How do you reduce your personal Income Tax Rate when filing your tax return?

How do you reduce your personal Income Tax Rate when filing your tax return?

Henley Financial & Wealth Management posted on our blog information regarding 2020 new Tax Rates and New Limits. But what does one do with that information?  As Canadian taxpayers you have until April 30th 2020, to file your personal 2019 tax return. However, as the calendar turns over on to a new year many of our clients want to know how best to maximize their tax refund or minimize what they owe the government.

So, we thought we would share the two main ways to reduce taxes owing. It is always important to seek professional advice from your accountant regarding personal taxes. We are not the tax experts we are just simply stating the rules around taxes as they exist today.

What are tax deductions or a tax credit? Which on there own are the answers to reducing one’s taxable position for the average person in Canada.

Tax Deductions:

A tax deduction reduces your taxable income. The value of a deduction depends on your marginal tax rate. So, if your income is more than $210,371, you’d be taxed at the federal rate of 33 percent and a $1,000 tax deduction would save you $330 in federal tax. On the other hand, if you earn less than $47,630, you’d be taxed at the federal rate of only 15 percent and a $1,000 tax deduction would only save you $150 in federal tax.

Two of the most valuable tax deductions are:

RRSP contributions

Your RRSP contribution is an example of a tax deduction, and is likely the best tax saving strategy available to the majority of Canadian taxpayers. The contribution reduces your net income, which in turn reduces your taxes owing. An added bonus for families who contribute to RRSPs is that the resulting lower net income will likely increase their Canada Child Benefit.

You have until 60 days of the current year to make a contribution to your RRSP and apply the deduction towards last year’s taxes. One tip for those who know in advance how much they’ll be contributing to their RRSP is to fill out the form T1213 – Request to Reduce Tax Deductions at Source.

You can contribute 18 percent of your income, up to a limit of $26,500 (2019). Watch out for RRSP over contributions – there’s a built-in safeguard where you can over contribute by $2,000. Excess contributions are taxed at 1 percent per month.

Child-care expenses

Day care is likely one of the largest expenses for young families today. Child-care expenses can be used as an eligible tax deduction on your tax return.

Typically, child-care expenses must be claimed by the lower income spouse. One exception is if the lower income spouse is enrolled in school and cannot provide child-care, the higher income spouse can claim the child-care costs.

 

The basic limit for child-care expenses are $8,000 for children born in 2012 or later, $11,000 for children born in 2018 or earlier, and $5,000 for children born between 2002 and 2011.

Note that most overnight camps and summer day camps are also eligible for the child-care deduction.

Tax Deductions checklist:

  • RRSP contributions
  • Union or professional dues
  • Child-care expenses
  • Moving expenses
  • Support payments
  • Employment expenses (w/ T2200)
  • Carrying charges or interest expense to earn business or investment income

Tax Credits:

There are two types of tax credits – refundable and non-refundable. A non-refundable tax credit is applied directly against your tax payable. So, if you have tax owing of $500 and get a tax credit of $100, you now owe just $400. If you don’t owe any tax, non-refundable credits are of no benefit.

For refundable tax credits such as the GST/HST credit, you will receive the credit even if you have no tax owing.

Three of the most valuable tax credits are:

Basic Personal Amount

The best example of a non-refundable tax credit is the basic personal amount, which every Canadian resident is entitled to claim on his or her tax return. The basic personal amount for 2019 is $12,069.

Instead of paying taxes on your entire income, you only pay taxes on the remaining income once the basic personal amount has been applied.

Spousal Amount

You can claim all or a portion of the spousal amount ($12,069) if you support your spouse or common-law partner, as long as his or her net income is less than $12,069. The amount is reduced by any net income earned by the spouse, and it can only be claimed by one person for their spouse or common-law partner.

Age Amount

The Age Amount tax credit is available to Canadians aged 65 or older (at the end of the tax year). The federal age amount for 2019 is $7,494. This amount is reduced by 15 percent of income exceeding a threshold amount of $37,790, and is eliminated when income exceeds $87,750.

The Age Amount tax credit is calculated using the lowest tax rate (15 percent federally), so the maximum federal tax credit is $1,124 for 2019 ($7,494 x 0.15).

Note that the age amount can be transferred to the spouse if the individual claiming this credit cannot utilize the entire amount before reducing his or her taxes to zero.

Tax Credits checklist:

  • Volunteer firefighter or Search & Rescue details
  • Adoption expenses
  • Interest paid on student loans
  • Tuition and education amounts
  • (T2202, TL11A), and exam fees
  • Medical expenses (including details of insurance reimbursements)
  • Donations or political contributions

The Verdict on Tax Deductions and Tax Credits:

Tax deductions are straightforward – if you earned $60,000 and made a $5,000 RRSP contribution your taxable income will be reduced to $55,000. Deductions typically result in bigger tax savings than credits as long as your marginal tax rate is higher than 15 percent.

