Filing your income taxes need not be the most dreaded ritual of the year. Just gather all your tax slips and receipts, complete the tax form and ensure you’ve reported everything properly and not overlooked tax credits or deductions you’re entitled to. That’s all. This year the Canada Revenue Agency has introduced a new service called Auto-fill my return and it can greatly expedite the process of completing a tax return. If you use tax software to complete your return and send it to CRA via Netfile, Auto-fill automatically fills in a lot of the boxes for you using information that employers and financial firms have supplied to CRA via T4s, T5s and more. Yes, CRA gets a copy of the same tax slips as you.
CRA says Auto-fill was used for more than 981,000 returns sent via Netfile as of April 10. Click here for a list of free tax software products that are good to go with Auto-fill.
But in the process, don’t forget legitimate tax minimization strategies. Here’s a link that lists how some taxes can be postponed for one’s entire life or even beyond one’s life. What is required to achieve these tax savings is careful control of investments, employment income, and bonuses in order to achieve income averaging where possible and, for investments, cash flow shifting where it is lawful.
For high-income families, one option is to use a prescribed rate loan. It is a legal way to avoid attribution.
If a person gives money to a spouse or child to invest, the gains on that money are attributed back to the family member who handed out the cash. But the Income Tax Act allows you to get around this problem by lending the money instead of giving it.
The demand loan can be made today and fixed for decades at the current prescribed rate of 1 per cent and secured by a promissory note. The family member who receives the loan must pay the interest by January 30 every year. Otherwise, any income earned on the money gets attributed back to the lender.
This strategy is effective when one family member is in a very high tax bracket and the other has little or no income.
The high-income spouse has to pay tax on the interest that is received, but the borrowing family member can deduct the interest payment because the loan was used for earning income.
The family enjoys a tax benefit because the dividend income or any other income earned through borrowed money gets taxed at the tax rate paid by the low-income spouse. This could very well be nil if his or her total income is low enough.
If both parents are high earners, the loan can be given to adult kids.
If the children are still minors, a discretionary family trust is often set up with the kids named as beneficiaries. The loan is then made to the trust at the prescribed rate and the trust invests the money.
Actional Idea: Check whether you applied all relevant applicable tax minimization strategies before filing your tax return
Need some help? You can contact Sree Kannuthurai, who is helping people to file their tax returns for the last 20 years. His phone: 647 268 2300