When you earn rental income, you report it on your personal tax return on Form T776 Statement of Real Estate Rentals. You can claim rental expenses to reduce your taxable rental income. Common expenses include:
Advertising
Insurance
Mortgage interest
Legal and accounting fees
Management fees
Condo fees
Repairs and maintenance
Property taxes
Utilities
This list is not exhaustive, and repairs and maintenance can be complicated because some expenses that are more lasting in nature—like a renovation—may be capital expenses that must be depreciated over time.
Rental losses
If you have more expenses than income, you can have a rental loss. A net rental loss can be deducted from your other sources of income. This can result in tax savings.
If you have consistent rental losses, especially if the losses result from charging a low rent, the Canada Revenue Agency (CRA) may start asking questions.
Renting below fair market value
If you are charging below market rent because you have a long-time tenant and provincial guidelines limit rent increases, that may be an exception. But if the rent is low because you have a non-arm’s length individual like a family member you are giving a good deal, this may negate your ability to claim rental losses.
Income Tax Guide for Canadians
Deadlines, tax tips and more
“In certain cases, you may ask your son or daughter, or anyone else living with you, to pay a small amount for the upkeep of your house or to cover the cost of groceries,” according to the CRA. “You do not report this amount in your income, and you cannot claim rental expenses. This is a cost-sharing arrangement, so you cannot claim a rental loss.”
This seems to be the case with your clients, Hans, so I would say the “rent” is not taxable rental income, at least in the eyes of the CRA.
Common-law status
You mention a three-year time horizon for common-law status in Ontario. This is a family law concept and may apply when two people are living in a conjugal relationship concept. After three years of cohabitation, there may be support payments payable by one party to the other should their relationship break down. Exceptions may apply, most notably if they have a child together.
Article Continues Below Advertisement
Family law implications can be complex and vary across provinces and territories. In some parts of Canada, common-law couples have the same rights as married couples, and property rights may apply even for common-law couples.
Regardless, it is important to note that for tax purposes, there is only a 12-month threshold before common-law status applies. Once a couple has lived together for one year, they must report this change in status on their tax return. It is not optional.
When a couple is common-law, they may be able to save tax by combining medical expenses or donations on one spouse’s tax return to claim higher non-refundable tax credits. But they may also lose access to certain means-tested government benefits, like the GST/HST credit.
Summary
Rental expenses can only be deducted when you incur them to earn an income. When someone pays you “rent,” it may not be rent from a tax perspective if it is simply a cost-sharing arrangement.
Although you can rent a property to a family member, it must be treated like you would if the tenant was an arm’s length stranger. So, make sure you understand the rules so that you file your tax return correctly.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
This form is typically used for foreign bank accounts, foreign investment accounts or foreign rental properties, but it can include other foreign assets. Foreign investments, including U.S. stocks, must be reported even if they are held in Canadian investment accounts. Foreign personal-use properties, like a snowbird’s condo that is not earning rental income, may be exempt.
U.S. citizens or green card holders must generally file U.S. tax returns despite living in Canada. The United States is one of the few countries in the world that has this requirement for non-residents. As a result, you may have to report both Canadian and U.S. income, deductions, credits and foreign tax payable.
Adding to the complexity is that certain types of income are taxable in one country but not the other, and some deductions or credits may only apply on one tax return.
Voluntary disclosure for previous years
If you have not reported foreign income or declared foreign assets in the past and you should have done so, you may be able to file a voluntary disclosure with the CRA. This program may allow relief on a case-by-case basis for taxpayers who contact the CRA to fix errors or omissions for past tax returns.
There are five conditions to apply:
You must submit your application voluntarily and before the CRA takes any enforcement action against you or a third party related to you.
You must include all relevant information and documentation (including all returns, forms and schedules needed to correct the error or omission).
Your information involves an application or potential application of a penalty.
Your information is at least one year or one reporting period past due.
You must include payment of the estimated tax owing, or request a payment arrangement (subject to CRA approval).
Before pursuing a voluntary disclosure, you should seek professional advice. The CRA also offers a pre-disclosure discussion service that is informal and non-binding, and it does not require the disclosure of your identity.
Bottom line
When you are a Canadian tax resident, whether you are a citizen or not, you have worldwide income and asset disclosure requirements on your tax return. Some Canadian residents, despite living abroad, may still be considered factual residents or deemed residents of Canada with ongoing tax-filing requirements.
Registered education savings plans (RESPs) are used to save for a child’s post-secondary education. Contributing to an RESP can give you access to government grants, including up to $7,200 in Canada Education Savings Grants (CESGs), typically requiring $36,000 of eligible contributions. The federal government provides matching grants of 20% on the first $2,500 in annual contributions. You can catch up on shortfalls from previous years, to a maximum of $2,500 of annual catch-up contributions. But there is a lifetime limit of $50,000 for contributions for a beneficiary.
