The Canadian income tax system, as it applies to individuals, operates on a calendar year basis. While there are a few exceptions (RRSP contributions and pension income splitting being the important ones), the general rule is that, in order to be effective for a particular taxation year, tax planning strategies must be implemented before the end of that year.
Although most taxpayers don’t give a lot of thought to their tax situation until it’s time to file the annual return, by then it’s usually too late to put any desired strategies in place. So, while individual tax returns for 2015 don’t have to be filed, at the earliest, until April 30, 2016, it’s worth taking the time now to evaluate one’s tax situation, consider possible strategies to reduce the tax bill for 2015, and execute those strategies before December 31, 2015. No one wants to be in the position of completing a tax return and discovering that money is owed to the government, while at the same time realizing that steps that could have been taken to reduce or eliminate that tax bill are no longer possible.
What follows is a list of some of the more common tax deductions and credits which are claimed by Canadian taxpayers, and the year-end considerations that apply to each.
Claiming medical expenses
While most out-of-pocket medical expenses incurred by Canadians may be claimed for purposes of the medical expense tax credit, the rules governing the computation of 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 (CRA) website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/llwbl-eng.html) in excess of 3% of the taxpayer’s net income or $2,208—whichever is less—can be claimed for purposes of the medical expense tax credit.
Put in practical terms, the rule for 2015 is that any taxpayer whose net income is less than $73,600 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 $73,600 will be limited to claiming expenses which exceed the $2,208 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 2015 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 is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower income spouse, where that spouse has tax payable for the year.
As December 31 approaches, it is a good idea to add up the medical expenses which have been incurred during 2015, as well as those paid during 2014 and not claimed on the 2014 return. Once those totals are known, it will be easier to determine whether to make a claim for 2015 or to wait and claim 2015 expenses on the 2016 return. And, if the decision is to make a claim for calendar year 2015, 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 2016. It may make sense, where possible, to accelerate the payment of those expenses to December 2015, where that means that they can be included in 2015 totals and claimed on the 2015 return.
Making charitable donations
The federal and all provincial governments provide a two-level tax credit for donations made to registered charities during the year. To claim a credit in a particular 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 2015 will receive a federal credit of $88 ($200 × 15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2015 and January 2016, the total credit claimable is only $60. ($200 × 15% + $200 × 15%), and the 2016 donation can’t be claimed until the 2016 return is filed in April of 2017. 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 2015 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 2010, 2011, 2012, 2013, or 2014 tax years can be carried forward and added to the total donations made in 2015, and then the aggregate amount claimed on the 2015 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—Ontario, Prince Edward Island, and the Yukon—it makes sense for the higher income spouse to make the claim for the total of charitable donations 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 the 2013 Budget, the federal government introduced a temporary (before 2018) charitable donations super-credit. That super-credit (which can be claimed only once) allows individuals who have not claimed a charitable donations tax credit for any taxation year after 2007 to claim a super-credit of 25% on up to $1,000 in cash donations made during the year. The super-credit, in combination with the regular charitable donations tax credit claimed, is therefore equal to 40% of donations under $200 and 54% of donations over the $200 threshold.
Reviewing tax instalments for 2015
Millions of Canadian taxpayers (particularly the self-employed and retired Canadians) 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 for this year will be due on Tuesday, December 15, 2015. By that date, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2015, and will therefore be in a position to estimate what the tax bill will be for the year, taking into account any tax planning strategies put in place. While the tax return forms to be used for the 2015 tax year haven’t yet been released by the CRA, it’s possible to arrive at an estimate by using the 2014 form. Increases in tax credit amounts and tax brackets from 2014 to 2015 will mean that using the 2014 form will result, if anything, in a slight overestimate of tax liability for 2015.
Once one’s tax bill for 2015 has been calculated, it’s possible to compare that figure with the total of tax instalments already made for 2015 (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281) and to determine whether the tax instalment to be paid on December 15 can be adjusted downward.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.