The tax deadline is fast approaching, and as you prepare that tax return you may wonder if you’re making the most of your credits and deductions. Depending on your tax strategy, it can sometimes make sense to carry benefits forward for a future year or even transfer them to a spouse. Nicole Ewing, Director of Tax and Estate Planning, TD Wealth, joins Kim Parlee to talk last-minute tax return maneuvers.
Here to help us-- Nicole Ewing, director of tax and estate planning at TD Wealth. Nicole, great to have you with us.
- Thanks, Kim. Great to be here.
- Let's start off. You've got a number of tips here. And the first we're going to talk about is charitable donations and when you need to report them this year. So let's first-- I love how you've broken this up. We can talk about what the issue is and then what the money move is, what you should be doing. So first, what is it?
- So if you or your spouse have made a gift of money or other property to a registered charity during the year, then you have-- that donation results in a charitable tax credit. And you can claim that charitable tax credit on your income tax return, either a portion of it or all of it, or you can carry it forward into a future year. And you can use up to 75% of your net income for the year.
So that's the "what." We have the tax credit. What we want to think about here is coordinating with our spouse. So generally, it will be best to combine your charitable donations with your spouse and to claim those on the return of the higher income earning spouse because this will reduce not only your base tax, but also any potential provincial surtaxes.
And then we also want to be thinking about, do we want to use it this year? So you don't have to use it in the year that the donation was made. You can carry it forward to a future year, up to 5 years or 10 years if it's ecologically sensitive land. And we want to be looking at whether-- what is the income of-- in my current year, what will it be in the future year, and what the size of the donation is to get the biggest bang for the buck?
- Good one. I always want to claim the credits in the year. It's always-- I just-- I like to have that. But anyways, I know it's a bit of--
- It's efficient.
- --a delay sometimes.
Tuition credits, the second one-- so the question is, does your child get the tuition credit? Do you get the tuition credit? So again, talk a bit about what it is and then how do we optimize that.
- So we do get a tuition credit. And the child gets the credit. And the child needs to not owe tax before they're transferring that credit to you. So firstly, they'll use that credit to reduce their own tax payable to $0. And then they have the ability to transfer that, any excess up to $5,000, for the federal tax credit and any maximums for provincial education or textbook or tuition amounts. And that can be transferred to a spouse, to a parent or a grandparent, or a spouse's parent or grandparent.
And so here, we want to be thinking about do-- really only transferring as much as the transferee actually needs to use to reduce their taxes. So we're going to transfer as much as we need to reduce the transferee's tax. And then that will allow us to maximize our carry-forward into future years because, again, we don't need to use it in the current year. We can carry it forward as well.
- Great. OK. The third one we always talk about. I don't hear enough people using them, prescribed rate loans. Again, what is it? Why is this year interesting? And I know-- and then also, how do we optimize it?
- I'll try to be really brief with this. When we transfer money between our spouse or minor children, there's something called attribution rules. And attribution rules mean that if I transfer a gift for less than this prescribed rate or make a loan for less than the prescribed rate, any income that my family member earns on that money is going to be attributed back to me.
And so instead, what we do is we use the prescribed rate loan in order to avoid that result. And we make the gift-- or sorry, we make the loan at the prescribed rate. This allows the lower income family member to invest those funds, have them taxed in their own hands, at their own lower rate. So it's a form of income splitting between family members.
Right now, that rate is 1%. And it's the lowest it can possibly be. And once we lock in that rate, that 1% rate, we carry that forward forever. So quarterly, this-- the CRA will announce what the new prescribed rate is. It could potentially go up. And certainly, it's tied to government of Canada Treasury bills, three-month Treasury bills.
So if this rate goes up in the future and we've locked in at that 1% rate, we will continue to enjoy the benefit of only needing to pay our 1% interest to our spouse and then benefiting from that spread between what the interest payment and the invested-- the income that I'm earning on that investment, but I'm now having taxed in a lower family member's-- the lower income family member's hands. That can be a spouse. It could be a trust for minor beneficiaries-- but a very useful strategy. And while it's 1%-- best to think about locking that in while we can.
- Rates are going up everywhere. That includes prescribed rate loans. So there you go. Now is the time. Carpe diem.
Last one, Nicole, where-- I think we can squeeze one more in there-- is RSPs. I've got about a-- just a minute and change. Everybody races to get their contributions in. But this is, again, delayed gratification. Maybe we want to wait to claim that contribution to later. So maybe explain it. And then what's the money move? We've got about a minute.
- So we have our RSP deduction that we can use the deductions that were made in 2021, or the first part of 2022, up until the time limit. And that can be used to reduce the taxes that we owe. And so a deduction is really worth-- what it's worth depends on what your marginal tax rate is.
So if my marginal tax rate is 20%, then a deduction-- a $1 of deduction equals $0.20. If my marginal rate is 40%, then $1 of deduction equals $0.40. So you can see, if I'm in a higher income year, where I'm paying 40% as opposed to 20%, using my deduction will be worth more than it is in a lower income year.
So we might look at what we're-- an income is expected to be this year versus next year and whether or not that makes a difference for us. But we don't just want to look at that number. We also want to look at the benefit if I did claim that deduction and received a refund-- if I'm reinvesting that, what am I expecting to earn on that? Will that offset the difference in the tax savings over the course of the year?
So a little bit of math here-- this is where we want to engage our professionals, talking to our investment advisors and financial planners, seeing what strategies they have in place for us and where the best time to claim that deduction will be.
- Awesome tips, great things to keep in mind-- and good to, of course, get that strategy moving with somebody. Nicole, thanks so much.