If a child is a teenager and there are a lot of missed contributions, the year-end could be a prompt to catch up before it’s too late. The deadline to contribute and be eligible for government grants is December 31 of the year that a child turns 17. And you need at least $2,000 of lifetime contributions, or at least four years with contributions of at least $100 by the end of the year a beneficiary turns 15, to receive CESGs in years that the beneficiary is 16 or 17.
Year-end may also be a prompt for withdrawals. The original contributions to an RESP can be withdrawn tax-free by taking post-secondary education (PSE) withdrawals. When investment growth and government grants are withdrawn for a child enrolled in eligible post-secondary schooling, they are called educational assistance payments (EAPs) and are taxable. If a child has a low income this year, taking additional EAP withdrawals from a large RESP may be a good way to use up their tax-free basic personal amount.
RRSP withdrawals, or RRSP-to-RRIF conversion
If you’re considering registered retirement savings plan (RRSP) contributions to bring down your taxable income, year-end does not bring any urgency. You have 60 days after the end of the year to make contributions that can be deducted on your tax return for the previous year.
If you are retired or semi-retired, year-end is a time to consider additional RRSP or registered retirement income fund (RRIF) withdrawals. If you are in a low tax bracket, and you expect to be in a higher tax bracket in the future, you could consider taking more RRSP or RRIF withdrawals before year-end.
If you are 64, you may want to consider converting your RRSP to a RRIF so that withdrawals in the year you turn 65 can be eligible for pension income splitting. This allows you to move up to 50% of your withdrawals onto your spouse’s or common-law partner’s tax return. If you are still working or you have variable income, this approach may not be best, since RRIF withdrawals are required every year thereafter.
If you are 71, the end of the year does bring some urgency, because your RRSP needs to be converted to a RRIF by the end of the year you turn 71. You can also buy an annuity from an insurance company. You will typically be contacted before year-end by the financial institution where your RRSP is held to open a RRIF.
Compare the best RRSP rates in Canada
TFSA contributions
For those investing or saving in a tax-free savings account (TFSA), year-end is not a significant event. TFSA room carries forward to the following year, so if you do not contribute by year-end, you can contribute the unused amount next year.
Yes, there is a chart that can help; check it out here. However, you’ll still need to calculate any taxes, preferably using tax software to make the math automatic, to get to net federal taxes payable on line 42000 first.
Will CPP and EI premiums make a difference to annual income taxes?
The answer is both yes and no. The self-employed, who are unincorporated and have net business income to report, may be required to make a payment of CPP (Canada Pension Plan) contributions. It may also include EI (Employment Insurance) premiums, if the taxpayer has opted to participate in EI.
CPP and EI are in addition to taxes otherwise payable. If you are required to make quarterly tax installments, these payments are included in the required remittances. But if the balance of income taxes payable, without the CPP/EI premiums, is less than $3,000, those premiums will not be added to the installment remittance threshold.
Top five questions about quarterly tax installments
Here are some common questions Canadians have around tax installments.
What happens if I am late paying a quarterly tax bill?
As mentioned, if you are not using the CRA’s billing method, you’ll be charged interest on late or insufficient installment payments when the T1 return is filed and that can sting. At the current quarterly prescribed rate (9% at the time of writing) that can add up quickly, as that interest is compounded daily.
It is possible to offset the compounding interest accruing when your installments are late or insufficient? Simply make the next payment early or pay more than you calculated the next payment to be.
What are the penalties of not making a quarterly tax payment?
In some cases, late or deficient installments will attract penalties if you will owe a lot of money at tax filing time. What’s a lot? CRA’s interest charge has to exceed $1,000. The penalties are 50% of the interest payable, less the greater of $1,000 and 25% of the installment interest. The penalty is calculated as if no installments had been made for the year.
What if my income changes from year to year?
If you qualify for quarterly tax remittances, you can reduce your income that is subject to tax with an RRSP or first home savings account (FHSA) contribution or by making sure that other larger deductions like child care, moving, or non-refundable tax credits like tuition, medical expenses or donations are all claimed in full.
At a time when Canada, just like every other country, is looking for highly skilled workers, our tax rates make it more difficult for them to choose to work here. This is equally true for Canadian citizens and potential new immigrants. Anecdotally, I’m hearing more and more from clients and people in my network that their children who have chosen to study abroad aren’t coming back home because they can earn and keep more of their income elsewhere. I’m not surprised.
Our high tax rates also make it hard to attract investment into our country and for existing businesses to expand. That is essential to improve productivity, innovate, create jobs and compete against peers in lower-tax jurisdictions.
The Allan Small Financial Show, featuring three tax experts—Fred O’Riordan of Ernst & Young, Jake Fuss of The Fraser Institute and Tim Cestnick, a Globe and Mail tax columnist and CEO of Our Family Office—originally aired on September 18, 2024.
Let’s explore a flat tax
We need a better, more thoughtful tax strategy as a country—one that is fair for everyone. Canada has not taken a hard, comprehensive look at our tax system since 1962, when Prime Minister John Diefenbaker appointed the Royal Commission on Taxation.
