10 more tax tips to save you money

1. Don’t cheat or lie. It’s not over when you file your 2010 return. Audit season comes next, and the Canada Revenue Agency can ask for your refund money back, with interest, if they disagree with your return.

If you have something to hide, consider making a correction sooner rather than later. The onus is on you to show you have not understated your income, or overstated your deductions or credits. If you can’t do that, you may face a penalty of 50 per cent of the taxes you owe.

Worse, if there was a willful intent to cheat the government, you will be charged with the crime of tax evasion. The penalty can be up to 200 per cent of the tax evaded, plus interest and gross negligence penalties too — and in severe cases, jail.

There are two other definitions to know. Tax avoidance compromises the spirit of the law and can result in the reversal of your transactions. Tax planning that is consistent with the intent of the law is your legal right.

Knowing the difference between tax evasion, tax avoidance and effective tax planning can keep you out of hot water with the tax department, and save you time and money.

2. File on time. Why prolong the agony? Many people file their tax returns late, and that’s a shame because if you owe money to the government, you’ll incur late-filing penalties and interest. If they owe you, you’re extending an interest-free loan, and that’s not smart either, especially if you could be paying down expensive consumer debt or contributing to your RRSP instead.

For most individuals, tax returns must be filed by midnight April 30 to avoid a late filing penalty on taxes owing.

For unincorporated small business owners and their spouses, that filing deadline is June 15. When either of these two dates falls on a weekend or holiday, the deadline is generally extended to midnight of the next business day. But if you owe, the interest clock starts ticking on May 1, so it makes sense for these folks to file by April 30 too.

3. Should you do it yourself? For many, the tax filing obligation seems big, expensive and overwhelming. If that describes you, you will want to get some help with your tax return, and focus your energies on what you have to do to earn the most tax-efficient income. This needs to be your focus over the long term — don’t abdicate on wealth building. Tax time is the right time to discuss what you can do to maximize your opportunities for next year. This is what makes paying for tax help really worthwhile.

Life can be uncontrollable at times but often you can determine the taxes you pay. See that trusted tax advisor throughout the year when significant changes in your family’s personal circumstances happen — marriage, divorce, births or deaths, new career, severance payments, retirement, death or disability are examples.

There is a difference between tax planning and tax preparation. I believe that everyone should learn the intricacies of their own tax situation, whether they end up actually preparing the tax return or not.

4. Don’t forget medical expenses. The average Canadian family spends over $500 out of pocket for medical expenses every year, and tax relief may come from your tax return. In fact, some claims can be quite lucrative.

It is possible to claim a variety of things in the best 12-month period ending in the tax year (24 months in the year of death). For example, unreimbursed portions of your prescriptions, glasses, dental work, and medical travel insurance protection plans count. Eligible expenses also include home and car modifications to accommodate the disabled — as well as a host of medical devices.

Even the incremental costs of buying gluten-free bread by those with celiac disease may be claimed (although the paperwork is a bit harrowing).

And yes, Fido may be deductible, too, in some cases. The costs of the use of support animals is possible if needed by taxpayers who are blind, deaf, have severe autism or epilepsy or a marked restriction to the use of their arms or legs.

Ask your tax advisor about every medical care cost you’ve had this year. You may be able to offset costs with a larger tax refund.

5. Check out the Disability Savings Plan. A new saving plan designed to help build a tax-preferred private pension for a disabled person was introduced in late 2008. It’s called a Registered Disability Savings Plan.

Any person eligible to claim the Disability Amount can become the beneficiary and the plan can be established by anyone for a beneficiary — that is, you don’t have to be related. Although contributions are not deductible, the investment income earned in the plan accumulates in an RDSP on a tax free basis.

More important, the government matches your contributions — by as much as $3 to your $1 — with lucrative Canada Disability Savings Grants and Bonds. There is no annual limit on contributions but lifetime contributions cannot exceed $200,000. Check it out with your financial institution.

6. Keep a car log. Electronic devices have made mileage records much easier to keep, as have applications like GoogleMaps. These tools are helpful when making a claim for deductible auto expenses if there is any personal driving mixed in with your business or employment use of the vehicle. This is true for most people, as driving to and from work is considered a personal expense.

What is required is that you keep close records of your business and personal driving for a year. After this, a representative sample period of time (3 months) is required every year to prove your driving patterns to the tax department

Don’t forget to keep all receipts for fixed automobile costs like leasing and interest charges and operating costs like maintenance, gas and repairs to maximize the claim for auto expenses.

7. Minimize tax on RRSP withdrawals. The best time to start planning your retirement is with the first dollar you put into your RRSP. The tax deduction is good at the start, and so is the tax deferred earnings growth. However, before you plan to spend your retirement pot from this source, you’ll need to plan to keep the taxes down.

Here’s what’s important: Money can be withdrawn from your RRSP at any time, but when it is, both earnings and principal will be fully taxable. That’s why taking a lump sum all in the same tax year can be expensive.

There are more tax-efficient ways to draw from your RRSP in retirement. Transfer the funds to a Registered Retirement Income Fund (RRIF), or to an annuity that will provide a steady stream of guaranteed income throughout your retirement. You may also want to take advantage of a spousal RRSP now if you’re married or living common law, so that your lower-income spouse can take payments from the RRSP in a lower tax bracket down the road. In addition, when you turn 65, your RRIF or annuity will qualify for pension income-splitting with your spouse. These planning strategies can put lots more money back into your pocket throughout your retirement.

8. Strategic giving. If you are like most Canadians, you are generous and dig deep when a charity calls. Aside from the obvious pleasure this can provide, planned giving can reap tax rewards too.

It is generally most beneficial to claim donations made by both spouses together on one tax return. This is because the first $200 of donations is eligible for only a 15 per cent federal tax credit, while any additional donations attract a tax credit of 29 per cent. The return on the investment is even higher when provincial taxes are factored in.

And don’t forget, transferring a security to your favorite charity will erase your capital gains, while providing you with a donation receipt. That’s a great way to share your good fortune.

9. Who gets the family cottage? I live in Manitoba, the home of 100,000 lakes, and that beloved family cottage is often the place where the hearts and souls meet. The memories are endless and run deep with all family members.

Yet, you often hear the whispers of nasty stories: some of the “adult children” use the cottage frequently, but don’t pay a dime. Others live far away, but continue to put money into the cottage to cover expenses — the roof, the dock, the boat house, the boat, and so on.

Here is the problem for mom and dad: Who should inherit the cottage? What’s the value? When should it be sold, and to whom? Who should cover the capital gain created by the transfer or disposition of this asset?

Tax time is the right time to ask these questions. Be sure to talk to your family and advisors before cottage season has begun. You need to start exploring solutions to avoid missteps fraught with expensive tax implications, later.

10. Working from home benefits. If you find yourself working from a home office, it’s important to keep books and records for all expenses, because a tax deduction for your costs may be possible. To be eligible, one of two tests must be met to satisfy the tax man:

•  It is your principal place of business, or

•  The space is exclusively used in the conduct of the business activities, and the space is used regularly and on a continuous basis for meeting customers or other people associated with the business.

What’s deductible depends on whether you are employed, earning income from commissions or are self-employed. Issues to discuss with a tax advisor include claiming mortgage interest, property taxes, insurance, utilities, repairs and maintenance and other home office costs on your tax return this year.

Tax expert and author Evelyn Jacks latest book is Essential Tax Facts. She is president of The Knowledge Bureau which offers professional development to tax and financial services advisors.