20 Tax Saving Tips by Chartered Allan Madan

aCCountant

Tax time is grueling for any consumer. Throughout the year you spend hours working, saving and hoping you have found every possible tax deduction only to realize there was a lot more you could have saved. On average, a person misses several hundred dollars of deductions to place on a tax return that could be a car payment, rent payment or even a full refrigerator of groceries. So this year, take on taxes like a professional and get to know the 20 tax saving tips the government would rather you not know.

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Table of Contents
Tax Saving Tip 1: Know the Difference between a Deduction and a Credit Tax Saving Tip 2: Lend Money and Charge Interest Tax Saving Tip 3: Generate Capital Gains in the Hands of Your Kids Tax Saving Tip 4: Pay Household Expenses Through the Higher Income Spouse Tax Saving Tip 5: Save Tax on Portfolio Investments with a Family Trust Tax Saving Tip 6: Create a Family Trust to Income Split Through a Corporation Tax Saving Tip 8: Write-Off Expenses against Commission Income Tax Saving Tip 9: Deducting Travel Expenses Tax Saving Tip 10: Expense Your Automobile Costs Tax Saving Tip 11: Claim the Cost of Supplies Tax Saving Tip 12: Write-Off Home Office Expenses Tax Saving Tip 13: Dont Forget to Claim Union and Professional Dues Tax Saving Tip 14: Maximize Your Deductions for Home Office Expenses 3 4 5 6 8 9 12 13 14 15 16 17 18

Tax Saving Tip 15: Maximize Deductions Related to Business Use of Your Automobile 21 Tax Saving Tip 16: Pay Salaries to Family Members Tax Saving Tip 17: Incorporate Your Business Tax Saving Tip 18: Use a Tax-Free Savings Account Tax Saving Tip 19: Buy Flow-Through Shares Tax Saving Tip 20: Borrow Money to Invest Tax Saving Tip 21: Contribute to RRSP for Tax Deferral and Tax-Free Growth 22 22 23 24 26 27

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Basics Tips
Tax Saving Tip 1: Know the Difference between a Deduction and a Credit
You have certainly heard the terms deduction and credit before, but if you are asked to give a definition you most likely cannot come up with the differences between the two. Though they are both a positive for consumers when it comes to taxes, there is a large difference between what a credit and deduction will do for taxes. A tax deduction is something you claim on your tax return in order to lower your total taxable income amount. When a tax return is prepared, you calculate your total, taxable income. So for example if your total taxable income is $100,000, and you receive a tax deduction for $10,000, then your taxable income will be reduced to $90,000. This, in turn, reduces your taxes payable or tax bill. A tax credit on the other hand, lowers your tax bill, not your taxable income. Therefore, if your federal and provincial tax bills are $300, but you have a $200 tax credit, you subtract your tax credit from your tax bill due to arrive at a new tax bill of $100.

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Income Splitting
You may or may not have heard about income splitting before. The term is just as it sounds splitting off income. In the tax world, income splitting is nothing complicated, but it has to be done right for effective tax planning. So what is income splitting? Income splitting is where an individual with a higher tax bill gives or splits off money to another family member in order to split or lower their income. For such a relatively simple process, the savings are extraordinary.

