Tax planning in Canada means understanding CRA rules. Here are some things you can do to help manage your finances and make tax returns easier. These tax-planning tips for the CRA will help but be sure to consult a tax professional before making any decisions.
Getting organized with your CRA tax planning
Each province and territory has its own form book. Different taxes and rates apply depending on where you live. Resident status depends on where an individual normally lives, even if they are often away.
Reporting income
In addition to any employment income, earnings from the following sources must be reported on an income tax return:
- Elected split-pension amount
- The taxable amount of dividends
- Interest and other investment income
- Rental income
- Taxable capital gains
- Self-employed income (business, professional, commission, farming, and fishing income).
Each of the above sources corresponds to a specific form or schedule. For example, taxable capital gains or losses from the following sources are reported on Schedule 3:
- Qualified small business corporation shares
- Qualified farm or fishing property
- Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares
- Real estate, depreciable property, and other properties
- Bonds debentures, promissory notes and other similar properties
- Other mortgage foreclosures and conditional sales repossessions
- Personal-use property
- Listed personal property (LPP)
- Principal residence.
CRA account
Some experts recommend registering for a personal CRA account. It can be an excellent resource for tax planning and retirement planning. The online service allows taxpayers to track their finances by showing information including:
- Past returns
- Statements
- Updated assessments
- RRSP contributions
- TFSA (tax-free savings account) contributions
- CPP (Canada Pension Plan) contributions and benefits - people can apply for CPP on the CRA website
- Disability tax credit.
Users can also update personal information, and apply for credits such as child benefits.
Tricks to minimize taxes?
Some investors may have heard of "tax-loss harvesting." This is an attempt to reduce taxes owed on capital gains from profitable stocks, by selling underperforming ones and reporting the loss. While the move may result in tax savings, it's a poor overall investment strategy.
Gifts - when do taxes apply?
In Canada, if a gift is given in the form of cash, there is no limit on amounts and the gift is not taxable. If a gift is made in the form of something that has gone up in value since initial purchase, such as mutual funds, then it is taxable. If a gift is made in the form of property, such as a house, then capital gains taxes apply. Gifting property to family in lower tax brackets can mean tax savings.
Keeping records for the CRA
The CRA advises keeping complete and organized records, in order to:
- Help identify sources of income
- Remind you of expenses and tax credits
- Help determine taxes owed
- Prevent problems should the CRA conduct an assessment.
Without sufficient proof, the CRA may calculate your income by other methods. The CRA may also disallow deductions or credits claimed. Most records and supporting documents should be kept for six years. The six years begin at the end of the tax year the records cover.
