Golf season is quickly arriving. The weather is getting warmer and the Masters Tournament starts next week. To prepare for the season, I pulled out my golf clubs, went to an indoor driving range nearby and proceeded to slice, shank and pull golf balls left and right for about an hour. It reminded me that I should buy a few dozen golf balls before I play a round this year – because most of them will end up lost somewhere. In fact, I’m starting a petition to have the government create a new refundable Lost Golf Ball Tax Credit. Hey, if there was such a thing as an Odour-Control Tax Credit (there was, until 2017), then surely some type of golf ball credit would be reasonable.
Last week, I introduced the topic of tax deductions and credits, and the difference between the two. I also spoke about the “Big Four” tax deductions. Today, I want to talk about the “Big Four” tax credits, then shed a little light on some other tips related to credits.
There are more tax credits than deductions available. The “Big Four” that I want to talk about are the most common and provide the greatest tax relief. Unlike tax deductions, which will generally save you a different amount of tax depending on your level of income, a tax credit typically saves everyone the same amount of tax (with some exceptions). A tax credit is calculated as a fixed percentage (generally 15-per-cent federally, plus some provincial percentage) of an eligible amount.
For the discussion below, let’s assume a taxpayer earns $80,000 of taxable income in a year and lives in Ontario (continuing our example from last week). Here are the tax credits worth noting:
Basic personal amount: This credit is based on an eligible amount of $11,809 for 2018 (it’s indexed to inflation annually). Generally, all Canadian taxpayers are entitled to this credit, which has the effect of making the first $11,809 (in 2018) tax-free. The actual federal tax savings are equal to 15 per cent of $11,809, or $1,771 in 2018. Each province also has a basic credit like this, but the amount differs by province. It’s this credit that can allow younger people – students for example – to earn some income (under $11,809) and pay no federal tax. These folks should still file a tax return if they earned income, because it will create RRSP contribution room for them, which can be helpful later when they start saving for retirement and want a tax deduction at that time.
Age amount: This credit is available to those 65 or older on Dec. 31, 2018, and whose income is under $85,863 for 2018. In my example of someone with $80,000 of income, the federal tax savings would be just $132, but for those receiving the maximum credit (income under $36,976), the federal tax savings would be $1,100.
Spouse amount: This also applies to common-law partners. If you have a low-income spouse (income under $11,809 in 2018) you may qualify for this credit. The maximum tax savings would be 15 per cent of $11,809, or $1,771. Once your spouse’s income is $11,809 or more, the credit becomes nil.
Donation credit: The credit available for donations provides greater tax relief than other credits because it’s a higher percentage of the eligible amounts. This credit will increase as your income moves into the highest tax bracket. Specifically, you won’t just receive 15 per cent of eligible donations as your federal tax savings if your donations exceed $200 for the year. For donations over $200, the tax savings will be 29 per cent, and to the extent your taxable income exceeds $205,842 in 2018, the tax savings on your donations will be 33 per cent. In our example, the federal tax savings on donations of $2,000 would be $552 (15 per cent on the first $200 and 29 per cent on the rest) – plus your provincial savings (in Ontario the savings would be $253, for total savings of $805).
Other credits: Check out Schedule 1 of your tax return for a list of other credits, but don’t forget to consider: the caregiver amount, eligible dependant amount, adoption expenses, pension income credit, the disability tax credit, interest on student loans, tuition credit, the home buyer’s amount, volunteer firefighters amount, and the home accessibility tax credit.
It’s possible to transfer certain tax credits to a spouse or common-law partner if you don’t need the credits to reduce your taxes to zero (complete Schedule 5 for this). Specifically, you can transfer the following credits: the age amount, pension income amount, disability amount for yourself, tuition amount, or the Canada caregiver amount for infirm children under the age of 18.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at email@example.com.