Tax Saving Tip 2: Lend Money and Charge Interest

There is a trick to performing income splitting. You cannot just give a family member with a lower tax bill money and think that will fix your tax problems you must create a loan and with a loan comes interest. Heres how the mechanics work. 1. Create a loan agreement between yourself and a family member who has a lower income than you. 2. Charge interest on the loan. The interest rate should be equal to the CRAs prescribed rate of interest, which is currently only at 1%, a historical low. 3. The family member pays out the interest on the loan directly to you by no later than January 30th of the following year. 4. You deduct the interest paid on your personal tax return. The lower income family member can invest the loan proceeds into an income producing investment, such as real estate, mutual funds, GICs, stocks, etc. And, the income earned will be included in the taxable income of the lower income family member! Keep in mind, that the loan needs to seem as legitimate as possible. That means you need to create a signed promissory note between you and the family member. In that note there should be details of the following: Date and amount of the loan Interest charged to the loan Calculation method used for the interest (i.e. annual, compounded daily or compounded monthly) Payment terms of the loan that include when interest will be paid (i.e. monthly payments, due on demand, etc).
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Income Splitting
Tax Saving Tip 3: Generate Capital Gains in the Hands of Your Kids
Income splitting can also be done by splitting it amongst your children, rather than another family member. One of the best ways to do this is by lending cash to your children to buy investments. The age of your child will not matter What is the point of doing this?? The point is, any capital gains generated on your childrens investments will be taxable to your children, not you. Your child, no matter his or her age, can earn up to $21,000 in capital gains and the tax bill is minimal if any, especially if they have no other source of income. It doesnt have to be just cash you lend to your children for investments either. In fact, you can transfer any current investments in your name to your children directly for the same effect. Just keep in mind, however, when you are transferring assets, you are considered selling them at their current market value. So if those assets have any appreciated value, you will most likely be charged capital gains tax yourself come tax time.

Lets talk about interest, dividends, rents, and royalties from properties. Though you can generally move these assets to your children to avoid a tax bill at the end of the year, any interest, dividends, rents, and royalties made on that property is still taxable to you.

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Income Splitting
Tax Saving Tip 4: Pay Household Expenses Through the Higher Income Spouse
One of the easiest ways to split income is by paying any household expenses through the spouse who has the highest income. For example, your spouse has a higher income and thus is in a higher marginal tax rate than yourself. If all of the household expenses are paid by your spouse, this frees up your own income to use in investments. You can have your spouse pay out your income tax as well as part of the household expenses. Thus, your income is free to invest and you will incur the taxes on those investments based on your lower marginal tax rate rather than paying a higher tax bill based on your spouses marginal tax rate.

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Family Trusts
Family trusts are an excellent tool to help manage family financial affairs especially in regards to properties and investments. Trusts are not as difficult as they seem to set up either. In fact, a quick visit to your accountant and lawyer can start up a family trust. There are legal and accounting fees with the initial setup of a family trust and each year families will need to file the T3 tax return for the family trust, but overall, the costs are more than deserving of it. So how does a family trust work? The first thing to keep in mind is that a trust is not a legal entity like a business. Instead of being a legal entity, it is a relationship between three separate parties: the settlor (the individual that settles property on the trust itself), the trustee (the individual given administrative power over the trust itself) and a beneficiary (the individual that gets something out of the trust itself). A trust can have multiple beneficiaries, as most do, and they can have more than one settlor and trustee if needed as well.

A trust is taxed like an individual is, by filing taxable income at the end of the year using a T3 form. Any income made on the trust is then factored into a tax bill. Trusts can avoid tax bills at the end of the year by paying out the beneficiary or beneficiaries any income that was earned in the trust at the end of the year. The beneficiaries, however, will have to pay income tax on that amount paid out to them.

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Family Trusts
Tax Saving Tip 5: Save Tax on Portfolio Investments with a Family Trust
Trustees Beneficiaries

The entire point of a family trust is to create an income split among family members. Typically parents or even grandparents settle the family trust by transferring cash assets (or another form of liquid asset within the trust) to the trustee as a benefit for the children listed as the beneficiaries. The cash can be invested by the trust in stocks, bonds, mutual funds, real estate and other financial assets. All, or a portion, of the investment income made by the trust is paid to the beneficiaries of the trust. Instead of being included in one persons taxable income, the trusts income is split by multiple beneficiaries, which reduces the tax bill.

