If the annual chore is still ahead of you, relax; doing your own taxes really is easier than it seems
By Olev Edur
It’s tax time again—the deadline for filing your 2016 tax return is May 1 (you get an extra day this year because the usual April 30 cutoff falls on a Sunday). Unless you owe nothing, you don’t want to be late because Canada Revenue Agency (CRA) will charge you five per cent of any outstanding balance, plus one per cent for each month your return remains late (to a maximum of 12 months). If you were also late in any of the previous three years, the penalties could be doubled. There will also be interest charges, so make sure you’re on time, even if it means initially sending an incomplete return.
Those with modest incomes and relatively simple finances may qualify for free tax return preparation help from the Community Volunteer Income Tax Program (CVITP). This program, a collaboration between CRA and local community groups, can be accessed by phone at 1-800-959-8281 or online at cra-arc.gc.ca.
Those with high incomes and complex finances will naturally want to seek the advice of an accountant or other qualified tax specialist. For the rest, if you have a computer, you should definitely consider a government-endorsed tax return software program such as TurboTax or UFile—a list of CRA-certified software programs is available at efile.cra.gc.ca/efile.
These tax preparation programs are relatively inexpensive, and they can eliminate the need for a whole slew of paperwork: forms, schedules, worksheets, guides, pamphlets, interpretation bulletins, et cetera. They automatically perform the dozens of calculations and cross-references involved in even a relatively straightforward federal income tax return, and they’ll complete your provincial/territorial return, as well.
Of course, you still have to enter all the relevant raw data, whether you do it by hand or by keystroke, so you still need to know what’s important and what’s not and, at least in broad strokes, how and why it affects your taxes—not just so that you can avoid omissions and errors in your return, but also to help structure your future finances for optimal tax results.
To that end, the following are some key points for retirees to consider as they complete this year’s return. Just bear in mind that this brief summary is far from comprehensive—our tax rules span thousands of pages—so professional help may still be in order, especially if your financial affairs are complicated.
Here We Go…
On the return itself, you must first complete the identification section on page 1 and the foreign property declaration at the top of page 2.
If you own any “specified foreign property” with a total cost (as opposed to market value) of more than $100,000, you must complete Form T1135, Foreign Income Verification Statement. Specified foreign property excludes:
- foreign property held in TFSAs, RRSPs, and other registered plans, or in Canadian mutual funds;
- foreign property used or held exclusively for business purposes; or
- personal‑use property (such as that condo in Florida or Arizona, provided it isn’t being rented out).
If you earned income from foreign properties and paid foreign tax on it, the tax can’t be deducted on Form T1135—you have to claim the foreign tax credit on line 54 of Schedule 1, after completing Form T2209, Federal Foreign Tax Credits.
(Lines 101 to 150)
On page 2, you must declare all your income for 2016 but can exclude certain items, including:
- Tax-Free Savings Account (TFSA) withdrawals;
- life insurance proceeds due to a death;
- gifts and inheritances;
- GST/HST credits;
- lottery winnings; and
- provincial/territorial compensation for victims of criminal acts or motor vehicle accidents.
For those still working, employment income goes on lines 101 (wages and salaries as per T4 slips), 102 (commissions), and 104 (other employment earnings such as tips or royalties, occasional earnings or grants, taxable insurance benefits, etc.). Totals on line 101 are eligible for the Canada employment amount of up to $1,161 on line 363 of Schedule 1. If Canada/Quebec Pension Plan (CPP/QPP) premiums were deducted from your pay, you can claim a non-refundable credit on line 308, after completing either Schedule 8 or Form RC381 (see the General Tax Guide for instructions).
Old Age Security (OAS) and CPP/QPP benefits go on lines 113 and 114, respectively, while other pension benefits (including most foreign pension income, for which you may be able to claim a deduction on line 256) go on line 115; CPP/QPP disability benefits go on line 152. If you were 65-plus at the end of 2016, you can include RRIF, LIF, annuity, Saskatchewan Pension Plan (SPP), and pooled registered pension plan (PRPP) payments on line 115, and they’ll be eligible for the $2,000 pension credit on line 314 of Schedule 1; if you were younger than 65, these items go on line 130.
