While it's a little late to be thinking about tax planning for 2010, there are a few things that can be done to save tax still. Today, I want to talk about two strategies to consider.
Report business activities
Many people believe that, unless they earned revenue from self-employment activities in 2010, they can't possibly report expenses for 2010. Not so. If your intention was to start a business in 2010 but you didn't generate any revenue, you may still be entitled to claim expenses incurred.
Whether your intention was to start a business in 2010, or are developing that intention today (after the fact and in the face of needing tax deductions for 2010) is a hard determination for anyone but you to make. In the first year of a business, it's not uncommon to experience losses - and the taxman is not surprised when this is the case.
Here's the deal: You'll need to report your business or professional activities on Form T2025, and if your expenses happen to exceed your revenue for 2010, those losses will be applied to offset other income you might report on your tax return, which will save tax.
To be allowed deductions you must have a reasonable expectation of profit from your business. This doesn't mean you have to report a profit every year, but you should expect your revenue to be more than your expenses over the length of time, perhaps years, that you plan to run the business.
So, what expenses can you claim? Any costs incurred for the purpose of earning income from your business, including many things you're paying for anyway: A portion of mortgage interest, property taxes, landscaping, vehicle costs, meals and entertainment, computer supplies, and tax-preparation fees come to mind.
You should know that home office costs can reduce your business income to zero, but can't create or increase a loss, although excess home office costs can be carried forward for use in future years.
Another benefit of reporting self-employment activity on your tax return is that your deadline for filing, and your spouse's, is extended to June 15 each year.
Defer RRSP deductions
If you made a contribution to your registered retirement savings plan for 2010, you're no doubt planning to deduct that contribution on your 2010 tax return. But is there a way to save even more tax by claiming all or part of the deduction in the future? Possibly.
You see, the amount of tax you'll save from an RRSP deduction is the amount of the deduction multiplied by your marginal tax rate. If, for example, your marginal tax rate is 40 per cent, then a $10,000 RRSP deduction will save you $4,000 in tax.
If you expect to earn significantly more in 2011 than in 2010, you might want to save your RRSP deduction until 2011. After all, you don't have to claim your RRSP deduction in the year you make that RRSP contribution - you can defer it to any future year.
Even if you don't expect your income to be higher in 2011, you might still benefit from deferring part of your deduction. For example, suppose you live in Ontario and earned $45,970 in 2010, and you made a $10,000 RRSP contribution for 2010. The first federal tax bracket ends at $40,970, so that the first $5,000 of your RRSP deduction in this case will save you tax at a marginal tax rate of 31.15 per cent. Once your taxable income is below $40,970, the tax savings on the last $5,000 of the deduction will be lower since marginal tax rates are lower under that threshold.
You may be better off claiming the first $5,000 of your RRSP deduction in 2010 and the balance in 2011 if the last $5,000 can be deducted against income next year that is taxed at a higher rate. There's a tradeoff between getting your tax savings sooner (this year) and getting greater tax savings later (next year). Generally, deferring the deduction for a year or two can make sense. You should use tax software or consult a tax pro to figure out whether deferring your deduction will save you tax.