Trust

Real Estate

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Family Trusts
Tax Saving Tip 6: Create a Family Trust to Income Split Through a Corporation
Being a shareholder of a private company (such as a family corporation) can increase your overall income which come tax time poses an issue. You can, however, split your corporate shares income with members of your family by using a family trust. Heres how the mechanics work: 1. A non-family member (e.g. close friend) loans a nominal amount (e.g. $20) to the trust, to set it up. 2. Beneficiaries are added to the trust. Typically, beneficiaries are children, grandchildren and spouses. Trustees Beneficiaries 3. Trustees are appointed. Trustees can include you and your spouse. A non-family member should also be appointed as a trustee, for a total of 3 trustees. Trust 4. The trust purchases shares in your corporation. If your corporation is newly formed, the purchase price can be for a small amount, e.g. $100. (Further steps are required for existing corporations that own assets, including goodwill). 5. The loan is repaid using your corporations cash. Corporation After your family trust owns the shares of the family corporation, the corporation itself can pay out dividends directly to the trust. Now you are probably asking yourself who will be responsible for the tax bill on those dividends that were paid out. So who pays the tax? Thats right, the beneficiaries do. Luckily, if the beneficiaries have no other sources of income, each beneficiary can receive up to $40,000 in dividends each year with little to no tax to pay come tax time.

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Moving Costs
Every family has to move, but thinking about your move in a taxrelated way can make a difference with how much tax is owed at the end of the year.

Tax Saving Tip 7: Plan the Familys Move Carefully to Maximize Tax Benefits
Its time to think from a tax point-of-view as you pack those boxes, wrap your mothers china and fold up your clothes for the big family move. The tax-saving tips with moving are clear as day you are allowed to deduct costs for moving to start your own business, moving for a new job, or relocation to attend a new school. Before you start racking up those deductions, however, you need to keep a few things in mind: Your new residence needs to be at least 40 kilometers closer to your new job, school or business than your old place of residence. You can deduct the costs of your move up to the income amount you have earned at your new job (if that is the reason for your move).

Is your income too low at the new job to claim your moving costs? Not to worry, you can carry those moving expenses over to the next year and claim them. Some of the items you can deduct are: Meals, lodging and other travel-related costs for the move Moving fees, storage costs and truck rentals to relocate your homes belongings Cancellation costs for leases or rental agreements Costs to sell your home (yes even rental commissions) Any legal charges applied to your new homes purchase If you sold that old house, any tax payable on the new home from your property transfer is deductible

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Moving Costs
Any costs associated with maintaining your old or new residence while it is vacant (including mortgage interest or property taxes that reach a maximum of $5,000) Legal fees associated with drivers license replacement, utility connections, disconnections, automobile permits and other legal documents associated with your new address Try planning your move so that it meets the 40 kilometer rule between your new job or new school. For college students, make sure you research any grants you can use for income at your new residence so that you can have a taxable amount at the end of the year. Keep in mind that fellowships, scholarships and bursaries cannot be taxed as income and therefore if they are your only source of income, you will not be able to claim any moving expenses on them.

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Employment Deductions
As an employee, you dont have many options when it comes to deductions on your tax bill. However, there are ways to help bring down your income that you have earned over the year, as minor as they may be. Take control of your finances and claim deductions your hard work entitled you to.

Tax Saving Tip 8: Write-Off Expenses against Commission Income

If you are a commissioned employee that sells services or products you are in luck come tax time. You can claim the expenses that help you get that commission against the income you have earned off the commission. These expenses are deducted similar to that of a self-employed individual. The catch, however, is you need to consider a few of the following: Your must have a contract with your employer that states you are liable for all expenses associated with your job Your job must allow you to do work outside of the office, which in turn produces outside expenses You can only claim expenses up to the commission limit you have earned with your company, because you cannot create a loss through your expenses

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Employment Deductions
Tax Saving Tip 9: Deducting Travel Expenses
Do a lot of travel in your line of work? If your company requires you to pay for those travel expenses and you are not reimbursed or given a tax-free allowance, then you can deduct those travel expenses from your tax bill at the end of the year. Some costs you can deduct are: Taxi, train, plane and bus fares Parking fees Hotel or motel stay fees 50% of meals and lodging (if you are a bus driver, truck driver or flight attendant who is not reimbursed