At the very least, it would be an opportunity to streamline what is a very complicated system, as I see it. At best, it may point to a better way forward. One potential way to streamline our tax system, and make it more efficient and fair, is to implement a flat tax rate across the board. This is not a new concept for taxation.
For the past decade, Estonia has reaped the rewards of having the most competitive, simple and transparent tax system in the OECD. Its personal and corporate tax rates are 20%. It’s set to increase to 22% in 2025 to match its consumption tax, which increased from 20% to 22% in 2024. In the case of individuals, the tax rate does not apply to dividend income; and businesses only pay tax on distributed profits.
The result: the country has been very successful attracting startups and investment.
And we don’t have to leave Canada for an example of a flat tax. From 2001 to 2014, Alberta had a single 10% personal and business income tax rate, dubbed the Alberta Tax Advantage. The Fraser Institute is now calling for Alberta to implement an even lower flat tax of 8% on personal and business income to attract people, businesses and investment in the province and to encourage spending. When Canadians pay less tax, they have more to spend and put back into the Canadian economy.
Another potential way to ensure tax fairness and generate revenue to meet government responsibilities is to foster more opportunities for the public, business and government to collaborate. For example, why not give individuals and businesses the ability to invest in infrastructure projects, such as new roads and highways, and get a rate of return over time.
The Canada Revenue Agency (CRA) uses an important distinction when evaluating a relationship between a worker and a business: the difference is between a contract for “services” and a “contract of service.”
What is a contract for services?
A contract for services is a business relationship, like when you hire a contractor to renovate your bathroom or a snow removal company to clear your driveway. Neither the general contractor nor the snowplow driver is your employee. They do not work for you. They provide work for you.
What is a contract of services?
If you own a restaurant and hire a cook, or you own a store and hire a cashier, this is a contract of service. You set the shifts and the terms of employment, so it’s a different type of relationship.
How to determine if you are employed or self employed
When in doubt about your employment status, the CRA considers six primary factors, Elza.
Control: When the payer dictates when and how work is done, it’s more likely that the person being paid is an employee.
Tools and equipment: An employer is more likely to provide equipment and tools to an employee compared to a self-employed contractor who provides their own.
Subcontracting work or hiring assistants: An employee is unlikely to be permitted to subcontract their work or hire others, whereas a self-employed person can make decisions like this without permission.
Financial risk: Employees typically do not have to pay for expenses to earn their income—or they are reimbursed when they do—whereas a self-employed person is responsible for their own expenses and business profitability.
Responsibility for investment and management: A worker generally does not have to invest their own capital to earn their living, and they don’t typically have a discernible business presence.
Opportunity for profit: An employee’s income may vary depending on their hours, bonus or commissions, but a worker cannot generally control their proceeds and expenses nor incur a loss, like a self-employed person.
It’s also more likely that you’re an employee if you’re only providing services to a single payer. Someone who is self-employed tends to have multiple clients or customers.
Should you incorporate if you’re self-employed?
If you’re self-employed and run a business that has a significant amount of risk, Elza, you may want to consider incorporating. This can limit your liability.
If you have business partners, incorporation can also be a more efficient way to involve shareholders or raise capital.
One of the main tax advantages of incorporating is the ability to retain savings within the corporation. You may benefit from a corporate small business tax rate that’s around 40% lower than the top personal tax rate.
Understanding the tax impact of more affordable care
Here’s the problem: your child-care expense deduction will decrease if you pay less to your child-care provider. As a result, your taxes payable will likely increase, depending on your income level. A reduced child-care expense deduction will also increase the net income on your tax return. This is the figure your refundable tax credits, like the Canada Child Benefit (CCB) are based on. These important monthly benefits, therefore, could shrink.
To understand this fully, take a look your tax return from last year. The child-care expense used as a deduction is found on line 21400 after being calculated on form T778. Net income is at line 23600. That important line is used for government “income testing” for a number of provisions on the return, including refundable tax credits like the Canada Child Benefit, the Canada Worker’s Benefit and the GST/HST Credit. It will also determine how much OAS (Old Age Security) seniors will get, or whether employment insurance (EI) benefits will be clawed back. Just as important, non-refundable tax credits, like the spousal amount, may be affected.
When your net income goes up because of your lower child-care expenses, these benefits are reduced, unfortunately.
Invest to offset a reduced net income
There is some good news for astute investors, howeve,. To keep your family’s net income low despite the reduction in your child-care expense deduction, make an RRSP (registered retirement savings plan) contribution. The resulting RRSP tax deduction reduces your net income and your taxable income and, in the process, works to increase income-tested refundable and non-refundable tax credits too! Check out how much RRSP room you have on your notice of assessment from the Canada Revenue Agency (CRA) to make the contribution.
The same effect occurs if you can claim a deduction for contributions made to the first home savings account (FHSA). An annual deduction of up to $8,000 may be claimable.
Maximize your child-care claim
The final way to shore up the tax benefits from your child-care expenses is to make sure you claim all of them and to your best tax advantage.
