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Last-minute options for saving taxes

By Arthur Drache

Tax planning is year-round work. Many plans take time to have an effect. Thus, for example, an income-splitting scheme will have more impact if it is undertaken in January rather than October.

Similarly, there are various deadlines that must be met. For example, if you want to claim medical expenses for a tax year, those expenses must be incurred no later than December 31. The same is true of charitable expenses, fees for investment counsellors, legal fees that can be claimed, safety deposit boxes and so forth.

It is important to remember that unlike businesses, individuals must account on a “cash basis,” and it is when the expense is incurred that counts.

Of course, statutory provisions may change the general rules. Thus, RRSP contributions will qualify for the year so long as they are made within 60 days of the end of the year in question.

In truth, there are very few tax-planning decisions that can be made at the time you fill in your tax return. But there are at least two that should be taken into account.

The first concerns medical expenses and there are three points to remember. First, medical expenses can be claimed by either spouse and this includes common-law spouses. Second, you can only get credit (at a rate of 16% federally) for expenses that are above 3% of net income. Third, all expenses in excess of $1,755 can be claimed.

Thus, unless both spouses have net income of more than $58,500, the one with the lower income should claim all the expenses. This is an inviolable rule unless that spouse’s income is so low that the credits will be of no use.

When making the medical expense claim, make certain that you claim everything to which you are entitled. Probably the greatest single medical expense for most families is medical and dental insurance. Keep in mind that all the premiums paid by you are treated as medical expenses. Often this item alone is enough to bring people over the threshold.

You can also claim the difference between what you actually paid for medical care, prescription drugs and the like and your reimbursement by insurance. Since very few policies will pay 100% of your costs, this component may turn out to be significant. Then there may be additional expenses not generally covered by insurance, such as prescription glasses and hearings aids.

We have often found that as couples get older, a combination of greater medical expenses and reduced income often means that the medical expense claim may be made in situations where higher incomes in past years would not allow for it.

Again, remember that one spouse might have $250,000 of income, but if the other spouse’s income is modest, the claim can be made.

Similar rules apply with regard to charitable donations – either spouse can claim them. With charitable donations, there are no limitations other than for the rule that the first $200 carries a federal tax credit of 16% and the excess has a credit of 29%. This leads many tax advisers to take the position that one spouse should claim all charitable donations. Again, this rule only applies if that spouse can use the donation credits.

However, we feel that it is worth pointing out that having both spouses make charitable donation claims is not terribly expensive. If each spouse claims the credit and each has a $200 threshold, the family will have federal credits of $64. If one spouse alone claims the credit, the credit on the $400 would rise to $90, a difference of just $26. If you figure in the provincial tax credit, this might run to $38.

Our position has always been that it might be better to forgo the $38 in order to use charitable donations on both tax returns. For example, we know of one couple that uses modest income splitting to shift about $3,000 annually from the husband to the wife through the payment of director’s fees. The husband then arranges for the appropriate level of charitable donations to be claimed by the wife to wipe out the potential tax liability. Yet he too has taxes that he wants to reduce. He always figured that the judicious splitting of the charitable tax credits to reduce taxes on both returns was well worth the extra $38 in joint taxes that resulted.

We should point out that this sort of planning is easy if you do your own returns. But if you go to a professional tax preparer, give explicit instructions. They cannot be expected to understand your planning ideas if you don’t tell them, and knee-jerk adherence to formulae is the hallmark of those who rely on computer programs to do taxes. Doing a return can be an art, not a science, if common sense is brought into the picture.


Copyright © 2004 by Arthur Drache. All rights reserved.

Arthur Drache is a partner of Drache, Buchmayer, LLP and specializes in all areas of personal tax and estate planning. The opinions and views expressed herein are those of the author and not those of CI Investments Inc. CI Investments Inc. does not necessarily endorse or encourage any specific tax strategies. Please consult a tax professional for advice specific to your particular situation.

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