Tax planning
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.[1] 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 small balance owing. Keeping the balance owing under $3,000 (or $1800 in Quebec) will help you avoid having to make tax installment payments.[2]
 | 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. |
Do
- Be aware of your marginal tax rate so that where possible, you can make effective financial decisions.
Pay an appropriate amount of tax during the year
- If you are employed, make sure you keep your TD1 - Personal Tax Credits Return[3] current and up-to-date.
- If you are employed, you can also complete a T1213 - Request to Reduce Tax Deductions at Source[4] 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. Deductions available include:
- Registered Retirement Savings Plan (RRSP) contributions
- Child care expenses
- Family support payments
- Employment expenses
- Interest paid on investment loans
- Medical expenses
- Charitable donations
Use exceptions
- A capital gain from the sale of a principal residence is except using the principal residence exception (PRE), although you have to declare the sale in your tax return.[5]
- Profits from up to $$883,384 in 2020 of capital gains from the sale of an active small business you own, are tax free thanks to Lifetime Capital Gains Exemption (LCGE).[6] It is indexed to inflation for tax years after 2014[7]
- 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 an 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.[8]
Optimize Canadian taxes on investments
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.
Watch foreign investment income and taxes
- File a T1135 Foreign Income Verification Statement if holding over $100,000 in foreign investments.[9]
- File a W-8 BEN if you are a Canadian resident and have US income subject to withholding taxes. The W-8 BEN form can reduce the tax withholding rate from 30% to 15%.
Don't
- 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.
Installments
You are required to pay your income tax by installments 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.[10]
An installment reminder is issued to help you determine if you have to pay income tax by installments. 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 installment reminders and payment history online using the CRA's My Account for Individuals.
Canada Revenue Agency (CRA) has an installments section on their website, Paying your income tax by installments, that provides comprehensive information about tax installments.
Calculating payments
If you are required to pay tax installments, you have three options to calculate the amount of the payments.[11] They are covered in the following sections.
No-calculation option
No-calculation option[11] is best for you if your income, deductions, and credits stay about the same from year to year. The amounts dues will be on the installment reminders that CRA will send you. CRA determines the amount of your installment payments based on the information in your latest assessed tax return.
CRA will send installment reminders to people who may have to pay tax by installments:
- The February reminder is for the March and June payments
- The August reminder is for the September and December payments
With this option you use CRA's 2024 installment notice payment amounts, which generally results in four installments due. The March and June payments will equal one-quarter of your balance due in 2022 (last assessed tax return as of February 2024). The September and December payments are calculated so that your total 2024 installments equal your 2023 balance due (last assessed tax return as of August 2024).[12] If you do not receive an installment notice from the CRA, no installment payment is required.
Advantages
- This option is easy to apply: pay the installments calculated by CRA.
- If you use the no-calculation option and make the payments in full by their 2024 due dates, CRA will not charge installment interest or a penalty.
Inconvenient
- If you know your 2024 net income will be lower than 2023 and 2022, CRA’s method of calculating installments may result in an overpayment, meaning you will pay too-high installments 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.[13]
Prior-year option
Prior-year option[11] is best for you if your 2024 income, deductions, and credits will be similar to the 2023 amounts but significantly different from those in 2022.
With this option each installment is one-quarter of your 2023 balance due.[12]
Advantage
- If you use the prior-year option and make the payments in full by their 2024 due dates, CRA will not charge installment interest or a penalty unless the total installment amount due you have calculated is too low.[11]
Inconvenients
- You will need to do calculations to estimate your installment amounts.
- CRA can charge you penalty and interest if the total installment amount due you have calculated is too low.
Current-year option
Current-year option[11] is best for you if you plan that your 2024 income, deductions, and credits will be significantly lower from those in 2023 and 2022.
With this option, you calculate each installment as one-quarter of your anticipated 2024 balance due.[12]
You do not have to pay your income tax by installments for 2024 if your net tax owing for 2024 will be $3,000 or less ($1,800 or less for residents of Quebec), even if you received an installment reminder in 2024.[10], but you are at risk of having to pay non-deductible penalty and interest.
Advantage
- If you expect that your tax owing will be lower in the current year, the current-year option will result in a lower installment requirement to pay in 2024.
Inconvenients
- You will need to estimate in advance your 2024 balance due.
- Should you underestimate your balance due and pay insufficient installments, you are subject to non-deductible penalty and interest charges.[11]
Installment due dates
There are four installment 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.[14] The notable exceptions are self-employed persons and deceased persons. CRA requires you must keep all required records and supporting documents for a period of six years from the end of the last tax year to which they apply.[15]
Securities trading
Important dates for security settlement are:
- Dec 27th, 2023 - final trade date for Canadian equities for settlement in 2023 tax year[16]
- Dec 27th, 2023 - final trade date for US equities for settlement in 2023 tax year.[16]
- Dec 28th, 2023 - final trade date for Options for settlement in 2023 tax year.
You should also check with your discount broker because some markets close early around holidays.
Other CRA important dates
There are many other important dates that can be found on CRA - Important dates for Individuals and CRA - Important dates for businesses.
Resources
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.
See also
- Donating appreciated securities
- Estate planning
- Settlement dates
- Tax-efficient investing
- Tax treatment of pension payments
References
- ^ Canada Revenue Agency, All about your tax return, viewed March 21, 2021.
- ^ Canada Revenue Agency, Do you have to pay tax by installments?, updated January 29, 2021, viewed March 21, 2021.
- ^ Canada Revenue Agency, TD1 - Personal Tax Credits Return, viewed March 21, 2021.
- ^ Canada Revenue Agency, T1213 - Request to Reduce Tax Deductions at Source, viewed March 21, 2021.
- ^ Canada Revenue Agency, Principal residence and other real estate, viewed March 21, 2021.
- ^ Canara Revenue Agency, What is the capital gains deduction limit?, viewed March 21, 2021.
- ^ TaxTips.ca, Lifetime Capital Gains Exemption (LCGE), viewed July 28, 2017.
- ^ Service Canada, Pension Sharing, Viewed July 28, 2017
- ^ "T1135 Foreign Income Verification Statement". Canada.ca. Retrieved March 24, 2020.
- ^ a b Canada Revenue Agency, Do you have to pay tax by installments?, viewed July 28, 2017.
- ^ a b c d e f "How do you calculate your installment payments?". Canada Revenue Agency. 2020-12-18. Retrieved February 15, 2021.
- ^ a b c "2020–21 Managing Your Personal Taxes, A Canadian Perspective" (PDF). Ernst & Young LLP. pp. 141–142. Retrieved February 15, 2021.
- ^ "CRA Reminder: Tax installments Are Due September 15". Segal LLP. August 24, 2016. Retrieved February 15, 2021.
- ^ Canada Revenue Agency, Filing due dates for the 2020 tax return, viewed March 21, 2021.
- ^ "How long should you keep your income tax records?". Government of Canada. 2023-01-24. Retrieved February 23, 2023.
- ^ a b "Tax treatment of investments - trade and settlement dates; Last trading date for 2023". TaxTips.ca. November 27, 2023. Retrieved November 28, 2023.
Further reading
- Financial Wisdom Forum topic: "Tax Installments"
- Financial Wisdom Forum topic: "T1135 - Just the beginning?"
- Financial Wisdom Forum topic: "The IRS and US citizens/green card holders living in Canada"
- Financial Wisdom Forum Taxing Situations sub-forum, which has many topics related to Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.