Child-care expenses are often missed entirely by parents. If this has happened to you, did you know you can go back and adjust prior filed returns to make that claim and receive the tax-credit benefits and tax refunds you missed? Especially if you are a first-time filer, be warned, however, that the claim for child care is complex and often audited. Be prepared to provide receipts to justify your claim.
It’s also important to know that the spouse with the lower income is the one that must claim child-care expenses, except in certain defined circumstances: when the lower earner is unable to care for the children due to a mental or physical infirmity, is in full time attendance at a qualifying school, or in hospital or incarcerated for at least two weeks, for example. Another exception is when there is a breakdown in the conjugal relationship for at least 90 days, but a reconciliation takes place within the first 60 days of the year. The usual $5,000, $8,000 or $11,000 maximum amounts claimable by the higher earner may be reduced, however, with a maximum weekly calculation.
Are you thinking you’d like to withdraw everything from your RRSP before starting your OAS or age 70? This way, if you die after age 70, there’s no RRSP/RRIF to transfer to your wife, no resulting income increase for her, and therefore no OAS clawback. This sounds like a good idea; let’s play it out and see. Start by converting your RRSP to a RRIF (registered retirement income fund) so you can split your pension income with your wife; you cannot split RRSP withdrawals.
To deplete your RRIF of $200,000 plus investment growth within five years, draw out about $45,000 a year and, at the same time, delay your OAS pension until age 70. The OAS pension increases by 0.6% per month for every month you delay beyond age 65 and if you delay until age 70 it will increase by 36%, guaranteed, and it is an indexed pension that will last a lifetime under current legislation.
What may have been a little better is delaying your CPP as it increases by 0.7%/month and the initial pension amount is based off the YMPE (yearly maximum pensionable earnings) which has historically increased faster than the rate of inflation, meaning that by delaying CPP to age 70 it may increase by more than 42%.
With your RRIF depleted, your wife will not experience an OAS clawback if you die before she does. Mission accomplished, but we should question the strategy. What are you going to do with the money you take out of your RRIF and how much money will you have after tax?
Consequences of accelerated withdrawals from a RRIF
I estimate that, in Ontario, your $45,000 after-tax RRIF withdrawal will leave you with $28,451 to invest. So, rather than having $45,000 growing and compounding tax sheltered you will have $28,451 growing and compounding. Ideally, if you have the room, you will invest this money in a tax-free savings account (TFSA), where it will also be tax sheltered, otherwise, you will invest in a non-registered account. A non-registered account means paying tax on interest, dividends and/or capital gains as they are earned, probate and no pension income splitting.
I should acknowledge that, if your intention is to spend the RRSP and have fun that is a perfectly suitable strategy, especially when you know the income, you need is $147,000 per year and you have indexed pensions to support that income. The problem for me is it makes for a short article, so let’s continue the analysis.
What would happen if, instead of drawing everything from your RRIF, you drew just enough to supplement your OAS pension while delaying it to age 70? What if, at age 72, your RRIF remains at about $200,000 and the mandatory minimum withdrawal is $10,800. You could split that $10,800 with your wife and not be subject to OAS clawback. Of course, when you die the RRIF will transfer to your wife, who will no longer be able to pension split and her OAS pension will likely be impacted.
Stop trying to predict the future and enjoy your money
Randy, I think you can see there is no clear-cut winning strategy here. Either draw RRSP/RRIF early or leave it to grow. You may read about strategies involving income averaging or early RRIF withdrawals to minimize tax, but often I find these to be more smart-sounding strategies rather than winning strategies. There are so many variables to account for, the analysis must be done using sophisticated planning software in conjunction with your life plan.
The other excellent reason to charge GST and HST is that it pays off in dollars and cents.
One of the great advantages of being self-employed is that when you charge these taxes, you only give the government what you charged minus the GST or HST you pay on your deductible business expenses.
For freelance writers like us, this is the sales tax we pay on printer paper, internet service, professional development workshops and more. The government lets us in essence deduct the sales taxes we pay on deductible expenses from the sales taxes we charge our clients. We then pocket the difference. The amount we save each year is roughly enough to pay for a trip to Europe.
HST quick method or detailed method?
The good news is that we don’t have to add up every bit of GST and sales tax we pay on our expenses to take advantage of this. That’s because we use the “quick method” for our calculations.
The government gives you two choices for paying GST and PST/HST instalments: the “detailed method” and the “quick method.” With the quick method, you simply pay 3.6% of the 5% GST you collect. In the case of provinces with HST, it’s a percentage of the HST: so, in Ontario, you only pay 8.8% to the government from the 13% you collect.
Image by rawpixel.com on Freepik
The advantage of the quick method is that it’s much less work. You must only add up how much sales tax you charge your clients or customers. My spouse and I use the quick method and find it easy to do our calculations with an Excel spreadsheet. There is no need to keep a detailed account of the sales tax you pay on all the pens, paper, printer cartridges and more you claim as deductible expenses.