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Employment Deductions
Tax Saving Tip 10: Expense Your Automobile Costs
You already pay the car payment and insurance, but did you know that costs to use your vehicle for employment can benefit you come tax time? If your employer requires you to use your automobile for employment-related tasks and you are not given a reimbursement, then you are allowed to deduct those costs come tax time. What kind of automobile costs are relevant? Mileage used by your personal vehicle for employment-related tasks Parking fees and tolls your vehicle incurs while being used for business-related tasks Depreciation of the vehicle for its use (or lease payments, if the vehicle is leased) Oil changes, gasoline, repairs, registration fees and licensing (depending on the overall use of the vehicle)

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Employment Deductions
Tax Saving Tip 11: Claim the Cost of Supplies If you had to purchase any supplies to use for your employment
or employment-related tasks that were not reimbursed by your employer you are eligible for a deduction. In order to deduct those supply costs, however, your employer will need to complete Form T2200, which will verify that you paid for those employment-related supplies and you were not furnished a tax-free allowance or reimbursement. Supplies you can deduct are: Cellular or long-distance charges (except any monthly service charges or internet fees) Office supplies Supplies directly related to your work (i.e. construction employees that are required to supply their own tools)

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Employment Deductions
Tax Saving Tip 12: Write-Off Home Office Expenses Creating a home office environment can become beneficial at tax

time. There are situations where you can utilize a home office for your employer and you are entitled to deduct the costs of that office at tax time. Before you attempt to write-off a home office, you need to make sure: Your employer requires a home office for you to work at Your home office is your principle place to work (which means over half of your work is performed at home) Your home office is used on a regular basis to meet with clients that are related directly to your employment With a home office, there are some restrictions as to what you can claim. There are limitations on how much rent, repairs, maintenance, utilities and supplies you can claim within the home office deduction, which is based on a percentage of how much square footage is used for your home office in comparison to the homes total square footage.

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Employment Deductions
Tax Saving Tip 13: Dont Forget to Claim Union and Professional Dues
Did you pay union or other professional dues for the year? If you happened to have to pay professional or union dues in order to maintain a membership with a particular organization for professional services, you can deduct the cost of those union and professional dues from your income. Examples of union or professional fees applicable are: Firefighter or police officers unions Construction workers unions Teachers, lawyers, accountants, engineers and other professionals can deduct professional fees paid to their respective governing body One exception to this deduction is for voluntary dues. If you have joined a professional organization or union voluntarily, you cannot claim your dues. Employees that receive reimbursement for their professional dues or union fees cannot use the deduction either.

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Business Deductions
Looking for a legal tax shelter? There is a reason self-employment is one of the best ways to save on your annual taxes deductions. Tax laws allow self-employed individuals to claim deductions for just about any costs associated with their self-employment work, just as long as they are directly associated with the income of the business. Ready to stake your claim on some self-employment deductions?

Tax Saving Tip 14: Maximize Your Deductions for Home Office Expenses
You already have to pay to have a roof over your head, so why not take advantage of that expense by making a portion of those living expenses deductible on this years taxes? Selfemployed individuals are able to do just that. Before you start claiming your home office, you need to make sure your space falls into one of two taxable categories: 1. Your home is where you conduct the principal portion of your business 2. There is a specific location in your home (such as a home office) that is exclusively used for your business

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Business Deductions
If your self-employment meets one of those two criteria (or both), you are allowed to start deducting your home office expenses. The biggest mistake self-employed individuals make, however, is skipping over valuable deductions. So what can you deduct? Rent Interest on a mortgage loan Property tax Utilities to run the space (i.e. electricity, gas, water) Home owners or renters insurance Repairs and maintenance for the space to function Landscaping Snow plowing Additional expenses such as further insurance Telephone (Note: there are special exceptions to this explained below)

Before you start deducting your entire rental payment or full utility bill, you need to keep one thing in mind. You only deduct a percentage of those expenses based on the total square footage of your home office out of the total square footage of your home. For example, your home is 1,000 square feet and your home office takes up 100 square feet of that home that means your home office uses 10 percent of the total space in your home. So in turn, you can deduct 10 percent of your expenses listed above from your taxable income. If you live in Quebec, your deductions will be reduced by 50 percent due to changes in the provinces 1996 budget.