All pension income from line 115 can be shared between spouses/partners to help lower your combined taxes. To shift such income from one partner to another, both of you must complete Form T1032, Joint Election to Split Pension Income, and the recipient must declare it on line 116 while the donor claims a corresponding deduction on line 210.
The taxable amounts of Canadian “eligible” dividends go on line 120, while “other than eligible” dividends are accorded a reduced tax credit and go on line 180 after you complete Schedule 4. If you do have any Canadian dividend income from your investments, don’t forget to claim the federal dividend tax credit on line 49 of Schedule 1. In some cases, it may be tax-advantageous to claim dividends received by a low-income spouse/partner on your own return—refer to the Guide for details. Foreign dividends should be entered on line 121 and aren’t eligible for the credit.
Interest (and other income—line 121) is generally taxable in the year it’s paid or credited to you, but interest from multi-year investments such as GICs must be reported on anniversaries of the date when the investment was purchased, even though it’s not paid until maturity. So if, for example, you bought a multi-year GIC in June 2017, you would report the first year’s income (through May 2018) when you do your 2018 return the following April.
Registered disability savings plan (RDSP) beneficiaries must report withdrawals on line 125—contributions made to the plan aren’t tax-deductible and withdrawals of these contributions aren’t taxable, but Canada disability savings grants and bonds, as well as rollover amounts and investment income earned within the plan, are taxable when withdrawn.
If you earned any rental income in 2016, the gross amount goes on line 160 and the net amount goes on line 126, accompanied by a completed Form T776, Statement of Real Estate Rentals. For more information on rental income and expenses, get a copy of Guide T4036, Rental Income.
Only half of any capital gain you realize during the year needs to be reported on line 127, after you complete Schedule 3. If the gains arise from selling or redeeming mutual fund units, get a copy of Information Sheet RC4169 (Tax Treatment of Mutual Funds for Individuals). If the gains arise from the donation of capital property, refer to Guide T4037 (Capital Gains) and Pamphlet P113 (Gifts and Income Tax). And if you are completing a final return for someone who passed away in 2016, get a copy of Guide T4011 (Preparing Returns for Deceased Persons).
Capital losses can’t be deducted from other income—they can be used only to offset capital gains earned in current or future years, or within the three previous calendar years (after completing Form T1A, Request for Loss Carryback).
RRSP withdrawals are reported on line 129. If you contributed to a spousal RRSP (or your spouse contributed to your RRSP) and money is withdrawn from that plan that same year or in the two following years, the withdrawal will be attributed back to the contributor rather than being taxable to the spouse. In such cases, the contributor must complete Form T2205, Amounts from a Spousal or Common-Law Partner RRSP, RRIF, or SPP to Include in Income, and enter the resulting amount on line 129. Repayments under the Lifelong Learning Plan (LLP) or the Home Buyers’ Plan (HBP) also go on this line.
Business, professional, commission, farming, or fishing income (gross and net) go in the self-employment section near the bottom of page 2, based on the appropriate Statement of Income and Expenses. Note that you may have to pay CPP premiums on these earnings on line 421, after completing either Schedule 8 or Form RC381, but you can claim a deduction on line 222 and a further credit on line 310.
If you report any social assistance payments on line 145 or net federal supplements (per box 21 of your T4A(OAS) slip) on line 146, you may be able to claim an offsetting deduction on line 250. Such amounts generally aren’t taxable, but the net figure is applied in other calculations.
Line 130 is for all taxable income not reported elsewhere, including:
- annuity, PRPP, RRIF, or LIF payments if you were under 65 at the end of 2016;
- retiring allowances;
- death benefits (other than from CPP/QPP);
- payments from a trust per T3 slips; and
- lump-sum payments from pensions and deferred profit-sharing plans (DPSPs). If you received such a payment in 2016 and it covered a number of previous years, you must report it all here, but if the previous years’ portion is $3,000 or more, you can apply to have it spread over those previous years (and thus get a tax reduction) by completing Form T1198, Statement of Qualifying Retroactive Lump-Sum Payment.