There’s another bonus to using the quick method. Governments offer a credit of an additional 1% on the first $30,000 of gross revenue. So, for example, in Ontario you pay 7.8% (instead of 8.8%) of the 13% HST you collect for that amount and pocket the other 5.2%. However, if you use the quick method, you must add the credit to your total revenue when you file your income tax return.
The detailed method involves more work, since you must add up the GST and PST/HST you paid on each of your expenses and subtract it from the taxes you collect to determine the amount you have to pay. But this calculation method is useful if your taxable expenses are proportionately high, amounting to roughly more than 50% of your income. The advantage of the detailed method is that you don’t have to add the amount you retain to your revenue when you file your income tax return.
An executor is a person named in your will who will be responsible, after you die, for making sure that your assets are distributed according to your wishes and that your estate is settled properly. This includes a wide range of activities, from filing a final tax return and cancelling your credit cards to giving away your jewellery or collectibles, and selling your home and investments.
Executor compensation in Canada is not standardized, and the regulations governing it are determined by each province. As a result, there can be considerable differences in the amount and rules for compensation from one province to another. Here is an overview of some key variations:
Ontario employs a system where the executor’s compensation is determined as a percentage of the estate’s total value. The percentage is outlined as 2.5% on capital receipts, 2.5% on capital disbursements, 2.5% on revenue receipts and 2.5% on revenue disbursements. In the end, it works out to be essentially 5% of the estate’s total value.
Alberta follows a tiered percentage structure. Executors are entitled to between 3% and 5% on the first $250,000 of the estate’s value; and 2% to 4% on the next $250,000; and then between 0.5% and 3% on the balance.
In contrast, Quebec has executor compensation billed by the hour which is typically set at $45 to $65 per hour of work completed during the estate’s administration process.
The pros and cons of allowing for executor compensation
As with everything in life, there are good and bad to certain decisions. When contemplating whether or not to take executor compensation, consider the following benefits and pitfalls:
Pros
Incentive to Act: Executor compensation can serve as an incentive for individuals to take on the role of an executor. Settling an estate is a time-consuming and often emotionally challenging task, and compensation can make it more attractive.
Financial Recognition: Serving as an executor often entails expenses and a time commitment. Compensation helps recognize and alleviate some of the financial burdens involved, especially if time off work is required of the individual.
Fairness: Compensation ensures that executors are fairly rewarded for their efforts, irrespective of the estate’s value. This encourages people to take on the role, regardless of the estate’s size.
Cons
Conflict of interest: Executor compensation can create conflicts of interest. The executor may be motivated to prioritize their own financial gain over the beneficiaries’ interests. This can lead to disputes and litigation.
Complexity: The varying rules and regulations across provinces can make executor compensation complex to navigate. Executors may require legal or financial advice to ensure they are adhering to the correct guidelines and calculations.
Emotional toll: The focus on compensation may overshadow the emotional toll and responsibilities that come with the role of an executor. It may lead individuals to take on the role primarily for financial gain, rather than out of a sense of duty.
Does an executor pay tax on the income they earn?
In Canada, executor’s compensation is generally considered taxable income. This means that the amount received as compensation is subject to income tax. Executors are required to report this income on their personal tax return for the year in which they receive the compensation.
The income tax rate applied to executor compensation depends on the province or territory in which the executor resides. Different provinces have different tax rates, which can significantly impact the final amount an executor retains after taxes. Additionally, executors who receive compensation must ensure they receive a T4A slip from the estate, indicating the total compensation they’ve received. Think of the estate becoming the employer of the executor, and the payment made to the executor is like a salary for the work they have done.
Requirements and compliance for executors
Executors must maintain accurate records of all financial transactions related to the estate, including the compensation they receive. These records should be kept for a specific period, as beneficiaries and even tax authorities may request them for verification. Estate accounting statements are the financial story of the estate’s administration and the most powerful tool in the executor’s arsenal when making a claim for compensation. While there’s not a mandatory requirement to formally pass accounts through the court, it is still a legal duty of the executor to maintain and record the financial transactions of the estate and provide them to the beneficiaries of the estate.
What do professional executors do?
When we consider that most executors do not have previous experience in administering an estate, the pains and troubles could be quite severe for someone in the role for the first time. In a poll conducted by Bank of Montreal in 2011, executors reported difficulties with the following categories:
Administrative issues/complications (47%)
Emotional issues/complications (31%)
Legal issues/complications (26%)
It’s reasonable to think that these categories and issues have not changed much over the course of the last 13 years, bringing the importance of working with professionals even more to the forefront. Whether it’s deciphering the varying provincial rules, navigating the complexities of taxation or ensuring compliance with legal requirements, professional guidance can provide clarity and peace of mind.
Executors who seek the assistance of legal, financial or tax professionals can make informed decisions, reduce the risk of errors and ensure that they fulfill their duties with precision and integrity. By doing so, they not only protect their interests but also safeguard the interests of the estate beneficiaries, ultimately upholding the deceased’s wishes with diligence and transparency.
