April 30 is this Year’s Tax Deadline

By Fin MacDonald

What is Income?

When you file your Individual Income Tax and Benefit Return you are required to report your Worldwide income from all sources. So, what is and what is not income?

Examples of amounts that are NOT income include GST/HST or Child Tax Benefit payments, criminal or motor vehicle injury compensation payments received from a province, military disability payments, most inheritances, most life insurance death benefits, strike pay, lottery winnings and Tax Refunds. (If there is any interest on your Tax Refund, THAT is taxable and must be reported the following year.)

Some income is not Taxable but still must be reported on your tax return. Examples are Workers' Compensation payments, Income Assistance (Welfare) payments and the Guaranteed Income Supplement and BC Seniors Supplement.

Some income is only partially taxable in Canada, for example foreign social security payments. US Social Security payments are taxed in Canada at 85 per cent of the normal rate (Social Security for those receiving it continuously since before 1996 is now taxed at only 50 percent of the normal rate). Another common example is German Social Security. If you started receiving this before 2005, only half of the pension was subject to tax. Since then, changes to the Tax Treaty are gradually reducing the exemption; it will disappear completely by 2040.

Deductions from Income

Deductions from income, reported in the 200 level on the return, are different from Non-Refundable Tax Credits, reported on the Schedule 1. Deductions from income lower the amount of income subject to tax. As your income increases and crosses into higher tax brackets, the benefit of the deduction increases. For example if you have an RRSP contribution of $5,000 and income of $25,000 your tax savings will be $1,003. If your income is $50,000 the tax savings from the same $5,000 RRSP contribution increases to $1,485 and at an income level of $135,000 the tax savings are $2,185.

A $1,000 donation to charity, which is a non-refundable tax credit, if you are taxable, will result in a reduction of taxes of $389.72, regardless of your tax bracket.

Deductions from income include Registered Pension Plan contributions, Split Pension, Union or Professional dues. Child Care expenses (from the income of the lower income spouse), Business losses, Moving Expenses (if you moved 40km or more to a new job), Support Payments, Carrying Charges and Interest Expenses and other various deductions.

Non Refundable Tax Credits

The Basic Personal Amount for the 2012 tax year is $10,822 federally and $11,354 provincially. (The federal amount increases at the rate of inflation each year. Due to return to the PST, the provincial amount is due to decline to $10,276 on the 2013 tax return. This will cause a tax increase of $54.55 for all taxable BC taxpayers.) This amount is the taxable income you can have without owing any taxes.

Other well-used Tax Credits are the Spousal Amount, Amount for Children 18 and under, Pension Income Amount, Disability Amount and Tuition, Education and Textbook amounts. All of these Credits can be transferred to your spouse if you don't need them.

Some credits may be split between spouses, such as the Public Transit Credit and the Medical Expenses Credit.

Most Credits can NOT be carried forward to the following year if they are not needed to reduce your taxes payable to zero. The exceptions are Charitable Donation Credit, which may be carried forward up to five years, and the Tuition, Education and Textbook Amount. The tuition credit, if not needed by the student in the year it was earned may be transferred to a supporting person, in an amount up to $5,000. The balance is then carried forward until the student needs it. After the first year, none is available for transfer.

Taking full advantage of all the Deductions and Tax Credits is the path to paying the least amount of tax to the governments. I hope reading my articles has helped you to keep more of YOUR money!

Next month - Now that your tax return has been assessed, I'll look at how tax planning can help reduce what you pay Stephen and Christy (Adrian) next year.