A non-refundable tax credit, on the other hand, must be applied to any taxes owing and is first multiplied by 15 percent. That means a $5,000 non-refundable tax credit would only result in about $750 in tax savings.

 

The most overlooked tax credits and tax deductions (the ones most likely to go unclaimed) are medical expenses, union dues, moving expenses, student loan interest, childcare expenses, and employment expenses.

That’s why it’s important that Canadian tax filers make a checklist of every tax deduction and tax credit available to them at tax-time and take advantage of all that apply to their situation.

 

The First RRSP

The First RRSP

The first RRSP — then called a registered retirement annuity — was created by the federal government in 1957. Back then, Canadians could contribute up to 10 per cent of their income to a maximum of $2,500. RRSPs still remain one of the cornerstones of retirement planning for Canadians. In fact, as employer pension plans become increasingly rare, the ability to save inside an RRSP over the course of a career can often make or break your retirement.

The deadline to make RRSP contributions for the 2018 tax year is March 1st, 2019.

If you need help or advice with you tax planning or investments we are always available to help @henleyfinancial.ca

Anyone living in Canada who has earned income has to file a tax return which will create RRSP contribution room. Canadian taxpayers can contribute to their RRSP until December 31st of the year he or she turns 71.

Contribution room is based on 18 percent of your earned income from the previous year, up to a maximum contribution limit of $26,230 for the 2018 tax year. Don’t worry if you’re not able to use up your entire RRSP contribution room in a given year – unused contribution room can be carried-forward indefinitely.

Keep an eye on over-contributions, however, as the taxman levies a stiff 1 percent penalty per month for contributions that exceed your deduction limit. The good news is that the government built-in a safeguard against possible errors and so you can over-contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax.

Find out your RRSP deduction limit on your latest notice of assessment clearly stated.

You can claim a tax deduction for the amount you contribute to your RRSP each year, which reduces your taxable income. However, just because you made an RRSP contribution doesn’t mean you have to claim the deduction in that tax year. It might make sense to wait until you are in a higher tax bracket to claim the deduction.

When should you contribute to an RRSP?

When your employer offers a matching program: Some companies offer to match their employees’ RRSP contributions, often adding between 25 cents and $1.50 for every dollar put into the plan. Take advantage of this “free” gift from your employers.

When your income is higher now than it’s expected to be in retirement: RRSPs are meant to work as a tax-deferral strategy, meaning you get a tax-deduction on your contributions today and your investments grow tax-free until it’s time to withdraw the funds in retirement, a time when you’ll hopefully be taxed at a lower rate. So contributing to your RRSP makes more sense during your high-income working years rather than when you’re just starting out in an entry-level position.

A good rule of thumb: Consider what is going to benefit you the most from a tax perspective.

When you want to take advantage of the Home Buyers’ Plan: First-time homebuyers can withdraw up to $25,000 from their RRSP tax-free to put towards a down payment on a home. Would-be buyers can also team up with their spouse or partner to each withdraw $25,000 when they purchase a home together. The withdrawals must be paid back over a period of 15 years – if you do not pay one fifteenth of the borrowed money, the amount owed in that calendar year it will be added to your taxable income for that year.

Unless it’s an emergency then it’s generally a bad idea to withdraw from your RRSP before you retire. You would have to report the amount you take out as income on your tax return. You won’t get back the contribution room that you originally used.

Also, your bank will hold back taxes – 10 percent on withdrawals under $5,000, 20 percent on withdrawals between $5,000 and $15,000, and 30 percent on withdrawals greater than $15,000 – and pay it directly to the government on your behalf. That means if you take out $20,000 from your RRSP, you will end up with $14,000 but you’ll have to add $20,000 to your taxable income at tax time. This is done to insure that you pay enough tax upfront for the withdrawal at the source so that you are not hit with an additional tax bill (assessment) when you file your tax return.

What kind of investments can you hold inside your RRSP?

A common misconception is that you “buy RRSPs” when in fact RRSPs are simply a type of account with some tax-saving attributes. It acts as a container in which to hold all types of instruments, such as a savings account, GICs, stocks, bonds, REITs, and gold, to name a few. You can even hold your mortgage inside your RRSP.

If you hold investments such as cash, bonds, and GICs then it makes sense to keep them sheltered inside an RRSP because interest income is taxed at a higher rate than capital gains and dividends.

For more information regarding WealthSense investments and RRSP’s

The Value of our Dollar…

The Value of our Dollar…

When will our dollar come back to a common value that we are comfortable with? Since the global oil rout began in late 2014, everyone has been trying to call a bottom in crude prices. Looking at it with a wider perspective, crude prices have a huge impact on the global economy as a whole, directly influencing those countries that are major exporters of it. Canada, the world’s sixth largest oil-producing country by volume is particularly exposed to fluctuations in crude prices, and its currency reflects this by showing a strong correlation to crude oil prices (given no other major economic developments).