How you choose to spend your tax refund will often boil down to your tax bracket and debt profile, Forward explains, and working with a certified financial planner (CFP) can help you cut through the noise and allocate it wisely. Here are 10 savvy ways to spend your tax refund.
1. Pay down credit card debt
“If you’re carrying credit card balances, you might want to go in that direction to get rid of any of those balances so that you’re not paying interest that you don’t need to pay,” says Forward. Eliminating or significantly reducing credit card debt with your tax refund can save you money in the long run and improve your overall financial health and creditworthiness.
2. Start an emergency fund
Building an emergency fund with your tax refund can provide a financial safety net for unexpected expenses and prevent you from going into debt during emergencies. Consider a high-interest savings account (HISA) for your emergency fund to earn interest on your savings and interest on the interest, which is called compound interest. (Check out MoneySense’s compound interest calculator).
3. Start a first home savings account (FHSA)
If home ownership is a future goal for you, setting up a first home savings account (FHSA) with your tax refund can kickstart your journey to becoming a homeowner. You’re limited to $8,000 a year and a maximum of $40,000, but it’s a solid first step to owning your first property that only first-timers can take advantage of.
4. Open a TFSA
If you haven’t created any financial goals yet but still want to be intentional with your tax refund, opening a tax-free savings account (TFSA) with your tax refund can help you grow your savings tax-free and provide flexibility for future financial goals.
5. Make an RRSP contribution
Contributing to an RRSP with your tax refund can help you save for retirement and reduce your taxable income. Still, Forward explains that this option may be less important if you need the money sooner or already have a pension. “A younger person might not be thinking about RRSPs because they’ve just started their career,” says Forward. “RRSPs make more sense when you’re in your highest tax bracket, and you can get the most bang for your buck.”
6. Make a prepayment on your mortgage
If you have a mortgage with a prepayment privilege, you may use your CRA tax refund to make a prepayment on your mortgage. It goes directly toward your principal owing, so you can reduce the overall interest you pay and shorten your mortgage term. Most lenders limit how many times you can pre-pay each year, but maxing out allowable prepayments can save you a lot of interest in the long run.
I am guessing you have downsized your home to move to a condo and now have money to contribute more to your registered retirement savings plans (RRSPs) as a result. First, we will start with a quick rundown of how RRSP to RRIF conversion works.
Converting an RRSP to a RRIF
A registered retirement income fund (RRIF) is the most common withdrawal option for RRSP savings. By December 31 of the year you turn 71, you need to convert your RRSP to a RRIF or buy an annuity from an insurance company. So, the conversion must take place not by his June birthday, Chris, but by December 31, 2025. You have a little more time than you might think.
A RRIF is like an RRSP in that you can hold cash, guaranteed investment certificates (GICs), stocks, bonds, mutual funds, and exchange traded funds (ETFs). In fact, when you convert your RRSP to a RRIF, the investments can stay the same. The primary difference is you withdraw from it rather than contributing to it.
Withdrawing from a RRIF
RRIFs have minimum withdrawals starting at 5.28% the following year if you convert your account the year you turn 71. This means you have to take at least 5.28% of the December 31 account value from the previous year as a withdrawal. Those withdrawals can be monthly, quarterly or annually, as long as the minimum is withdrawn in full by year’s end. Each year, that minimum percentage rises.
There is no maximum withdrawal for a RRIF. Withdrawals are taxable, though. If you are 65 or older, you can split up to 50% of your withdrawal with your spouse by moving anywhere between 0% and 50% to their tax return when you file. You do this to minimize your combined income tax by trying to equalize your incomes.
You can base your withdrawals on your spouse’s age and if they are younger, the minimum withdrawals are lower.
Contributions before you convert
If you have funds available from your condo downsize, Chris, you could contribute to your husband’s RRSP. He can contribute until December 31, 2025. If you are younger than him, he can even contribute to a spousal RRSP in your name until December 31 of the year you turn 71, whereby he gets to claim the deductions, but the account belongs to you with future withdrawals made by you.
However, just because you have money to contribute, it doesn’t mean you should. Say your husband has $10,000 of RRSP room and his taxable income from Canada Pension Plan (CPP), Old Age Security (OAS), investments, and other sources is $50,000. He could contribute and deduct that $10,000 to reduce his taxable income to $40,000. In most provinces, the tax savings would be about 20%. His tax refund would be about $2,000.
The simplest answer is yes: Social Security income is generally taxable at the federal level, though whether or not you have to pay taxes on your Social Security benefits depends on your income level. If you have other sources of retirement income, such as a 401(k) or a part-time job, then you should expect to pay income taxes on your Social Security benefits. If you rely exclusively on your Social Security checks, though, you probably won’t pay taxes on your benefits. State laws vary on taxing Social Security. Regardless, it’s a good idea to work with a financial advisor to help you understand how different sources of retirement income are taxed.
Is My Social Security Income Taxable?
