So, you've resolved to save more tax in 2013. The way to do this? Use the "five pillars of tax planning," which I introduced last week. The first pillar is "deducting" to save tax. This is the idea of claiming deductions and credits to reduce your tax burden. Today, I want to share seven of the more creative or little-used deductions available. Set up your affairs today to use these and save tax in 2013.
1. Mortgage interest. Most Canadians are not able to claim a deduction for mortgage interest, but it's possible to create the opportunity to deduct your mortgage interest by carrying on a business from your home. You don't have to give up your day job, but selling some type of product or service on a part-time basis and using your home as your principal place of business, or using your home on a regular or continuous basis to meet customers or clients, will allow you to claim a deduction for part of your mortgage interest. See my article dated April 7, 2010, at waterstreet.ca.
2. Self-employment losses. Consider creating a small business in 2013. It's not unusual in the first couple of years of a business to incur losses, driven largely by deducting things you're paying for anyway – such as car expenses. These losses can be applied against any other type of income you might report. You can't create or increase a loss from home office expenses (such as mortgage interest or property taxes), but those costs can bring your self-employment income down to zero, and other non-home-office expenses may create a loss. Unused home office expenses can be carried forward and claimed against self-employment income in the future.
3. Salary of an assistant. Although employees aren't generally entitled to many deductions, it's possible to claim a deduction for salary or wages paid to an assistant if your employer requires you to pay for such a person's services. Consider hiring your spouse or child to assume that assistant's role. This can result in a sizable deduction against your employment income for amounts paid to that person – and you'll be keeping the money in the family to boot. Your employer will need to complete Form T2200 verifying that you were required to pay for an assistant.
4. Automobile costs. Where your employer required you to use your own vehicle in your employment and you did not receive a reimbursement or tax-free allowance to cover those costs, you'll be entitled to claim a deduction for a portion of all your car costs. Deductible costs can include gas, oil, repairs, insurance, licence fees, auto club fees, interest on a car loan, lease costs, capital cost allowance and more. If you did receive a tax-free allowance, but the total of your car expenses is higher than this allowance, you can choose to include your unreasonable allowance in your income and then deduct your actual car expenses. Have your employer sign Form T2200 annually to verify that you're eligible to claim these costs. If you have self-employment income, you may be entitled to claim a portion of your automobile costs as well.
5. Income from certain employers. Have you been thinking about looking for a new job? Consider looking for a position with a "prescribed international organization." If you earn employment income from such an organization you're entitled to a deduction for the full amount of your income. Organizations that qualify include the United Nations and certain organizations that have a special relationship with the UN. Your employer, in this case, may impose a levy of some type on your income, but you won't face tax in Canada despite being a Canadian resident. This could leave you better off than paying tax as most employees do.
6. Capital losses of a spouse. If you have realized taxable capital gains and your spouse has unrealized capital losses, it's possible to transfer your spouse's losses to you so that you can apply them against your gains to save tax. See my article dated Nov. 10, 2011, at waterstreet.ca.
7. Carrying charges. Most people aren't aware of the variety of carrying charges that can be deducted. These costs include investment management and custody fees, safety deposit box fees, fees paid to investment counsellors, fees for recording investment income, tax preparation fees (if you have income from a business or investments and accounting is necessary), interest on borrowed money used for business or to earn investment income (excluding capital gains), and legal fees you paid relating to support payments that are, or will be, owing to you.