Special rules apply to lump-sum Canada/Quebec Pension Plan (CPP/QPP) payments, which go on line 114. In this case, Service Canada will send you a letter indicating the amounts applying to previous years and if you attach this letter to a paper tax return and mail it in, CRA will make the necessary adjustments to your return(s).
Net and Taxable Income
(Lines 206 to 260)
After entering your total income from line 150 at the top of page 3, you claim various deductions to arrive first at a “net” income figure and then a “taxable” income figure. The net income figure is used for various other tax and benefit calculations, hence the two-step approach. Deductions of possible significance to retirees as well as those contemplating retirement include:
- contributions to registered retirement or pension plans, and a pension adjustment figure for those with the latter (lines 206 through 208). All these amounts must be supported by information slips.
- the pension-splitting deduction noted earlier (line 210).
- a disability supports deduction (line 215) for expenses incurred by a disabled person to earn income or go to school, provided the same expenses aren’t claimed by you or someone else as medical expenses on line 330 or 331 of Schedule 1. Refer to Guide RC4064, Disability-Related Information, for more details on allowable expenses.
- small business investment losses (lines 217 and 228). For more information, refer to Guide T4037, Capital Gains.
- carrying charges and interest expenses (line 221). These include investment management and custodial fees (but not administrative fees for RRSPs and RRIFs); certain fees for investment advice (see Interpretation Bulletin IT-238, Fees Paid to Investment Counsel); fees for completing your tax return if you have business or rental income (see Interpretation Bulletin IT-99, Legal and Accounting Fees); interest on money borrowed for investment purposes, provided some interest or dividend income is earned. Refer to the General Tax Guide for further information.
- CPP or QPP contributions on self-employment and other earnings (line 222), along with a completed Schedule 8 or Form RC381. See the General Tax Guide for details, and don’t forget to claim a corresponding credit on line 308 or 310 of Schedule 1.
- other deductions (line 232) can include income amounts repaid (other than Employment Insurance or Old Age Security repayments, which go on line 235 after you calculate the amount using the Federal Worksheet), or legal fees relating to income or taxation (see the General Tax Guide)
- At this point, you arrive at a net income figure, after which certain further deductions are permitted, including:
- most amounts included on line 147 (line 250);
- non-capital and capital losses from previous years (lines 251 and 252, respectively) and the capital gains deduction on sales of qualifying business shares and farming or fishing property (line 254); refer to the General Tax Guide and to Guide T4037, Capital Gains, for further details on these provisions;
- an enhanced northern residents deduction (line 255, after completing Form T2222, Northern Residents Deduction);
- tax-exempt foreign income, or income from prescribed international organizations such as the United Nations (line 256—see the General Tax Guide).
Once you’ve arrived at a taxable income figure on line 260, transfer it to the back of Schedule 1 (line 37), and then you flip to the front and begin claiming the various “non-refundable” (meaning you can’t use them to get cash back if your tax is reduced to zero) credits to which you may be entitled. The amounts you enter are subsequently multiplied by the lowest federal tax rate of 15 per cent to determine how much your federal tax bill is reduced.
Everyone over the age of 18 can claim the basic personal amount of $11,474 (line 300), and anyone 65 or older by the end of 2016 can claim the age amount of up to $7,125 (line 301); this amount is reduced by 15 cents for each dollar of net income you receive in excess of $35,927, and disappears when net income reaches $83,427. Use the Federal Worksheet to calculate your entitlement.
If you have a spouse whose net income was less than $11,474, you can claim the unusable portion of his or her personal amount on line 303 after completing Schedule 5; you also may be able to claim certain other amounts from a low-income spouse or other family member on lines 318, 324, or 326. Refer to the Guide for details and, if applicable, complete Schedule 2 or 5.
As noted earlier, you can claim a credit for CPP/QPP contributions on line 308 or 310; claim Employment Insurance (EI) premiums on line 312 or 317. Also noted earlier is the Canada employment amount of $1,161 on line 363. You can claim a credit for the cost of most public transit passes on line 364.
New this year is the home accessibility expenses credit (line 398, accompanied by Schedule 12) providing up to $10,000 (a $1,500 tax reduction) on home renovations. To qualify, you must be 65 or older or eligible for the disability tax credit (or the spouse/partner of someone who is eligible; there are a few other conditions that might make someone eligible—see the Guide) and the renovation or alteration must be “of an enduring nature” and enhance access to, or mobility or functionality within, “the dwelling,” or it must “reduce the risk of harm to the qualifying individual within the dwelling or in gaining access to the dwelling.”