According to the IRS, the quick way to see if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income (combined income = adjusted gross income (AGI) + nontaxable interest + half of your Social Security benefits).
If your combined income is above a certain limit (the IRS calls this limit the base amount), you will need to pay at least some tax.
The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit for joint filers is $32,000. If you are married filing separately, you will likely have to pay taxes on your Social Security income.
Calculating Your Social Security Income Tax
If your Social Security income is taxable, the amount you pay in tax will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income. If you file as an individual with a total income that’s less than $25,000, you won’t have to pay taxes on your Social Security benefits in 2021, according to the Social Security Administration.
For the 2021 tax year (which you will file in 2022), single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income was more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.
For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.
If 50% of your benefits are subject to tax, the exact amount you include in your taxable income (meaning on your Form 1040) will be the lesser of either a) half of your annual Social Security benefits or b) half of the difference between your combined income and the IRS base amount.
Let’s look at an example. Say you’re a single filer who receives a monthly benefit of $1,543, which is the average benefit after the cost of living increase in January 2021. Your total annual benefits would be $18,516. Half of that would be $9,258. Then let’s say you have a combined income of $30,000. The difference between your combined income and your base amount (which is $25,000 for single filers) is $5,000. So the taxable amount that you would enter on your federal income tax form is $5,000, because it is lower than half of your annual Social Security benefit.
The example above is for someone who is paying taxes on 50% of his or her Social Security benefits. Things get more complicated if you’re paying taxes on 85% of your benefits. However, the IRS helps taxpayers by offering software and a worksheet to calculate Social Security tax liability.
If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
How to File Social Security Income on Your Federal Taxes
Once you calculate the amount of your taxable Social Security income, you will need to enter that amount on your income tax form. Luckily, this part is easy. First, find the total amount of your benefits. This will be in box 3 of your Form SSA-1099. Then, on Form 1040, you will write the total amount of your Social Security benefits on line 5a and the taxable amount on line 5b.
Note that if you are filing or amending a tax return for the 2017 tax year or earlier, you will need to file with either Form 1040-A or 1040. The 2017 1040-EZ did not allow you to report Social Security income.
Simplifying Your Social Security Taxes
During your working years, your employer probably withheld payroll taxes from your paycheck. If you make enough in retirement that you need to pay federal income tax, then you will also need to withhold taxes from your monthly income.
To withhold taxes from your Social Security benefits, you will need to fill out Form W-4V (Voluntary Withholding Request). The form only has only seven lines. You will need to enter your personal information and then choose how much to withhold from your benefits. The only withholding options are 7%, 10%, 12% or 22% of your monthly benefit. After you fill out the form, mail it to your closest Social Security Administration (SSA) office or drop it off in person.
If you prefer to pay more exact withholding payments, you can choose to file estimated tax payments instead of having the SSA withhold taxes. Estimated payments are tax payments that you make each quarter on income that an employer is not required to withhold tax from. So if you ever earned income from self-employment, you may already be familiar with estimated payments.
In general, it’s easier for retirees to have the SSA withhold taxes. Estimated taxes are a bit more complicated and will simply require you to do more work throughout the year. However, you should make the decision based on your personal situation. At any time you can also switch strategies by asking the the SSA to stop withholding taxes.
The Impact of Roth IRAs
If you’re concerned about your income tax burden in retirement, consider saving in a Roth IRA. With a Roth IRA, you save after-tax dollars. Because you pay taxes on the money before contributing it to your Roth IRA, you will not pay any taxes when you withdraw your contributions. You also do not have to withdraw the funds on any specific schedule after you retire. This differs from traditional IRAs and 401(k) plans, which require you to begin withdrawing money once you reach 72 years old, or 70.5 if you were born before July 1, 1949.
So, when you calculate your combined income for Social Security tax purposes, your withdrawals from a Roth IRA won’t count as part of that income. That could make a Roth IRA a great way to increase your retirement income without increasing your taxes in retirement.
Another thing to note is that many retirement plans allow individuals, aged 50 years or older, to make annual catch-up contributions. You can make catch-up contributions up to $1,000. These must be made by the due date of your tax return. You have until April 15, 2022 to make the $1,000 catch-up contribution apply to your 2021 Roth IRA contribution total.
State Taxes on Social Security Benefits
Everything we’ve discussed above is about your federal income taxes. Depending on where you live, you may also have to pay state income taxes.
There are 12 states that collect taxes on at least some Social Security income. Two of those states (Minnesota and Utah) follow the same taxation rules as the federal government. So if you live in one of those two states then you will pay the state’s regular income tax rates on all of your taxable benefits (that is, up to 85% of your benefits).
The other states also follow the federal rules but offer deductions or exemptions based on your age or income. So in those nine states, you likely won’t pay tax on the full taxable amount.
The other 38 states (plus Washington, D.C.) do not tax Social Security income.
