It is during the tax period that taxpayers realize that they should have planned their tax affairs well in advance and take advantage of tax planning opportunities available. Tax planning is a legitimate activity that Canadians use to reduce their tax liabilities by arranging their financial affairs within the law so as to minimise the amount of taxes they pay. Tax Avoidance is a method of Tax Planning that is inconsistent with the overall spirit of the law. The CRA interpretation of “Tax Avoidance” includes all unacceptable and abusive tax planning methods. Tax Planning and Tax Avoidance both involve tax reduction arrangements that may meet specific wording of the legislation. On the contrary, Tax Evasion is illegal and involves deliberately ignoring specific parts of the law. Tax evasion includes activities such as failing to report income earned or misstating facts so as to claim credits or deductions for which you are not entitled. Tax evasion, unlike tax avoidance, has criminal consequences and perpetrators can be prosecuted in a court of law.
Many Canadians at various stages of their lives prepare a financial plan either on their own or with the help of an experienced Financial Planner. Saving for retirement; or to finance a house, or for a child’s education, need to be identified and clarified in one’s financial plan. Creation of wealth has long-term implications for families and tax planning is an integral part of the process. The aim of tax planning is to minimize your family’s overall tax bill by claiming all credits and deducting allowable expenses.
Common Tax Credits and Allowable Deductions (Alberta)
Below is a list of common tax credits and allowable deductions that you can make against your return:
- Eligible dependant credit: Claim this credit if at any time in the year you were single and supported a family member
- Adoption expenses: Claim this for the adoption of a child less than 18 years of age.
- Age amount: You can claim this amount if you were 65 years or older on Dec 31, 2012, and your net income (line 236) is less than $67,958
- Medical expenses for self, spouse or common-law partner and other dependants
- Claim amounts for infirm dependant age 18 or older
- Donations, gifts and political contributions
- Tuition and Education amounts
- Interest paid on student loans
- Child care expenses
The above list is not exhaustive and relates largely to individual tax returns. For businesses, including sole proprietorships, the general rule is to charge to the business only those expenses that were incurred in order to generate revenue. This can be cumbersome especially for small businesses where there is little or no distinction between personal and business expenses. Maintaining proper business records is therefore critical. Using a professional bookkeeper/accountant can make a big difference.
The Canadian Income Tax Act is a large and complex document that is constantly changing. New laws, regulations and rules are issued from time to time. What is applicable in one period may not be so, in subsequent periods. The use of a professional accountant is recommended to ensure nothing falls through the cracks!