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Business Deductions
No matter where you live, it is important to maximize your deductions as much as possible. How do you maximize your deductions? Increasing the amount of square footage your home office takes up in your home. For example, include space in another room for storage or include the bathroom as part of the square footage for your home business. Exclude square footage that is non-usable. For example, if you have an unfinished basement, you can exclude that square footage from the total square footage of your home. You can write off 100 percent of your telephone line, however the telephone line must be solely dedicated to your home business and cannot be used for personal phone calls of any kind. You must prove that you have a separate line for the business in order to take on this deduction. You can still deduct telephone use, however, even if you do not have a dedicated business line. In this case, your business time usage versus your personal use will create the deduction amount.

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Business Deductions
Tax Saving Tip 15: Maximize Deductions Related to Business Use of Your Automobile
Self-employed individuals have it made when it comes to deductions and the automobile deductions are no different. The same rules apply when it comes to automobile expenses for employees and the self-employed, which mean you can write off: Mileage used by your personal vehicle for employment-related tasks Parking fees and tolls your vehicle incurs while being used for business-related tasks Depreciation of the vehicle for its use (or leases payments, if you lease your vehicle) Oil changes, gasoline, repairs, registration fees and licensing (depending on the overall use of the vehicle) Automobile club costs Car washes Insurance Auto loan interest Want to save even more? Instead of trading in that old car, keep it! Thats right, by keeping your old car, you are more likely to have repair costs, which means more to deduct from your annual taxes than a new car with minimal (if any) repairs.

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Business Deductions
Tax Saving Tip 16: Pay Salaries to Family Members
Self-employed individuals can take advantage of income splitting just like a regular employed individual. Essentially, selfemployed individuals are taking advantage of the fact that they can claim deductions for salaries or wages paid to employees, but rather than employees, they are paid to family members. The compensation, however, must be reasonable for the services rendered.

Tax Saving Tip 17: Incorporate Your Business

When it comes to saving some money on taxes, your business can help. Since incorporated companies only pay 15.5% of combined Federal and Ontario rate taxes on their first $500,000 in profits, it is certainly a money saving alternative to the typical 46.4% the average consumer would pay on the same amount of profits. So what does that mean for you? That means if you incorporate your business, you are looking at a much lower rate of taxes 31% to be exact. Is your business already incorporated? If so, you can save even more by deferring your taxes to leave as much money as you can in your business. This is because profits from your business typically go to you and when they do, you will pay your own personal income tax on those profits. For example, your income has placed you in the highest tax bracket of 46.4%, but by leaving profits within your incorporated business you reduce that amount by 31% and leave those profits inside the business rather than paying it directly to you.

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Investing
Your grandparents, parents and even co-workers are talking about their investments and for good reason there are numerous tax benefits to investments as long as you operate them right. Sure investments are seen as additional income, but by understanding the tax laws, you can invest without taking a hit at the end of the year.

Tax Saving Tip 18: Use a Tax-Free Savings Account

As of 2008, investors have a new option: a tax-free savings account. Known as a TFSA, a taxfree savings account allows investors to earn their income on a tax-free basis within their savings account. So how does it work? You cannot claim a deduction for any money you contribute to your TFSA, however all of the earnings inside your savings account will become tax-free and any money you withdraw from that account is also tax-free. To be eligible for a TFSA you must: Be a Canadian resident Be at least 18 years of age Open a TFSA account at any qualifying bank, credit union, trust or other financial institution You must provide your social insurance number at the time you open the account
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Investing
You can open more than one TFSA account, however the total contribution amount between the multiple accounts cannot be more than your contribution room allows. What is your contribution room limited by? For each year starting in 2009 you can claim up to $5,000, which will be indexed to inflation and rounded to the nearest $500 annually. Withdrawals made the year before are eligible to be re-invested into the TFSA on top of the new years contribution room. Any unused contribution room from the prior year can be added to the current year.

