Written by Chartered Professional Accountants of BC
Tax season is beginning, and that means you are probably trying to make sense of tax changes and how to handle your RRSPs. The Chartered Professional Accountants of BC (CPABC) is committed to providing resources to assist individuals and businesses prepare their income tax returns, invest in RRSPs, and plan their finances. It is why the Chartered Professional Accountants of BC (CPABC) has compiled a list of “RRSP and Tax Tips” for the 2014 tax year as a public service to all British Columbians.
Here are 10 questions and answers regarding income, deductions and tax credits to help you get through this tax season:
1. What is the Family Tax Cut Credit?
The Family Tax Cut credit, effective starting in 2014, is a new non-refundable tax credit which can result in tax savings of up to $2,000 for couples with children under 18. The Family Tax Cut credit calculation can be quite complex, so consult a professional accountant for more information.
2. Can I claim a deduction if I’ve moved for work or school?
A lot of people may not be aware that you can claim a deduction for certain moving expenses if you have moved to work or carry on business in a new location, or to attend a university or other post-secondary educational institution. To be eligible, your new residence must be at least 40 kilometres closer to your new work place or educational institution. You may not claim a deduction for any expenses paid by your employer on your behalf.
3. Is there a penalty if a repeatedly fail to report my income?
If you missed or forgot to report any income on your 2011, 2012 or 2013 returns, and you again miss or forget to report any income on your 2014 return, you may be subject to a penalty for the repeat offense. This penalty applies whether the missing amounts are large or small, and even where they don’t actually increase your taxes owing.
4. Can I include the medical expenses of my minor children to my own medical expense?
You can add the medical expenses of your spouse and minor children to your own medical expenses. In addition, you can also add the medical expenses of certain other dependents subject to certain restrictions. In particular, caregivers are able to claim eligible medical expenses incurred in respect of a “dependent” relative if the caregiver pays medical or disability-related expenses of the dependent relative. For this purpose, a “dependent” relative is defined as a child who is 18 years of age or older, or a grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew, who is dependent on the taxpayer for support.
5. What expenses can I deduct from my rental income?
If you rent out all or a portion of your property, you may deduct certain expenses connected with earning that rental income. These expenses may include the proportion of your property taxes, mortgage interest, repairs and maintenance, insurance, light, heat and other utilities and expenses that relate to the rental space.
Keep in mind that the rental of your residence could affect your ability to claim the “principal residence exemption” on a future sale. Seek the advice of a professional accountant when considering deducting depreciation and other amounts involved in home rentals.
6. Is my university scholarship tax exempt?
Scholarship, fellowship or bursary income received by a student is considered fully tax-exempt, provided the income is connected with a program that entitles the student to claim the education tax credit. The education tax credit is available to students who are enrolled in qualifying post-secondary educational programs at designated educational institutions. Generally, to be considered at the post-secondary school level, a course should provide credit towards a degree, diploma or certificate.
7. I am self-employed, what records do I need to keep for my tax return?
The Income Tax Act requires every taxpayer carrying on a business to keep books of account so that the Minister may verify the validity of the expenses claimed and thus establish the amount of tax payable. Therefore, to the extent you are claiming automobile expenses, meals and entertainment costs, or any other business expenses, you should retain the documents or invoices that support your expense claims. To the extent automobile expenses are incurred in part for personal purposes, a record documenting total distance travelled and distance travelled in the year to earn income needs to be maintained.
Without these supporting documents, you might not be able to claim what would otherwise be valid business expenses against your source of income. In addition, if you are ever subject to an audit, good accounting records will save you time and money in dealing with Canada Revenue Agency (CRA). You are required to retain the records supporting your business expense claims for at least six years after the end of the year to which the records relate.
8. Are the administration fees I’ve paid for my RRSP tax deductible?
If you pay an administration fee or management fee for your registered retirement savings plan (“RRSP”), retirement income fund (“RIF”) or tax-free savings account (“TFSA”), the fees are not deductible for income tax purposes. You should talk to your financial advisors to see if they can make a reasonable allocation of these fees to a non-registered account. By doing so, a portion of these fees may be tax deductible.
If you do pay a fee within your registered plan, pay the fee yourself each year. Do not have the money paid from the registered account. This will allow your RRSP to grow unhindered. Your payment of the RRSP fee will not be considered a contribution to your RRSP.
9. Can I make withdrawals from my RRSP account?
Provided your RRSP is not in a non-redeemable investment or a locked-in RRSP, you may withdraw any portion of your RRSP at any time. In most circumstances, you will pay tax on the amount withdrawn from an RRSP as it is considered income in the year you make the withdrawal. In addition, withdrawals do not affect your RRSP deduction limit; therefore, you will permanently lose that contribution room.
It might make sense to withdraw funds from your RRSP or a spousal RRSP in the first year you become self-employed and your net income is low as a result of start-up costs, or income is deferred as a result of tax planning. That said, since the purpose of an RRSP is to save for retirement, you should think very carefully about the future impact on your retirement wealth before withdrawing funds from your RRSP, especially since RRSP contribution room is finite. Also be careful about withdrawing from a spousal RRSP because the income could be attributed to the contributing spouse if a spousal RRSP contribution had been made in the prior three years.
10. How can I make income tax savings from making an RRSP contribution?
If you have an RRSP deduction limit as shown on your 2013 Notice of Assessment and you are a B.C. resident, the following are the income tax savings you could realize from making an RRSP contribution:
- If your taxable income is between $11,139 and $43,953, a $1,000 RRSP contribution would reduce your 2014 taxes by up to $227.
- If your taxable income is between $43,954 and $87,907, a $1,000 RRSP contribution would reduce your 2014 taxes by about $227 to $343.
- If your taxable income is between $87,908 and $136,270, a $1,000 RRSP contribution would reduce your 2014 taxes by about $343 to $407.
- If your taxable income is over $136,271, a $1,000 RRSP contribution would reduce your 2014 taxes by about $407 to $458.
Remember, an RRSP is a tax deferral vehicle – you will be taxed on the funds when withdrawn. That said, you would rather pay $1 of income tax tomorrow than $1 of income tax today. Actual tax savings will result if you are in a lower tax bracket when you withdraw the funds, or if you can save income taxes by moving taxable income to a lower income spouse through a spousal RRSP.
To see more RRSP and tax tips from CPABC, check out www.bccpa.ca/RRSPandTaxTips.
IMPORTANT: The information on this post is not intended to be a substitute for professional advice from your accounting, tax or legal advisors. Each individual situation differs, and a professional advisor can assist you in using the information on this website to your best advantage. Readers are expected to use professional judgement in determining whether information is both appropriate and relevant to their unique circumstances.
Written by Chartered Professional Accountants of BC for Vancity Buzz.
Feature image: Tax time via Shutterstock