1. Get organized.
Use a checklist to find all deductions which may be available to you. We have publicly available checklists at www.dubeaccountants.com, including checklists for rental properties, automobile expenses, business activities, home office expenses and, of course, general personal taxes.
2. Maximize interest deductions.
Maximizing your interest deductions can take a large bite out of taxes owing. Ensure that you are claiming all allowable expenses such as:
- interest on a HELOC where you are employing the Smith Manouevre or a similar technique to convert non-deductible interest into deductible interest
- interest paid to a spouse on an investment loan
- lines of credits or other loans used in addition to a normal mortgage for your real estate or other investment acquisitions
- certain interest personally paid on loans of funds from institutions which in turn were invested into your corporation
- interest paid to a financial institution where the proceeds were used to acquire real estate or many other investments.
While you must follow a variety of rules to deduct eligible amounts, being able to trace the loans to a business/investment purpose and subsequent payments/advances goes a long way in maintaining your deductions.
3. Know your marital status…
Your marital status seems rather straightforward, right? However, for people living together who are not formally married, it gets confusing. Tax definitions of marriage are not identical to legal definitions. We see some people try to file their returns and claim that they are single, separated or divorced as compared to living as spouses in a common-law relationship. Often this doesn’t actually provide any advantage, and can be detrimental from a tax perspective for claiming pension splitting amounts and different refundable credits. Further, you may be setting a dangerous precedent if, for example, your loved one passes away. Different pensions and benefits from the government and employers only go to spouses. So, filing as a single individual can put you into quite a pickle. And, tax elections allowing assets to transfer automatically to a surviving spouse disappear. Thus, watch the precedent that you may be setting.
4. Make foreign disclosures
Different disclosures are required for foreign property where, for example, you own a property in a foreign country which is held at least partially as an investment (including occasionally renting it out). The typical example that we see is a property owned in the southern US which costs $100,000 Cdn. When combined with US stocks and investments, you may be close to the $100,000 disclosure limit. We recommend simply disclosing foreign investments to the CRA if you are anywhere near the limit. As the disclosure does not trigger taxes, your only concern is if you were trying to commit tax fraud, in which case you have a larger problem. Penalties for late disclosure can be significant.
5. Use TFSAs (Tax Free Savings Account) wisely
TFSA investments are becoming more popular. You can now hold $15,000 in the account and in turn earn income tax free without “attribution rule” concerns. Real estate investors could use TFSAs as a vehicle to accumulate down payments or at least argue that the funds are available from this source. If funds are withdrawn, you do not lose your contribution room but rather can recontribute the amount to top yourself back up, provided that the contribution is done in the following calendar year. Pay careful attention to this as thousands of Canadians found out in 2010 that they repaid the account too early and were suddenly offside the rules and faced penalties.
Stay tuned for Tips 6 to 10
Authored by George E. Dube, CA and Joseph Martins, CGA. A version of this article appeared in Canadian Real Estate Magazine, April 2011. Tags: deductions, tax, TFSA, tips