Several credit amounts are health-related. If you have a dependant with an impairment in physical or mental function, you may be able to claim a family caregiver amount of $2,121 on line 367, or on one or more of lines 303, 305, or 315. Line 306 provides an amount for infirm dependants age 18 or older, and there’s another caregiver amount on line 315, a “disability amount for self” on line 316, the disability amount transferred from a dependant on line 318, and the medical expenses amount on lines 330 through 332.
If you’re in a situation in which any of these credits might apply, you should read the relevant Guide information carefully because the rules are complex and the amounts can be very large, especially when retroactivity is involved. In fact, this complexity has given rise to a mini-industry of experts on claiming these health-related tax credits.
Finally, tally all your credits and multiply by 15 per cent.
The credit for donations and gifts is calculated on Schedule 9 and entered on line 349. Since this credit is 15 per cent on the first $200 you donate, 29 per cent on additional donations, and 33 per cent to the extent your income exceeds $200,000, it can make sense to lump several years’ donations together to make the greatest use of the higher rate(s). Also, if neither you nor your spouse/partner has made a charitable donation since 2007, you may be entitled to an additional “first-time donor’s super credit” of 25 per cent on up to $1,000 of your cash donations since 2013. Refer to Schedule 9.
Enter your total federal non-refundable tax credit (line 350), and copy this onto line 47 on the flip side of Schedule 1. Do the tax calculations at the top of the page, deduct your credits and the dividend tax credit (line 425, if applicable), foreign tax credits (line 54), political donations, and certain other items to get a net federal tax figure (line 64), which goes onto line 420 of the T1 return.
Now you have to do it all again with a similar provincial or territorial tax return. Many of the dollar amounts and percentages will differ and various other credits, deductions, and special rules will apply. In addition, many of the forms for Quebec residents differ from the above. Space limitations preclude comprehensive coverage here, so pay close attention to all the details and follow the instructions carefully, even if you’re using a computer program.
Once you’ve completed your provincial/territorial return and entered the required tax and credit figures on page 4 of the federal return, you arrive at a refund or balance owing figure. Make sure to sign and date this page at the bottom (unless filing electronically), send it off, and you’re done. Until next year.
Changes on Your 2016 Return
There are several changes in this year’s tax return, although some—such as the replacement of various child-related benefits with a single Canada child benefit (CCB), the elimination of the Family Tax Cut, and the reduction of the children’s fitness tax credit to $500—will be of no significance to the majority of retirees.
Some of these changes could, however, impact the taxes of many retirees. These include the following:
- The basic and additional residency amounts used to calculate the northern residency deduction have both increased to $11 per day.
- A home accessibility expenses deduction of up to $10,000 can now be claimed on line 398, for eligible expenses incurred for work done or goods acquired for improving accessibility to an eligible dwelling.
- The tax credit rate that applies to “other than eligible dividends” has been reduced slightly, although further reductions that were previously scheduled have been eliminated (see lines 120 and 425).
- The sale of a principal residence must now be reported, along with a principal residence designation, on Schedule 3. You must provide basic information (date of acquisition, proceeds of disposition, and description of the property), and it’s important that you tick off the box representing your designation—late designations will be accepted only in certain circumstances, and a penalty of up to $8,000 may apply.
You’re usually considered to have changed the use of part of your principal residence when you start to use that part for rental or business purposes. However, you are not considered to have changed its use if:
– your rental or business use of the property is relatively small in relation to its use as your principal residence;
– you don’t make any structural changes to the property to make it more suitable for rental or business purposes; and
– you don’t deduct any capital cost allowance on the part you’re using for rental or business purposes.
If you meet all of the above conditions, the whole property may qualify as your principal residence, even though you’re using part of it for rental or business purposes.
- Finally, as is the case every year, many of the dollar amounts on the return have changed as a result of inflation indexation. In addition, previously announced marginal rate changes now apply, affecting the donations and gifts tax credit (see Schedule 9).