State Taxes on Social Security Benefits
Taxed According to Federal Rules: Minnesota, Utah
Partially Taxed (Exemptions for Income and Age): Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Vermont, West Virginia
No State Tax on Social Security Benefits: Alabama, Alaska, Arizona, Arkansas, California, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, Wyoming
Don’t miss out on news that could impact your finances. Get news and tips to make smarter financial decisions with SmartAsset’s semi-weekly email. It’s 100% free and you can unsubscribe at any time. Sign up today.
Bottom Line
We all want to pay as little in taxes as possible. That’s especially true in retirement, when most of us have a set amount of savings. But consider that if you have enough retirement income that you’re paying taxes on Social Security benefits, you’re probably in decent shape financially. It means you have income from other sources and you’re not entirely dependent on Social Security to meet living expenses.
You can also save on your taxes in retirement simply by having a plan. Help yourself get ready for retirement by working with a financial advisor to create a financial plan.
Tips for Saving on Taxes in Retirement
Financial advisors can offer valuable guidance and insight into retiree taxes. Finding a qualified financial advisor doesn’t have to be hard. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
What you pay in taxes during your retirement will depend on how retirement friendly your state is. So if you want to decrease tax bite, consider moving to a state with fewer taxes that affect retirees.
Another way to save in retirement is to downsize your home. Moving into a smaller home could lower your property taxes and it could also lower your other housing costs.
Opinions expressed by Entrepreneur contributors are their own.
Millions of taxpayers requested a six-month extension to file their 2022 federal income tax return. If you’re among them and haven’t yet completed your return, it’s time to get serious.
The extension runs out on October 16. While plenty of good reasons exist to file for the initial extension, you want to avoid missing this deadline. The penalties for not filing by then can get costly, and you need to shift your focus to your 2023 return.
Here’s how to wrap this project up.
1. Finalize your documentation
The biggest underlying reason people seek a tax extension is that they don’t have the documentation they need to file a complete, accurate return. Use these remaining months of your extension to sort through any loose ends and instill proper bookkeeping and recordkeeping systems so that you don’t run into this issue in the future.
Most business owners and investors are eligible for a long list of tax deductions. Make sure you have the proper documentation for any deductible expenses, such as business purchases, travel, education, training, charitable contributions and your home office. Double-check your documentation to ensure there aren’t any errors or omissions before you complete your return.
The biggest deduction available to entrepreneurs and investors with real estate holdings is depreciation. Taking this deduction correctly requires substantial documentation through a cost segregation analysis — this determines the schedule for depreciating each component of the asset.
Land, land improvements, buildings and building fixtures all depreciate at different rates, and a cost segregation analysis will help you accurately calculate the right amount of depreciation. For the 2022 tax year, bonus depreciation was still 100%, making this an even more powerful part of a tax strategy. But these studies take time, so make sure you are on top of this.
Tax credits can be even more valuable than tax deductions because they give you a dollar-for-dollar reduction in your tax liability. Yet, many taxpayers don’t take advantage of the credits for which they are eligible, either because they don’t know about them or because they’ve received bad advice about using them. Use your extension to make sure you receive the proper tax credits on your return.
The IRS offers a lot of information about tax credits on its website, and a tax advisor should be able to guide you through the process. Some of the many tax credits of interest for entrepreneurs and investors for the 2022 tax year include:
Installing solar energy systems.
Buying certain electric vehicles.
Creating jobs in economically distressed communities.
Providing certain benefits to employees.
Hiring people from groups that have faced significant barriers to employment.
Investing in research and development.
Making your business accessible to customers with disabilities.
These are valuable tax credits — take them if they apply to you. Don’t pay more tax than you are required to pay. Invest that money back into your business.
While you can use various tax software programs to prepare a return and file your taxes, entrepreneurs and investors benefit greatly from working with a high-quality tax professional. There’s simply too much money at stake and too much complexity to treat your taxes as a do-it-yourself project.
If you don’t have one already, look for a certified public accountant (CPA) who specializes in tax. As you speak with potential advisors, look for someone who takes a consultative approach. You don’t want to feel like just another transaction. You want a tax advisor who will be a trusted member of your wealth strategy team.
It gets expensive. Being just a day late can turn into a penalty equal to 26% of the taxes you owed back in April.
If you’re still not ready to file your taxes by the October 15 deadline, you absolutely should be working with a tax advisor to navigate the situation. Your advisor will help you in two key ways. First, it’s possible you can get an additional extension. These are rare and mainly apply to people living outside of the U.S. or serving in a combat zone, but it’s worth checking. Second, and most importantly, a high-quality tax advisor will help you create a plan to get your taxes back on track.
Sticking your head in the sand is not a tax strategy, and facing your tax situation doesn’t have to be frustrating or confusing. A good advisor will help you understand the tax law so that you can use it in a way that gives the government what it wants while also legally and permanently reducing the amount that you need to pay.
The government wants people to invest in seven key categories (business, technology, energy, real estate, insurance, agriculture and retirement), and it offers great tax incentives to people who do so. Your tax advisor should be talking with you regularly about how you can build these investments into your wealth and tax strategy. It will allow you to make way more money while paying far less in taxes.