Adding to this point, Canada’s largest trading partner for oil is just south, as the United States gobbles up more than 95% of its crude exports. Oil is priced in U.S. dollars (USD), so lower oil prices mean less U.S. dollars coming in per barrel exported. Less USD supply drives up the value of USD versus the Canadian dollar (CAD), resulting in a weaker Canadian dollar.

The weakening of the Canadian dollar is a major concern for anyone who has immigrated to the United States from Canada, and a great boon for anyone looking to move to Canada or buy property here.

So now for the 96.5-billion-barrel question: Have oil prices bottomed? Speculators look to global events for a clue as to a bottom forming for oil, as every OPEC meeting and every meeting between Russia, Iran, or Saudi Arabia about oil production immediately causes a spike in crude. If the talks yield nothing of substance, crude prices immediately fall back down. Is this just the Wall Street, or is there more to it? The answer lies in Economics 101: Supply and Demand.

Oil speculators know that a commodity’s price is dependent on the balance between the supply present and available for use and the current and future demand of that commodity. When representatives from OPEC, Russia, Saudi Arabia or Iran meet with each other, speculators are hoping for an agreement that affects the supply/demand balance with a lessening of the future supply via production cuts, or at least a freezing of the output to allow for demand to outpace supply. It is the underlying supply data, however, that suggests we’ve bottomed out in crude prices and thus the Canadian dollar in the short-term at least.

Is oil turning around, and could it possibly be undervalued.

Well if we look at the price at the pump it seems to be rising slowly. Although yesterday I bought some US currency and paid the highest exchange I have in recent years. Time will tell but as we know our currency is valued to our resources.

 

The past does not predict the future…

The past does not predict the future…

After the last debate for the presidency of the United States of America, it’s hard to imagine that these are the best two candidates to lead a world power for at least the next four years. You would think with all the people in the political ring you would have someone who cares about our future generations and not about what happened 20 years ago and how that makes you unfit to lead. If having a skeleton in the closet means you will be called out when you run for office. Then you would never have a leader in the free world as we have all done something that would consider us unfit to lead a country.

Henley Financial and Wealth Management brings you this article with consideration of what might happen moving forward.

Predicting what will happen in the stock market is hard. Nope, scratch that. It’s pretty much impossible. But in light of the looming November vote, I took a look at what happened in the markets over the past few decades in relation to US presidential elections. However, before I get to that, I would like to emphasize that when it comes to markets, the past does not predict the future. And so I am not making any predictions here about what will happen on  November 9, 2016, the morning after.

What happens in the markets during the lame duck session between an election and the inauguration of the new president? The performance of the stock market between Election Day and Inauguration Day might be taken, in part, as a statement of investor confidence — or lack thereof — in the incoming administration.

The line of thinking is that Republicans are better for the markets because they tend to push for more pro-business policies, such as lower taxes and less regulation. However, the stock market has historically performed better under Democratic presidents. American presidents since 1945 show the average annual gain under the blues (Democrats) was 9.7%, while under the reds (Republicans)  was 6.7%.

The only two presidents who saw negative market returns during their tenure were Republicans: Richard Nixon, who was in office during the Arab oil embargo, and George W. Bush, who closed out his second term as the Financial Meltdown in 2008.

Taking it a step further, both poor and good stock performance in the year before or after an election had less to do with the president’s party and more to do with what was going on in the actual economy.

As for Obama, he took office the year after stocks lost nearly 40%. And notably, days before stocks touched their lowest in March of 2009, the president stated, “What you’re now seeing is profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective”. Stocks are up by about 209% since he said that. Is it because Obama was a great president and his policies changed the world?

No the strong performance of the market from 2009, was not due to the election of President Obama and retention of a Democrat-controlled Congress in 2008. It resulted instead from a recovery in the economy after the Great Financial Crisis.

So what does this mean for November 8?

The result of that election is unlikely to have a major bearing on the performance of the US stock market.

The markets don’t like uncertainty, as the market sees it, Hillary Clinton is a known player whose policies are expected to be largely a continuation of the current administration.

Trump and his economic positions, however, are less predictable and do not always follow the party, he is for tax cuts and deregulation, but against free trade. Thus, he is perceived as more of a political risk in the market.

That sort of emotional response to a political shock is actually quite typical of investor and, more broadly, human behavior. Unexpected and potentially destabilizing political events tend to make traders and investors nervous, which then sometimes leads to volatility in financial markets. But as history has shown time and time again, these events generally do not have a sustained impact on markets.

