Tax Tips For Canadian Income Tax Return
We understand that you are here to learn tips for filing income tax so that you can maximize your personal income tax refund. Before we go through the tax tips, let us review how income tax system actually works in Canada. What you pay as tax amount is primarily driven by your income amount. However, Revenue Canada (CRA) allows you various deductions to cover eligible expenses or investment for you and your extended family members which reduces your taxable income. CRA follows progressive tax rate system which means higher personal income is taxed at a higher rate and lower personal income is taxed at lower rate. By applying proper deductions, you can reduce your taxable income and move from higher tax rate to a lower tax rate and reduce your tax liability. You can estimate your income tax quickly using our simple income tax calculator.
Let us look at the tax credit to maximize your tax refund. There are 2 kinds of tax credits - non-refundable tax credits and other tax credits. Non-refundable tax credits can reduce your tax liability upto zero. If you have more non-refundable tax credits than your tax owing, you can carry forward or transfer your tax credits to other family members who can make use of those credits to reduce their tax owing and thus maximizing the tax refund for entire family. Each province has their own set of non-refundable tax credits. Not all credits can be transferred or carried forward.
The key to maximize your tax refund depends on how you use the available deductions and non-refundable tax credits. In some cases, you can also transfer income from one family member to other family members to maximize tax refund and increase your tax saving. We will review all the available deductions and non-refundable tax credits with 4 ways to maximize your tax refund - Split, Combine, Carry forward or Transfer. Select your matching profile to find the applicable deduction and credits and the ways you can use them to maximize your tax refund.
Year end tax tips Canada income tax credit and deduction
You will find some interesting articles below to maximize your income tax refund.
Make the most of your charitable donations
Got a huge tax refund from Revenue Canada this year
Make the most of your charitable donations
As Canadians, we are very generous. Almost 80 to 85% of Canadians make an average annual donation of around $400 to various charities. CRA recognizes donations to registered charities and provides 2 tiered non-refundable tax credit to enhance the value of your charitable donation. Since it is non-refundable credit, you can only reduce your tax owing by using this credit. It is better for higher income spouse to claim credit for charitable donation.
There is no minimum donation to claim tax credit. For first $200, you get tax credit at the minimum tax rate. Anything beyond $200 earns you tax credit at the highest marginal tax rate which can be different depending on your province of residence. CRA also allows you to carry forward your donation upto 5 years.
E.g. As a good Canadian residing in Ontario, you donate $200 every year for 5 years. If you claim donation credit for $200 every year, you will get a credit of around $40 (@ 20.05%) every year with a total tax credit of $200. Alternately, you can carry forward all the donations for 5 years and claim it all at the end of 5 year. In this case, you will get $40 credit for the first $200 and $320 (@40.16% - highest marginal tax rate for ON) for the remaining donation of $800. You get a total tax credit of $360, 80% increase in your tax credit by just deferring the claim of donation credit and combining all donations to claim together. No safe investment can get you that kind of return. You can also combine donations by your spouse with your tax return and get more tax credit.
Combine and accumulate your donation to increase your tax refund in Canada.
Got a huge tax refund from Revenue Canada this year
You must be excited to receive a huge tax refund. It appears to be free money you can spend on anything you want - be it a family cruise, or a big home theater package or upgrade your house or upgrade your car.
Now that the money has found its place, stop for a moment to think about the origin of this money coming from your tax return. This was your money all the time, but not accessible for whole one year. Unknowingly, you had given interest free loan to Revenue Canada for one year. With tax withholding practice imminent for almost all fixed earning areas, Revenue Canada always gets its share first before you get your take home pay.
One of the biggest sources of huge refund can be attributed to your RRSP contribution. Over the years, financial institutions have created a RRSP season (first 2 months of the year) with different kind of incentives for taxpayers to make contribution during this season. Based on your income level and province of residence, you can get an immediate tax refund of 20% to 46% of RRSP contribution. While this results in instant gratification, you can opt to plan ahead for next tax year. You can decide to contribute a fixed monthly amount to your RRSP throughout the year. You need to submit form T1213 to CRA to reduce your withholding tax based on your proposed monthly contribution amount. CRA will review and send a letter to be given to your employer/income provider to reduce withholding tax. This will increase your monthly cash flow now and you don't have to wait till next year to see your hard earned money. All you need to manage huge tax refund is a simple discipline - plan, act and a bigger paycheck will be in your mail every month.
You can do the same for all other withholding tax for different sources of income. And request your income provider to reduce withholding tax based on CRA authorization.
Claim your next year tax refund now