With the exception of RRSP contributions (in most cases) and pension income splitting, any tax planning strategies intended to reduce one’s tax payable for 2013 must be implemented by the end of the calendar year.
While 2013 tax returns don’t have to be filed for at least another six months, it’s worth taking the time now to review possible tax-saving opportunities to make sure any necessary steps are taken before December 31st. Doing so can help avoid or minimize “sticker shock”, in the form of a large tax bill, when the annual tax return is completed next spring.
Make charitable donations for 2013
The federal and all provincial governments provide a two-level tax credit for donations made to registered charities during the year. To earn a credit for the tax year, donations must be made by the end of the calendar year. There is, however, another reason to ensure donations are made by December 31. For federal purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess.
As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December of 2013 will receive a federal credit of $88.00 ($200 times 15% plus $200 times 29%). If the same amount is donated, but the donation is split equally between December 2013 and January 2014, the total credit claimed is only $60. ($200 times 15% plus $200 times 15%), and the 2014 donation can’t be claimed until the 2014 return is filed in April of 2015. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% rather than the 15% level.
It’s also possible to carry forward for up to five years donations which were made in a particular tax year. So, if donations made in 2013 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2008, 2009, 2010, 2011, or 2012 tax years can be carried forward and added to the total donations made in 2013, and then the aggregate amount claimed on the 2013 tax return.
When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high income surtax (i.e., Ontario, Prince Edward Island and the Yukon) it makes sense for the higher income spouse to make the claim for the total of charitable contributions made by both spouses.
For Canadians who have not been in the habit of making charitable donations, there is now an additional incentive to make a cash donation to charity. In this year’s budget, the federal government introduced a temporary (before 2018) charitable donations super-credit. That super-credit allows individuals who have not claimed a charitable donations tax credit in any of the last 5 tax years (that is, 2008, 2009, 2010, 2011 and 2012) to claim a super-credit on up to $1,000 in cash donations made after the budget date of March 21, 2013. The super-credit is equal to 40% of donations under $200 and 54% of donations over the $200 threshold. Donations in excess of $1,000 will, of course, be creditable at regular federal charitable donation credit rates of 15% and 29%, as outlined above.
Make a registered education savings plan (RESP) contribution
It’s possible for Canadians to save for their children’s education on a tax-favoured basis, through a registered education savings plan. While no deduction is provided for contributions made to the plan, investment income earned by those contributions accumulates tax-free, and amounts paid out of the plan to pay for post-secondary education are generally taxed at lower rates in the hands of the student and not those of the original contributor.
The federal government assists contributors to an RESP through a grant program, the Canada Education Savings Grant (CESG). The CESG is equal to 20% of the first $2,500 in contributions made during the year, for a maximum annual grant of $500.
While it’s possible to carryforward grant entitlement to a future year, there are restrictions on the amount of such carryforward. The best way to ensure that the maximum possible CESG is received is to make $2,500 in RESP contributions in each calendar year, by the end of that year.
Consider accelerating medical expenses into 2013
While most out-of-pocket medical expenses incurred by Canadians may be claimed for purposes of the medical expense tax credit, the rules governing that credit can be confusing. The basic rule is that qualifying medical expenses (a list of which can be found on the Canada Revenue Agency website in excess of 3% of the taxpayer’s net income, or $2,152, whichever is less, can be claimed for purposes of the medical expense tax credit.
More practically, the rule for 2013 is that any taxpayer whose net income is less than $71,750 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $71,750 will be limited to claiming expenses which exceed the $2,152 threshold.
The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year but weren’t claimed on the return for the year the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending during 2013 will produce the greatest credit amount. That determination will obviously depend on when medical expenses were incurred, so there is, unfortunately, no universal rule of thumb.
Medical expenses incurred by all family members can be added together and claimed by one member of the family. In most cases, it’s best, in order to maximize the amount claimable, to make that claim on the tax return of the lowest income member of the family who has tax payable for the year.
As December 31st approaches, it’s a good idea to add up the medical expenses which have been incurred during 2013 as well as those paid during 2012 and not claimed on the 2012 return. Once those totals are known, it will be easier to determine whether to make a claim for 2013 or to wait and claim 2013 expenses on the 2014 return. And, if the decision is to make a claim for calendar year 2013, knowing what medical expenses were paid when will enable the taxpayer to determine the optimal 12-month period for the claim. Finally, it’s a good idea to look into the timing of medical expenses which will have to be paid early in 2014. It may make sense, where possible, to accelerate the payment of those expenses to December 2013, where that means that they can be included in 2013 totals and claimed on the 2013 return.
Take a look at the amount of tax instalments paid this year
Millions of Canadian taxpayers (in particular, the self-employed or retired) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total tax liability for the year.
The final quarterly instalment will be due on December 15, 2013. (However, since this year December 15 falls on a Sunday, the actual date on which payment is due will be Monday December 16.) By that date, almost everyone should have a reasonably good idea of what his or her income will be for 2013 and so will be in a position to estimate what the tax bill will be for the year. While the tax return forms to be used for the 2013 tax year haven’t yet been released by the Canada Revenue Agency, it’s possible to arrive at an estimate by using the 2012 form. Increases in tax credit amounts and tax brackets from 2012 to 2013 will mean that using the 2012 form will result, if anything, in a slight overestimate of tax liability for 2013.
Once one’s tax bill for 2013 has been estimated, it’s possible to compare that figure with the total of tax instalments already made for 2013 and to determine whether the tax instalment to be paid on December 15 can be adjusted downward.