Tax planning is about organizing your affairs to minimize (or reduce) your tax burden. Taxes are one of the biggest expenses to the Canadian investor. The Income Tax Act imposes taxes on the income of every individual resident in Canada. The Income Tax Act is enormously complex but detailed knowledge is not required. The average person will be well served by knowing and taking advantage of some simple and common tax saving opportunities.
If you are a Canadian resident who earns income you are required to file a tax return. Filing a tax return is a one-time annual event. However, throughout the year you should take the time to consider the tax implications of your financial and investment decisions.
Although filing a tax return and getting a refund seems advantageous, in reality it means that you have loaned money to the government interest free for the year. More prudent tax planning arranges things so that when you file your tax return you have a balance owing. Keeping the balance owing under $3,000 will help you avoid having to make tax instalment payments.
|This article is intended to provide general guidelines and information about Tax planning. However, the description of tax and legal issues should not be construed as professional advice. Investors are strongly urged to consult an accountant or lawyer for specific recommendations to fit their personal circumstances.|
- 1 Do
- 2 Don't
- 3 Instalments
- 4 Other key dates to remember
- 5 Resources
- 6 See also
- 7 References
- 8 Further reading
- 9 External links
- If you are employed, make sure you keep your TD1 - Personal Tax Credits Return current and up-to-date.
- If you are employed, you can also complete a T1213 - Request to Reduce Tax Deductions at Source to ask for reduced tax deductions at source for any deductions or non-refundable tax credits that are not part of the Form TD1, Personal Tax Credits Return. If your T1213 is approved, the approval is given to your employer. The employer reduces your at source tax deductions by the approved amounts.
- Be aware of your marginal tax rate so that where possible, you can make effective financial decisions.
- Avoid taxes:
- Profits from the sale of a principal residence are tax free, although you have to declare the sale in your tax return.
- Profits from up to $835,714 in 2017 of capital gains from the sale of an active business you own, are tax free thanks to Lifetime Capital Gains Exemption (LCGE). It is indexed to inflation for tax years after 2014
- Since 2009, adults can avoid income taxes on investment income in a Tax-Free Savings Account (TFSA).
- Defer taxes: Contribute to your pension plan or a Registered Retirement Savings Plan (RRSP), and a Registered Education Savings Plan (RESP) if you have children. Investment income and gains are not taxed until withdrawal, which allows investment returns to compound tax-free over long periods of time. Consider the incorporation of small businesses in order to use the deferral opportunities inherent in the special low tax rate available to a Canadian controlled private corporation (CCPC).
- Split income: Canada's tax system has progressively higher rates as you earn more, so having income taxed in the hands of lower income family members saves money. Consider employing your spouse or children if you have a business. Contribute to a spousal RRSP. Split your Canada Pension Plan entitlements. Consider setting up a spousal testamentary trust. Income in a spousal testamentary trust can be taxed on a graduated separate basis from your spouse.
- Generate tax-preferred investment income: dividends from Canadian corporations and capital gains on the sale of investments get preferential tax treatment relative to earned income and interest. Earning $80,000 at a job in 2008 would cost an Ontario resident about $23,000 in income tax, Canada Pension Plan (CPP)] and Employment Insurance (EI) premiums. The same income, half in dividends from Canadian public companies and half in capital gains, is liable for about $6,000.
- Keep the least tax-efficient securities (e.g. bonds and high yielding foreign equities) inside your RRSP/Registered Retirement Income Fund (RRIF)/TFSA and the most tax-efficient outside.
- File a Foreign Income Verification Statement, Form T1135 if holding over $100,000 in foreign investments.
- Cheat on your income tax returns by falsifying your income or expenses.
- Buy an investment that is being touted more for its tax benefits than its returns.
You are required to pay your income tax by instalments for a tax year if your net tax owing is more than $3,000 ($1,800 if you lived in Quebec on December 31) in that tax year, and in either of two previous years. An instalment reminder is issued to help you determine if you have to pay income tax by instalments. Two reminders are sent out. The first one is sent in February and is for the March and June payments. The second one is sent in August and is for the September and December payments. The reminder will suggest an amount to pay and list the payment options.
You can also see your instalment reminders and payment history online using the CRA's My Account for Individuals.
Canada Revenue Agency (CRA) has an Instalments section on their website, Paying your income tax by instalments, that provides comprehensive information about tax instalments.
If you are required to pay tax instalments, you have three options to calculate the amount of the payments. They are covered in the following sections.
