This article was written in partnership with the Chartered Professional Accountants (CPA) of Canada.
During tax season, there is an opportunity to refresh or add to your financial knowledge and to do a financial wellness check-up for yourself and your family. That’s why Alberta Blue Cross® is partnering with the CPA to provide advice from experts you can trust.
Acquiring tax smarts
In Canada, the Income Tax Act is the primary source for income tax law. The Canada Revenue Agency (CRA) is responsible for administering the Income Tax Act. You can find lots of current and crucial tax information on the CRA’s website, including their annual T1 income tax package.
Some simple tips to ensure you’re prepared to be a savvy tax filer include
- using the CRA’s resources;
- researching various tax preparation software so you can ensure you’re using one that meets your needs;
- track and organize your finances throughout the year so that it’s simple to see and understand your financial situation in tax season; and
- consider working with a tax professional if you feel that your tax situation is complex, you are uncertain if you are filing your taxes correctly or if you are just looking for a professional second opinion.
Types of tax savings
There are two types of savings that provide tax benefits: absolute and deferred.
Absolute tax savings are money that is saved and can be withdrawn without a tax penalty, such as money in a Tax-Free Savings Account (TFSA). TFSAs have a limit on the amount that you can contribute each year, made up of your annual contribution limit ($6,000 in 2019 and 2020) plus your unused contributions from the previous year (including any contribution space created by withdrawals in the previous year).
Deferred tax savings are money that is saved and will incur taxes upon withdrawal unless it is withdrawn for the express purpose of the savings account, such as money in a Registered Retirement Savings Plan (RRSP) or Registered Education Savings Plan (RESP). RRSPs and RESPs each have unique contribution limits that can be found on their sections of the CRA website.
When managing your household finances and planning for tax season, your overall goal should be to arrange your affairs to minimize your tax liability. This can involve timing income and expenses when possible and utilizing tax credits, deductions and tax-deferred investments.
It is always a good idea to plan ahead and be proactive, not reactive. Set financial goals for the year (for example, maximizing your RRSP contribution), then review your goals and financial situation at the end of the year so you can ensure you’re taking advantage of the available deductions and tax credits. The following are three fundamental strategies you can use to accomplish your tax goals:
- Reduce your income that is subject to tax
- Use income adjustments like interest on investment loans and childcare costs to reduce your total income.
- Defer or postpone income and accelerate discretionary expenses.
- Keep track of and maximize how you use any investment losses.
- Be aware of other income reduction methods, such as claiming motor vehicle expenses (if applicable) or donating publicly traded securities to charity.
- Increase tax deductions
- Tax deductions are a method of reducing your taxable income, such as union dues, moving expenses or RRSP contributions.
- Maximize tax credits
- Tax credits are direct deductions from your taxes payable, rather than your income. This can include charitable donations, medical expenses or tuition costs.
Basic tax strategies
Your T1 return and any balance owing are due April 30 of the following year—so your 2020 tax return is due April 30, 2021. Make sure you file on time to avoid penalties and interest and keep track of any credits or deductions that can be carried forward to future years. Remember to ensure all your family members have filed their returns as well.
You should retain your tax records and financial statements for at least six years, including stock transactions, housing and business property records. Make sure you have backup documents stored and saved by tax year for easy retrieval.
To enhance your tax knowledge, the following links provide some helpful and informative tax resources: