Lost in the system: Tax credits you may be missing

Choose your analogy: our tax system is like:

a) A patchwork quilt

b) A labyrinth

c) A Rubik’s Cube

d) A black hole

Whichever one you picked, you’re right. Any and all of them apply.

You can get tax credits if you have children in fitness or arts programs, if you take public transit, if you’re a volunteer firefighter, if you’re over 65, if you’re a caregiver, if you adopt a child, if you are a post-secondary student, if you have a disability, if you make charitable contributions, and on and on.

Every year brings more complexity. I’m sure search and rescue workers are delighted with the new tax credit for eligible ground, air and marine search and rescue volunteers announced in the 2014 budget which will knock $450 off their federal tax payable. But it adds one more layer to an already dense and complicated system.

The problem with all these piecemeal credits is that people can’t keep track of them. Many are associated with specific stages in life — such as child rearing, caregiving, and aging — so you may not realize when you become eligible for a new one and miss the opportunity.

A reader wrote to me with that specific problem. “Only recently have I discovered that since I retired and started to receive pension income I could have shared that with my lower-income spouse over the past three years,” he said. “I estimated that between my wife and myself we could have saved enough tax to have coffee daily at Tim’s with our retired friends. Can we go back some years and ask the Canada Revenue Agency to adjust our returns to avail ourselves of this tax break?”

The good news is that yes, our reader can go back and get that coffee money from the CRA. You can ask to have a return changed for up to 10 years. But don’t file another return for the year(s) in question until you receive your notice of assessment. At that point, you can change your return online if you use the CRA’s My Account program. Alternatively, you can complete form T1-ADJ (T-1 Adjustment Request) or send a letter with the relevant information, along with supporting documents, to your taxation office.

The changes will normally take between two and eight weeks to process — it’s faster if you make them online.

Related:

Income splitting a tax gift for the affluentEND

More Gordon Pape columns on Thestar.com

That still leaves the issue of taking advantage of pension income splitting. This option has been available since the 2007 tax year but judging from our reader email, some people still aren’t aware of it. In some cases, it can cut a couple’s tax bill by hundreds or even thousands of dollars.

Under the program, a taxpayer can split up to 50 per cent of his/her pension income with a spouse or partner. This includes payments from employer pension plans, life annuities, and, for those 65 and older, RRIFs. Canada Pension Plan and Old Age Security payments are not eligible although CPP benefits can be split under a separate arrangement.

It looks simple but in fact figuring out how much to split is extremely complicated. A 50-50 split might not always be the most advantageous because, among other negative effects, it could push lower income spouses into a higher tax bracket, expose them to the Old Age Security clawback, or erode the value of the age credit, which is income-based.

I’ve always done my own tax returns but I found that calculating the optimum amount to split with my late wife was almost impossible without the help of tax preparation software. If you have pension income, I suggest you make the investment or have a professional do your returns. The savings could buy a lot of coffee.