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Managing Your Money
Take full advantage of all the tax breaks you deserve
March 2006
When you earn income, it's virtually impossible to avoid paying taxes. But you should never pay more in taxes than absolutely necessary. Here is a checklist of tax deductions and credits and some tips for getting the most out of them.
Tax credits directly reduce the actual amount of your federal taxes and, in many cases, your provincial taxes, as well:
- Basic personal tax credit – All taxpayers are eligible for this federal tax credit on a basic personal amount of $8,648.
- Spousal/equivalent-to-spouse credit – This is available to you if you supported a spouse or common-law partner whose net income is less than $7,344.
- Caregiver credit – you are eligible for this federal tax credit of up to $3,848 if you care for an infirm or elderly relative in your home.
- Age credit – You may be eligible for this credit if you were 65 or older at the end of 2005 and your net income was less than the cut-off maximum level of $56,146. Tax-saving tip: If you don't need all of this credit to reduce your tax payable to zero, transfer the unused portion to a supporting spouse.
- Charitable donation credit – You will receive a 16% federal tax credit* on the first $200 in money or property donated to a registered charity, and a 29% credit on all eligible donations above that. Tax tip: You can add up and claim previously unclaimed donations for a five-year period and you can pool contributions with your spouse to increase the amount that qualifies for the 29% credit.
- Medical expenses credit – You can claim eligible medical expenses over 3% of your net income or $1,844 (whichever is less). Tax tip: Combine family expenses on the return of the lower-income spouse to generate a larger credit. You can also maximize your medical expense credit by choosing any 12-month period ending in the current taxation year, provided you haven't already claimed these expenses.
- Disability credit – This is available to those suffering from a significant physical or mental impairment. Tax tip: This credit can be transferred to a supporting relative.
- Tuition fees and education costs – Most course fees qualify for a federal credit; a monthly education credit is also available based on the number of months of full-time enrolment. Tax tip: If your children don't need all of their 2005 tuition and education amounts to reduce their taxable income to zero, transfer the credits to a supporting parent or grandparent (to a maximum of $5,000).
Tax deductions reduce the amount of your income that's subject to tax – and by so doing, they can also reduce your marginal tax rate:
- RRSP contributions – It's too late to make an RRSP contribution in respect to 2005 – but the time is right to take care of your 2006 RRSP contribution. After you file your 2005 tax return, you will receive your 2005 assessment notice. This assessment notice will indicate your RRSP contribution room for 2006. You can make RRSP contributions for 2006 up until March 1, 2007.
- Company pension-plan contributions – If you made contributions to the plan in 2005, they are deductible within limits.
- Child-care – If you incurred babysitting, nursery and/or other child-care expenses to allow you or your spouse to work or take a training course, they may be deductible. Tax tip: This deduction must be claimed by the lower-earning spouse.
- Moving expenses – If you moved to a residence at least 40 kilometres closer to your work, you may be able to deduct your reasonable moving expenses.
Be sure to take advantage of all the tax-saving, income-building strategies available for your situation. Talk to your financial advisor before you file your return.
*On November 14, 2005, the Federal government announced that, for the 2005 taxation year, it intended to introduce legislation to reduce the lowest marginal tax rate and the rate at which credits are calculated from 16% to 15%. At the date of writing, it is unknown if this change will be effective for the 2005 or subsequent taxation years.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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