Last minute tax tips before April 30th deadline

Key Concepts

• Tax Filing Compliance: The importance of reporting all income and claiming all eligible expenses.
• Automatic Tax Filing: Government initiatives to assist low-income earners in accessing benefits.
• Tax Deductions & Credits: Specific financial adjustments to reduce taxable income or tax liability.
• Alternative Minimum Tax (AMT): A secondary tax calculation system designed to ensure high-income earners pay a minimum level of tax.
• First Home Savings Account (FHSA): A tax-advantaged savings vehicle for prospective homebuyers.
• Tax Complexity: The administrative burden of the Canadian tax system compared to international standards.

1. Common Filing Mistakes

John Natali, Head of Tax, Retirement, and Estate Planning at Manulife Investment Management, highlights two primary errors:

• Incomplete Reporting: Failing to gather all tax slips and eligible expenses, which leads to missed deductions and credits. Conversely, failing to report all income is a major risk, as the government possesses records of these slips and will pursue discrepancies.
• Neglecting to File: Many low-income earners mistakenly believe that because they owe no tax, they do not need to file. This is a significant error, as filing is the only way to access government benefits and credits.

2. The Importance of Filing for Low-Income Earners

The government is actively encouraging non-filers to enter the system. Benefits of filing for this cohort include:

• Access to Benefits: Eligibility for the GST/HST credit and the Canada Child Benefit.
• RRSP Contribution Room: Even small amounts of earned income generate RRSP contribution room, which can be utilized in future years when the taxpayer is in a higher tax bracket.
• Automatic Filing: The government has introduced programs to simplify the process for low-income individuals to ensure they receive their entitled benefits.

3. Overlooked Deductions and Credits

Natali identifies several common areas where taxpayers miss out on potential savings:

• Child Care Expenses: Includes costs for summer camps and similar programs.
• Moving Expenses: Claimable if the move is at least 40 kilometers closer to a new place of work (provided the employer did not reimburse the costs).
• Investment & Interest Expenses: Includes investment counseling fees and interest paid on loans for investment purposes.
• Charitable Donations: Taxpayers must maintain receipts for all charitable contributions in the event of an audit.

4. Tax Rule Changes and AMT

• Lowest Tax Rate Adjustment: For the 2025 tax year, the lowest federal tax rate is 14.5%, moving to 14% in 2026. Natali notes this is a "double-edged sword": while it reduces tax paid, it also reduces the value of certain federal tax credits.
• Alternative Minimum Tax (AMT): This is a secondary set of rules to ensure individuals who utilize many deductions/exemptions pay a "fair share."
  • Bill C-15 Update: Investment counseling fees are now only 50% deductible for AMT purposes for 2024 and 2025. Natali warns that taxpayers may need to refile or submit adjustments if they did not account for this change.

5. First Home Savings Account (FHSA)

Natali describes the FHSA as a "wonderful birth child of a TFSA and an RRSP."

• Mechanism: Contributions are tax-deductible (like an RRSP), and withdrawals for a first-time home purchase are tax-free (like a TFSA).
• Limits: $8,000 annual limit; $40,000 lifetime limit.
• Flexibility: Unlike the Home Buyers' Plan (HBP) under the RRSP, there is no requirement to pay the money back. If the individual does not buy a home, the funds can be transferred to an RRSP on a tax-deferred basis.

6. Synthesis and Conclusion

The Canadian tax system remains complex, and while there is a desire for more "automatic" filing, the current reality requires taxpayers to be proactive. The most significant takeaways are the necessity of filing regardless of income level to capture government benefits, the strategic use of the FHSA for future homeowners, and the importance of staying informed on technical adjustments like the recent changes to the Alternative Minimum Tax. Natali emphasizes that maximizing deductions requires meticulous record-keeping and an awareness of both federal changes and individual eligibility.