Family Milestones Require Careful Tax Planning

April 21, 2015

A woman doing her taxesSee some serious life-changing events headed your way?

Whether it’s marriage, the birth of a child, sending older kids off to university, or your own forthcoming retirement, it’s important to take stock and see how each transition will affect your financial situation.

And, given that tax season is here once again, what better place to start than with a few ways to reduce your tax bill?

Looks Like It’s The Two Of Us Now

Once you’re no longer single, you should make sure that you view your tax plan in the context of the entire family. Why? Because there are several deductions and credits that can be transferred between partners, regardless of whether you’re actually married.

When it comes to taxes, common-law couples (including same-sex relationships) are treated the same way as those who are legally married. To qualify though, you need to have lived in a conjugal relationship for at least a year.

Start by looking at the lowest income earner’s return and work your way up to the higher earner to get a clearer picture. If your partner has little or no taxable income and can’t use all the federal tax credits to which they might be entitled, you can claim the balance.

You can claim the spouse or common-law partner amount, for instance, as long as you’ve been living together through the year. For 2014, the limit is $11,138, although that’s reduced on a dollar-for-dollar basis by the dependant’s net income.

Gee, Having Kids Is Really Expensive

A preschool classroom

As your family grows, you can claim the cost of childcare where one or both spouses are working or attending school – as long as you get a receipt. However, the total deduction can’t exceed two-thirds of your earned income.

Childcare expenses can include everything from nannies to an occasional babysitter, provided you needed the care in order to work. Other expenses can include daycare fees, day nursery schools, boarding school, day sports schools, or summer day camp fees.

The maximum you’re allowed to claim under the childcare deduction is $7,000 for each child under seven at the end of the year, and $4,000 for each child over seven and under 16. However, this limit is increased to $10,000 for a disabled child.

When it comes to camps and boarding schools, there’s a ceiling of $175 per week for children under the age of 7 or who have mental or physical disabilities, and $100 per week for other kids. The weekly limitation doesn’t apply to a day camp, but only to overnight camps or schools.

If you have children under 16, consider whether you can claim the children’s fitness tax credit. This allows most parents to claim up to $1,000 per year for eligible fitness expenses. There’s also another $500 available for more artistic pursuits – including tutoring or language lessons.

Don’t forget to claim the “child amount” of $2,255 for each child under the age of 18 in 2014, as well as student bus passes, assuming you paid for them and they’re not provided free by the local school board.

Making Sure Big School Pays Off

Students studying in the library

Post-secondary students enjoy some of the most generous tax credits available. And while your older kids generally can’t use them right away, they can transfer these credits to a spouse, parent or grandparent – thus helping to offset the family costs of funding their education.

The claims for such credits are normally supported by Form T2202 or T2202A, the “Tuition, Education, and Textbook Amounts Certificate” which is completed by the educational institution.

There’s no age limit for a student transferring tuition costs. Full-time students can claim $400 per month, plus $65 a month for textbooks, and part-time students $120 per month and $20 a months for books.

The number of months you’re allowed to claim is driven by the calendar year. So if your daughter attended school from September to December, she’d be looking at four months of eligibility – although you can claim partial months if she started late or finished early.

A student enrolled at a university outside Canada, or taking courses online may also be able to claim and or transfer a tuition tax credit – provided they’re studying full-time.

Here’s another wrinkle to think about: Students are able to claim the interest paid on student loans granted as a tax credit. If they can’t use the credit, they can carry it forward for five years.

Unfortunately, in this instance, they’re not allowed to transfer it to anyone else – even if their benefactor actually paid the interest on the loan.

Stretching Those Pension Cheques However You Can

A group of retired friends

Retirement is a transition into a new stage of life. You get the freedom to choose how to spend your time, but you also face important tax planning decisions.

Older Canadians are able to split up to half of their pension income with their spouse or common-law partner. Transferring money to the lower-earning spouse this way will even out the family’s income, reducing the tax bite at the same time.

The type of income that qualifies for splitting is different if you’re under or over 65 years of age and OAS payments don’t count.

No funds are actually transferred, the split occurs only on paper. In fact, you don’t have to do much else except provide a few details on your returns and completing form T1032, “Joint Election to Split Pension Income.”

The savings here will vary sharply depending on family income, particularly for mid-income families. And, the optimal balancing factor – you don’t have to split pension income equally – could change from year to year, particularly if one spouse has an indexed pension plan that’s protected from inflation and the other doesn’t.

Remember, the first $2,000 of eligible pension income is eligible for a tax credit, although CPP and OAS payment don’t qualify here.

If you’re 65 but don’t have such qualifying income, consider using some of the funds in your RRSP to purchase an annuity or RRIF to provide you with $2,000 of annual pension income.