Yes, investor sentiment in the immediate aftermath of the election can affect the market. And, yes, presidential policies affect the economy, which then, in turn, can affect the markets.

However, there are a bunch of other factors not wholly connected to presidential policies — such as oil-price shocks, productivity shocks, and things like China’s devaluation of its currency — that all influence what happens with the stock market. In any case, perhaps the most telling historical debate with respect to the relationship between presidents and the stock market (or lack thereof) is the following. Stocks saw their best gains under Republican Gerald Ford — but he wasn’t elected president, and he wasn’t even the original vice president on Richard Nixon’s ticket in 1972.

So whoever wins this circus act called the US presidential election of 2016, the markets will continue to perform based on solid economic performance until that performance is upended by a real economic event.

What does this mean for Canadians

What does this mean for Canadians

If history is any guide, a win by Justin Trudeau and the Liberals bodes well for Canadian stocks.

Stretching back to 1922 and the time of William Lyon Mackenzie King’s first term in office, stock returns have been three times higher under Liberal prime ministers than with Conservative leaders, this according to monthly data up until August 2015 compiled by Bloomberg from TMX Group Ltd., operator of the Toronto Stock Exchange.

Over about 63 years in power, the Liberals of Pierre Elliott Trudeau, Jean Chretien and Louis St-Laurent witnessed a weighted compound annual growth rate of 6.8 per cent for the Standard & Poor’s/TSX Composite Index and its predecessor TSE Index. That compares with a 2.2 per cent annual gain for the Tories of Stephen Harper, John Diefenbaker, Brian Mulroney and others.

Is it timing? Have the Liberals been lucky over 100 years to do so well? Over 100 years there does seem to be a pattern.  It could be that when economic growth is poor, people want austerity and think Conservatives are better managers.  Then when things improve people get tired of that and they vote for the Liberals.  Or has change always come at the right time?

The data, which covers the tenures of more than a dozen prime ministers of both major parties, compares the compounded annual growth of Canadian stocks weighted relative to the amount of time a particular leader was in office.  The longer the time served, the greater the impact on the resulting figures.

Under Harper, Canada’s leader since 2006, the benchmark gauge has posted compound annual growth of 1.5 per cent, the second-worst performance of any prime minister since Richard Bennett. Bennett, a Conservative who ruled during the time of the Great Depression from 1930 to 1935, is the only prime minister with a negative stock return of 9.7 per cent.  Pierre Trudeau’s second term was weaker than Harper’s for stock performance but his overall tenure was better.

As with other leaders, Harper’s stock market record reflects events that are beyond his control. The incumbent Conservative led the country through the worst global financial crisis since the Depression and more recently witnessed a 50 per cent drop in the price of oil, one of the nation’s biggest export products.  As a result, Canada’s economic growth will be about 1.1 per cent this year, one of the weakest in the Group of Seven countries.

Markets are, at least in part, a reflection of confidence or a lack thereof.  It is interesting that the Liberal legacy of sound economic management, jobs and growth, is something we don’t hear about during election campaigns.  But it would appear that they have delivered and can contribute to the economic growth of a country.

Typically if you get more money into the hands of people with a higher tendency to spend it that’s good for economic growth. The market will do better if the Liberals are seen as more of a middle of the road player that encompasses all, as opposed to the Conservatives which have been linked to business and benefiting corporate entities.

Liberals returns

The 13-year Liberal dynasty that came before Harper, led by Chretien and Paul Martin, presided over combined compound annual growth of 8.3 per cent from 1993 to 2006.

Martin, who held power for three years through a minority government, posted the best compound growth rate of any elected Liberal at 18 per cent. Resource stocks in the S&P/TSX surged as the Canadian economy wrestled with a weakened currency for much of their rule, along with the rise of China as a global economic power and the rapid rise of commodities prices from crude to gold.

Again we must understand that the Harper government went through the financial crisis of 2008, which certainly was not his doing.

All is not lost for the Conservatives, however.  The best performance of any prime minister was the nine-month rule of Joe Clark from June 1979 to March 1980. Canadian equities surged 33 per cent during his time in office, for annualized compound growth of 47 per cent. Elected at age 40, Clark was the youngest prime minister in Canadian history.

This is not to say that Trudeau will not go through a financial crisis, or market correction over the next four years.  But while in power the results from the markets going forward are in his favor.  2015 has been flat year with minimal gains and as we have seen in the past there is a calm before the storm approach in the markets.  We cannot predict markets going forward but we do know that they will go up and of course go down.  Timing may once again in favor of the Liberals.

For all those who believe that the Liberals will only raise taxes, we have an answer at Henley Financial and Wealth Management that helps remove the threat of tax.  To understand our Onshore Tax Shelter

visit us at http://www.henleyfinancial.ca

or email us http://info@henleyfinancial.ca