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Tax Tips
Here are some tax tips regarding RRSPs, Student Credits and Medical Expenses. If you have any questions about these tips or any other tax questions, please feel free to contact us and we’ll be happy to answer them. Call us at 514-935-3321 or send an email to info@mdtaxes.ca
RRSP
There has always been a lot of talk about RRSPs and how they can help with lowering tax liability/getting a tax refund but few actually know how beneficial they really are.
Below is an example of an individual who takes out a bank loan in order to buy $2,000 of RRSP. The loan will be paid back over a year, taken directly out of his bank account. We are assuming the individual makes $45,000 a year.
RRSPs which are bought (within your allowable limit) reduce your taxable income dollar for dollar. That means, our client will have only $38,000 taxable income instead of $45,000 ($45,000 - $2,000 RRSP = $43,000)
On our Federal tax return, all income over $37,885 is taxed at 22%. Because we reduced our taxable income from $45,000 to $43,000, we avoid paying 22% on $2,000.
On the Québec return, the second tax bracket starts at $37,500. All income above this line is taxed at 20%. Again, because we reduced our taxable income from $45,000 to $43,000, we avoid paying 20% on $2,000 provincially.
| Federal - $2,000 x 22% = | $440 |
| Provincial - $2,000 x 20% = | $400 |
| Less Interest paid on the RRSP loan - $2,000 x 4% = | ($80) |
| ------- | |
| Tax savings = | $760 |
Even if you fall under the first tax bracket, we can see that taking a loan for an RRSP is worth while:
| Federal - $2,000 x 15% = | $300 |
| Provincial - $2,000 x 16% = | $320 |
| Less Interest paid on the RRSP loan - $2,000 x 4% = | ($80) |
| ------- | |
| Tax savings = | $540 |
So no matter what tax bracket you are in, there is definite value in purchasing RRSPs.
RRSPs do not offer a tax benefit if an individual has enough credits to cover his tax liability. Both Federal and Québec governments offer “basic” credits to everyone which basically covers the first $10,000 to $11,000 of income making these amounts “tax free”. RRSPs only help to lower taxable income. If you make $10,000 a year, any contribution to RRSPs will not help you tax wise as the basic credit already reduces your tax liability to zero. Any RRSP contribution at this level will not yield a refund as RRSP do not increase refundable tax credits.
If you have any questions about RRSPs or any other tax inquiry, please call us at 514-935-3321 or send an email to info@mdtaxes.ca.
Students
There has always been confusion over student credits as to who would benefit more, the student or the parents (in the case of transfers).
The reality is that transfers are equally beneficial to students and parents. Even if the parent is in a higher tax bracket, the same amount of credits are applied regardless.
The difference usually lies in the fact that most students don’t have enough income to even use the student credits as their “basic” credits usually cover any income they made during the year. As discussed above, the first $10,000 to $11,000 of income made is covered by basic credits available to everyone and this income is tax free. Most students will not be able to take advantage of the education credits available due to their lower income while parents will.
The government does recognize this situation so they gave students the ability to carry forward any unused education credits for future use, indefinitely. This allows students to use the credits after they have finished school and have entered the work force. These credits are substantial and over the life of a university degree, can accumulate into a large stock of credits that can greatly benefit the student in their first year in a full-time job.
Ultimately, it’s up to the student to decide if they want to transfer the credits or not. The student must sign a form as proof of approval of the education credits transfer to a parent.
If the student is being supported by the parents while in school, it’s a nice little way of thanking the parents for helping them out.
Medical Expenses
Medical Expenses has always been an area of concern not because of people claiming non-allowable deductions but because they fail to realize how broad a range of expenses can be claimed.
Virtually anything of a medical nature can be claimed as long as it’s not cosmetic. Some examples of the most common expenses are:
- Prescription glasses
- Almost any dental procedure
- Travel Medical Insurance
- Prescription Medicine
- Medical Devices necessary for the home
- Ambulance Fees
For a full list of all allowable expenses, you can visit CRA’s Eligible Medical Expense page
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/llwbl-eng.html
and for a listing of the most common non-allowable medical expenses you can visit
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/ntllwbl-eng.html
When it comes to prescription receipts most people either have a shoebox full or none at all. Both scenarios pose challenges. The person with the full shoebox must spend time trying to sort the receipts by date and then add up the amount for all of them. At the other end of the spectrum, the person with no receipts never bothers to collect and file his bills.
All of this can be solved with a visit to your local pharmacy. Most pharmacies can print out a yearly summary of all prescriptions purchased over the course of the calendar year. These summaries are acceptable as receipts that can be submitted along with your tax return. This method of collecting prescriptions bills is especially suited to seniors as they tend to have more medication and therefore more information to track.