Tax Saving Tip 19: Buy FlowThrough Shares

Want a more attractive investment that wont come back and hurt you come tax time? Flow-shares are an appealing alternative that help investors save money and enjoy direct tax savings. Though they are more attractive, flow-through shares are much higher-risk than your average investment and are issued by Canadian companies that need to raise capital for development. The shares themselves are specifically designed to give investors tax deductions that will come equal to or close to the amount originally invested. Instead of the company using these deductions, they renounce these deductions and
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flow them through the consumer who has invested in their company so that they can claim the deductions instead. Typically these are Canadian exploration expenses, also known as CEE, which you can deduct 100% of off your taxable income. The other deduction, Canadian development expenses, are 30% deductible, but on a declining basis. Before the company incurs any costs, they can renounce the deductions up to one year. For example, a company that is issuing flowshares in the year 2011 can renounce their eligible expenses in the year of 2011 and not pay for those expenses until the year 2012.

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Investing
Some facts to keep in mind about flow-through shares: Flow-shares provide tax deductions to the investor that equals up to the same amount of the investment Deductions are not used in the same year, but about 90% are deductible the first year, while the balance is deducted in the second or third year Flow-shares will be reduced by any deductions the investor is able to claim Flow-shares do raise the issue of capital gains toward the investor, however investors that have capital losses to use can invest in flow-shares for capital gain down the road So is there really a return in flow-shares? Investors that claim the full deductions on their investments one year after selling their shares can earn back close to what they originally paid. Even when shares drop, most investors still break even due to the tax savings of flow-shares as long as the investor has a marginal tax rate of 46 percent.
Original Purchase Price Deductions Claimed Amount Earned on Sale of Shares Tax for Capital Gain Sale Investment Dollar Return Percentage of Return (after tax) $10,000 $4,600 $10,000 $2,300 $2,300 23%

Percentage of Return for Flow-Shares

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Investing
Tax Saving Tip 20: Borrow Money to Invest
Borrowing, also referred to leveraging in the investment world, is one of the more effective ways to invest. By leveraging an investment, essentially, you are borrowing in order to invest in it. Though borrowing typically spells trouble, there are numerous advantages for consumers when they borrow in order to invest. How so? By leveraging you are forced to invest, because the money borrowed is for investment-only and the borrower pays back the leverage throughout the life of the investment By using anothers resources, a borrower can build their own wealth. A borrower can jump-start their investment portfolio, even if they do not have the capital themselves Effective returns can be boosted by leveraging Financial goals of the borrower can be reached faster through leveraging Leveraging creates a tax deduction when it comes to interest charges on the leveraged amount

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Investing
Tax Saving Tip 21: Contribute to RRSP for Tax Deferral and Tax-Free Growth
An RRSP, also known as a Registered Retirement Savings Plan is registered with the CRA or Canadian Revenue Agency. Rather than skip saving for retirement, the RRSP was designed to help encourage retirement savings plans. Using an RRSP has two benefits when it comes to taxes: Tax Deductible: RRSP contributions are tax deductible, which reduces your tax bill. The maximum amount that you can contribute to your RRSP in year, known as your RRSP Contribution Limit, can be found on your Notice of Assessment. The maximum RRSP Contribution Limit for the 2011 year is $22,450. The contribution limit is indexed annually for inflation. Tax-Free Growth: Unlike traditional investments, income earned within an RRSP account stays tax-free as long as it stays within the account regardless of how much is earned. For example, an individual that put away $300 per month for a total of 30 years with a 7% growth rate would earn $352,953 total at the end of the 30 year period. If the consumer had invested that money outside the account, she would have faced a tax rate of 46% on that same income generation, and would have far less money at the end of the 30 year period - $198,629. That means, money growing within your RRSP account stays tax-free unlike traditional investments where you have to pay annual tax on any gains earned.

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Investing

One important thing to remember about RRSPs is that the earlier you start, the more you will earn. Even waiting five years can make a significant difference on how much is earned as the tax-free account grows.

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