A report released by the Internal Revenue Service south of the border showed that, in 2014, more than 100,000 U.S. federal government employees owed more than $1-billion (U.S.) in back taxes. I wonder what the statistics for government employees look like in Canada? I'm sure we'd find a similar percentage of employees also finding income taxes distasteful in this country. The reality is that employees – no matter where you're employed – aren't given many tax breaks under our tax law. Still, there are a few ideas employees should consider. Here's a year-end tax checklist for you.
Defer your bonus
If you're expecting a bonus this year, talk with your employer about delaying payment of this year's bonus until January of the new year.
In fact, the bonus can be deferred for as long as three years from the end of this year. This will defer the tax on the bonus to a future year, which can make sense if you will be in a lower tax bracket or expect to have deductions or losses to use in a future year.
Pay interest on loans
Ensure that any interest that you are to pay on an employee loan is paid by Jan. 30, 2017, for this year's interest charge. This will reduce any taxable interest benefit you may otherwise face for 2016 from your employer.
Reduce the stand-by charge
If you drive a company car, you'll face taxable benefits. One of these is the "stand-by charge." Reduce the taxable stand-by charge by reducing the number of days between now and year-end that the car is available to you.
Also, consider purchasing the car from your employer at its depreciated value to avoid the taxable benefit next year.
Reduce the operating cost
Reduce the taxable operating cost benefit on a company car by reimbursing your employer for some, or all, of the operating costs by Feb. 14, 2017, and by minimizing your personal-use driving between now and year-end.
Negotiate a home office
Before year-end, negotiate with your employer the requirement to work from home more than half the time so that you'll be able to deduct certain home office costs next year. Your employer will have to sign Form T2200 as evidence of this requirement.
Purchase assets for CCA
Consider purchasing assets (automobiles, aircraft, and musical instruments) before year end that will entitle you to a claim for capital cost allowance (CCA, which is depreciation for tax purposes) this year, rather than waiting until 2017 to buy those assets. This will also minimize the impact of the half-year rule. This rule says only half the CCA otherwise allowable can be claimed in the year an asset is purchased.
Reduce your tax deducted at source
If you expect to receive a tax refund when you file your tax return in April, and this typically happens each year, you may be able to apply to have the tax deducted from your pay reduced. This would have the effect of giving you more take-home pay throughout the year and less of a refund in April. To apply for reduced tax withholdings, use Form T1213, which you'll find on the Canada Revenue Agency's website at cra.gc.ca.
If the taxman approves your application, a letter will be sent to you that you can provide to your employer authorizing reduced tax withholdings. Apply now so that you may be able to start the new year with more take-home pay.
Negotiate non-taxable benefits
Most compensation you receive from your employer will be fully taxable. There are some benefits, however, that your employer can provide that won't face tax in your hands. Speak to your employer about building some of these benefits into your total compensation. These benefits can include personal counselling, discounts on merchandise, club membership dues and education costs.
Purchase tools if you're a trades-person
If you're a trades-person, you may be able to deduct up to $500 for the cost of new tools you're required to purchase as an employee. The deductible amount for 2016 is the cost of your new tools in excess of a base amount, which is $1,161 or 5 per cent of your apprenticeship income for 2016 – whichever is greater. If you're a trades-person who has not yet purchased tools in excess of the base amount, consider making additional planned purchases before year-end.
Purchase teaching supplies
Teachers may be eligible to claim a tax credit for the cost of up to $1,000 of eligible teaching supplies. Consider buying supplies before year-end to make a claim in 2016.