No-calculation option is best for you if your income, deductions, and credits stay about the same from year to year.
With this option you use CRA's instalment notice payment amounts, which generally results in four instalments due. The first two will equal one-quarter of your balance due in 2016. The second two are calculated so that your total instalments equal your 2017 balance due.
- This option is easy to apply: pay the instalments calculated by CRA.
- If you use the no-calculation option and make the payments in full by their 2017 due dates, CRA will not charge instalment interest or a penalty.
- If you know your 2018 net income will be lower than 2017 and 2016, CRA’s method of calculating instalments may result in an overpayment, meaning you will pay too-high instalments during the year and you will need to wait until you receive a tax refund to get the money back. This may happen if your income has been decreasing over the past two years.
Prior-year option is best for you if your 2018 income, deductions, and credits will be similar to the 2017 amounts but significantly different from those in 2016.
With this option each instalment is one-quarter of your 2017 balance due.
- If you use the prior-year option and make the payments in full by their 2017 due dates, CRA will not charge instalment interest or a penalty unless the total instalment amount due you have calculated is too low.
- You will need to do calculations to estimate your instalment amounts.
- CRA can charge you penalty and interest if the total instalment amount due you have calculated is too low.
Current-year option is best for you if you plan that your 2018 income, deductions, and credits will be significantly lower from those in 2017 and 2016.
With this option, you calculate each instalment as one-quarter of your anticipated 2018 balance due.
You do not have to pay your income tax by instalments for 2018 if your net tax owing for 2018 will be $3,000 or less ($1,800 or less for residents of Quebec), even if you received an instalment reminder in 2018., but you are at risk of having to pay non-deductible penalty and interest.
- If you expect that your tax owing will be lower in the current year, the current-year option will result in a lower instalment requirement to pay in 2018.
- You will need to estimate in advance your 2018 balance due.
- Should you underestimate your balance due and pay insufficient instalments, you are subject to non-deductible penalty and interest charges.
Instalment due dates
There are four instalment due dates, set to the 15th of each quarter:
- March 15th
- June 15th
- September 15th
- December 15th
When a due date falls on a Saturday, a Sunday, or a public holiday recognized by the CRA, your payment is considered to be paid on time if they receive it or if it is postmarked on the next business day.
Other key dates to remember
Personal tax returns
Generally your tax return must be filed on or before April 30th of the following year. The notable exceptions are self-employed persons and deceased persons.
Important dates for security settlement are:
- Dec 27th, 2017 - final trade date for Canadian equities for settlement in 2017 tax year
- Dec 27th, 2017 - final trade date for US equities for settlement in 2017 tax year.
- Dec 28th, 2017 - final trade date for Options for settlement in 2017 tax year.
You should also check with your discount broker because some markets close early around holidays.
Other CRA important dates
If you want to estimate income taxes payable, there are a few online tax estimators available.
The Chartered Professional Accountants of Canada (CPA Canada) has an annual publication, 'The Personal Tax Planning Guide 20xx-yy'. Each year, the CPA prints this helpful client guide so that firms can distribute copies to their clients in the early fall in preparation for the next tax season. Many accounting firms make this guide available not only to their clients, but include links to an electronic copy of their website.
- Canada Revenue Agency, All about your tax return, viewed July 28, 2017.
- Canada Revenue Agency, TD1 - Personal Tax Credits Return, viewed July 28, 2017.
- Canada Revenue Agency, T1213 - Request to Reduce Tax Deductions at Source, viewed July 28, 2017.
- TaxTips.ca, Lifetime Capital Gains Exemption (LCGE), viewed July 28, 2017.
- Service Canada, Pension Sharing, Viewed July 28, 2017
- GlobeAdvisor.com, Pitfalls of JTWROS Accounts--Scenario B
- Canada Revenue Agency, Do you have to pay tax by instalments?, viewed July 28, 2017.
- Canada Revenue Agency, How do you calculate your instalment payments?, viewed July 28, 2017.
- EY, Managing Your Personal Taxes 2015-16: A Canadian Perspective, page 98, viewed July 28, 2017.
- Segal, Tax Instalments, viewed July 28, 2017.
- Canada Revenue Agency, Tax return filing due dates, viewed December 10, 2013.
- "Tax treatment of investments - trade and settlement dates; Last trading date for 2017". TaxTips.ca. http://www.taxtips.ca/personaltax/investing/taxtreatment/tradeandsettlement.htm. Retrieved 13-Dec-2017.
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