This is an excerpt of select chapters from 78 Tax Tips for Canadians for Dummies, written by Christie Henderson, Brian Quinlan and Suzanne Schultz.
Tip #49 Know What Tax Credits Are Available for You and Your Family
Basic personal credit amount Each and every Canadian filing a tax return is able to claim this credit. The amount changes every year, but it is in excess of $10,000. In other words, the first $10,000 or so of income you earn is not subject to tax! Here's how this actually works. Assume your taxable income is $10,000. The tax rate at this income level is 15 per cent, so your tax equals $1,500. On schedule 1 you calculate the non-refundable tax credits available to you. If the basic personal amount is $10,000 (and it's likely more), the 15 per cent tax credit equals $1,500. See a pattern? The tax credit completely offsets the tax, so your final tax liability is nil.
Spouse/common-law partner credit amount The spouse/common-law credit amount is another credit worth at least $10,000. Again, the amount changes every year. Assuming the credit is $10,000 and you're able to claim the full amount, the federal tax savings will be $1,500 ($10,000 times15 per cent).
How do you qualify? Well, first you have to have a spouse. For income tax purposes, "spouse" includes the person you're legally married to or a person who is your common-law partner. (Of course, if you happen to have both, you can make a claim for only one these "spouses"!) Common-law partners are defined as two persons, regardless of sex, who cohabit in a conjugal relationship that has been continuous for at least 12 months or, if fewer than 12 months, have a child, natural or adopted, together.
As you might have guessed, more qualifications exist. If your spouse had any net income for the year, the credit amount is reduced dollar for dollar. If your spouse's income is greater than the credit amount, the amount available to you is reduced to zero. Your spouse's net income is the amount reported on line 236 of his or her tax return.
If you separated during the year and were not back together by December 31, reduce the credit amount by your spouse's net income before the separation only.
Tip If you cannot claim the spousal amount (say, because the credit amount calculation works out to zero), or you have to reduce the credit claimed because of your spouse's net income, you still may be able to claim the credit, or an increased credit amount, if your spouse's income for the year includes dividend income from Canadian corporations. You do this by claiming your spouse's dividend income on your return so that his or her income is lowered to permit the credit amount you claim - or, perhaps, a greater credit amount than originally calculated.
Child tax credit amount If you have a child, then this credit is for you! The child tax credit amount is at least $2,000 for each child under the age of 18 at the end of the year. No receipts required! The credit amount changes each year, but assuming a credit of $2,000 the actual federal tax saving is $300 per child ($2,000 times 15 per cent)!
Remember If you don't need all the child tax credit to reduce your federal tax to zero, you can transfer any of the unused portion to your spouse or common-law partner.
Tip If you'll be eligible to claim the child tax credit in the future, you might want to let your employer know so that your taxes at source can be reduced throughout the year. Otherwise, you have to wait until you file your tax return to benefit from the credit. You can inform your employer via a letter or by filling out form TD1 (you can download it from the CRA Website). Your payroll department should also have copies on hand.
Tip # 68 Reduce Your Family's Tax Bill by Sharing CPP and Pension Splitting
Income splitting - or income sharing, or shifting - is one of the best, and easiest, tax planning ideas we can offer.
Sharing Your CPP Retirement Pension Remember Don't confuse sharing your CPP with the tax planning opportunity provided by pension splitting (also discussed in this tip).
In undertaking CPP sharing you and your spouse/common-law partner receive an equal share of the CPP retirement pension you both earned during the years you were together (not separated or divorced). If only one spouse/common-law partner is entitled to a CPP retirement pension, then the one CPP pension can be shared. Sharing your CPP does not increase or decrease the overall retirement pension to which you and your spouse/common-law partner are entitled. CPP sharing is simply undertaken to reduce the family's tax burden.
CPP sharing eligibility and how to apply To share your CPP retirement pension entitlements, you and your spouse/common-law partner must both be at least 60 years of age, and you must request that your CPP retirement pension be shared.
The request is made on form ISP1002, "Application for Pension Sharing of Retirement Pension(s) Canada Pension Plan." You can download the form from the HDRSC Web site or pick one up at any Service Canada office.
After the application is accepted, the CPP retirement pension cheques (or direct deposit) sent to you and your spouse/common-law partner will reflect the CPP sharing, as will the T4A(P) slip, "Statement of Canada Pension Plan Benefits," you receive at the end of each year to use in completing your tax return.
Pension Splitting In addition to sharing your CPP with your spouse/common-law partner as discussed above, you can also "share" or "split" other types of pension income.
Remember Unlike in CPP sharing, with pension splitting you don't need to contact the payer of the pension income. The pension can continue to be paid to one spouse and the tax information slip (that is, the T4A, T4RIF) is issued solely to the actual recipient of the pension. No actual payment needs to be made to the other spouse. In other words, in using pension splitting you don't have to do anything except make a few new notations on tax returns and complete form T1032, "Joint Election to Split Pension Income."
Up to 50 per cent of certain types of pension income can be split, shifted, or allocated from a higher-tax-bracket spouse/common-law partner to a lower-tax-bracket spouse/common-law partner. This results in the couple paying less tax! The tax paid by the lower-tax-bracket spouse/common-law partner will be less than the tax saved by the higher-tax-bracket spouse/common-law partner.
Excerpted from 78 Tax Tips For Canadians For Dummies. Copyright (c) 2010 by John Wiley & Sons Canada, Ltd. Excerpted with permission of the publisher John Wiley & Sons Canada, Ltd.