Top ten tips for filing your 2022 tax return
The tax filing deadline is fast approaching and can be quite a challenge for many. This year, April 30 falls on a Sunday, leaving you a little extra time to complete your tax return, as the deadline is extended to the next business day, May 1, 2023. Failure to file and pay any balances owing may result in penalties and interest on unpaid taxes.
Here are some suggestions to make your tax filing experience smoother. Some commonly overlooked items are included that may help you increase your tax savings.
Pension income splitting can result in significant tax savings, but the opportunity is often missed. If you received eligible pension income in 2022, you could allocate up to one-half of that pension income to your spouse or common-law partner’s tax return. Pension income that qualifies for this treatment depends on age and type of pension income received. Income from a company pension plan is eligible for pension income splitting regardless of the pensioner’s age. However, some forms of pension income, such as income from a Registered Retirement Income Fund (RRIF) or from a life income fund (LIF/LRIF) will be eligible for pension income splitting only if you are over the age of 65. Pension income splitting makes sense when the pensioner has a spouse or partner who is in a lower tax bracket. However, it’s best to work with a tax professional to determine the optimal amount of income that should be allocated.
Last year was a tough one for the markets. If you triggered capital losses during 2022, now is the time to utilize these losses. Capital losses are reported on Schedule 3 of the T1 personal tax return and are first applied against capital gains during 2022. Excess losses can then be carried back three years and applied against any capital gains reported in those years. Doing so will allow you to recover taxes already paid in previous years. Generally, it is best to apply losses back to the oldest year first, since this will be your last opportunity to recover taxes paid on capital gains that year. Unused capital losses may be carried forward indefinitely for use in a future year.
Since the beginning of the pandemic, the government has made available a tax deduction of up to $500 under the Temporary Flat Rate method for employees working from home due to COVID-19. This deduction has been extended to 2022 and is available if you worked more than 50% of the time from home for a period of at least four consecutive weeks due to COVID-19. This method can also be used if your employer provided you a choice to work from home due to COVID-19 during this period.
If you received COVID-19 benefit payments and repaid a portion of the benefits prior to January 1, 2023, the repayment can be claimed as a deduction in the year you made the repayment or in the year you received the benefits. You also have the option of splitting the deduction between your tax returns. The CRA has created a new Form T1B, Request to Deduct Federal COVID-19 Benefit Repayment in a Prior Year, which can be used to deduct a repayment made in 2022 on your 2020 or 2021 tax return (depending on when you received the benefit). Alternatively, you may split the deduction between 2022 and the year when you received the benefit. CRA will automatically reassess the prior year’s tax return when Form T1B is filed, so you do not need to request changes separately. Note that benefits repaid on or after January 1, 2023, can only be deducted in the year of repayment.
Charitable donations provide tax savings through a two-stage donation tax credit system. The first $200 provides a federal tax credit of 15% and any donations above $200 attract a tax credit of 29%. The tax credit can be further increased to 33% on donations above $200 to the extent your income is taxed at the highest federal tax rate. There are also provincial tax credits to consider as well, so the total savings will vary by province.
Spouses and common law partners can choose to combine donations made in the year (or unclaimed donations from previous five years) and claim them on one tax return. This can allow you to maximize tax savings using a higher donation tax credit.
Keep in mind that if you have donated any securities or mutual funds in-kind to charity, you can benefit from a zero percent capital gains inclusion rate (using CRA Form T1170) which means you may be exempt from income tax on any capital gains. If investments in a capital loss position are donated to charity however, you can receive a double benefit: tax savings from claiming a donation tax credit, plus any tax savings from utilizing the capital loss.
The principal residence exemption (PRE) is available to eliminate, in most cases, income tax that would otherwise be payable on the profits earned from the sale of a principal residence. In the past, the CRA has maintained an administrative position that if there were no taxes owing on the sale of a principal residence, it did not need to be reported on the T1. However, a change in administrative policy now requires all dispositions (including deemed dispositions) to be reported on the tax return in the year of sale on Schedule 3. The PRE is still available to eliminate taxation, however the CRA requires disclosure if you sold your principal residence during 2022.
If the total cost of all specified foreign property you own exceeds $100,000 (CAD) at any time in the year, it is very important that you file Form T1135, Foreign Income Verification Statement with your annual tax return. If the total cost is $250,000 (CAD) or more at any time in the year, a detailed reporting is required for each specified foreign property.
Examples of specified foreign property include amounts in a foreign bank account, foreign stocks (but excludes Canadian mutual funds with foreign holdings), real estate situated outside of Canada (but not personal use vacation property). The penalties for failing to disclose this information can be quite costly; $25 per day to a maximum of $2,500. The penalties are even more severe if you knowingly fail to file this form.
If you are a “US person” living in Canada, there is more to consider than just filing a Canadian tax return. A US person includes US citizens, green card holders and residents of the US. As a US person living in Canada, you are required to file annual US tax returns even if you do not have any US taxes owing. Failure to file a US tax return may result in severe penalties for non-compliance.
In addition to filing a US income tax return, you may be required to disclose certain information to the Internal Revenue Service (IRS) depending on the type of accounts that you own. These requirements may include:
- Filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if you have a financial interest in (or signing authority over) financial account(s) with an aggregate value above $10,000 (USD) at any time during the year.
- Filing Form 8938, Statement of Foreign Assets, if you have interest in specified foreign financial assets valued above $200,000 (USD) — $400,000 USD if filing a joint return —at the end of the year, or above $300,000 (USD) — $600,000 if filing a joint return — at any time during the year.
As of October 2014, IRS eliminated the reporting requirement to qualify for the tax deferral on RRSPs and RRIFs. This means that, generally, you may automatically qualify for the tax deferral in the US as long as you filed and continue to file US tax returns and report any RRSP/RRIF distributions as income on your US tax return.
In many cases, children do not have an income tax liability since very few earn more than the basic personal exemption amount. As a result, many parents may choose to not file a tax return on their behalf. However, if the children have some income or have a part-time job, it may be advantageous to file a tax return even when the reported income falls below the basic personal exemption. It will allow the children to recover any income taxes, overpaid CPP and/or EI premiums withheld by an employer.
In addition, the children may be entitled to certain provincial credits that will put additional cash in their pockets. For those children who are earning income, filing a tax return will also accumulate RRSP contribution room, that can be used in the future. If the children are over the age of 18, filing a tax return will also establish Tax Free Savings Account (TFSA) contribution room.
Filing a tax return can also be beneficial for students who require federal/provincial loans to fund education as the tax return is the main document required to verify income, or to be eligible for other government grants or bonds, such as those aged 17 and beneficiary of an RDSP.
The climate action incentive payment (CAIP) is a tax-free amount available to residents of Alberta, Saskatchewan, Manitoba and Ontario to offset the cost of federal fuel charge. Beginning in July 2023, residents of Newfoundland and Labrador, Nova Scotia and Prince Edward Island will also be eligible for CAIP. To be eligible for this payment, you must file your annual tax return even if you did not earn any income. Note that CAIP is no longer claimed as a refundable tax credit on the tax return, instead the payments are delivered quarterly by the government.
These are just a few tax-filing tips that could reduce your tax liability for the year. It is important that you work with a trusted tax professional and your financial advisor to ensure that your tax filings are in order, accurate and that you have made the most of the tax savings opportunities available to you and your family.