Tax Tip: Manage Net Income for 2016

Who pays higher marginal tax rates: the executive earning $250,000, or the family that makes do on $60,000? If you said the family, you would be correct. That’s because marginal tax rates are higher in income brackets that are impacted by the clawback of social benefits and tax credits. But when does that happen?

For most families, clawbacks start when family net income is around the $30,000 mark. But just how do you determine if your income is too high for refundable tax credits? For some provisions, like the Old Age Security and the Age Amount, or the Medical Expense Supplement, clawbacks are based on the individual’s net income on Line 236 of the tax return.

“Family net income” is used to determine the level of most other refundable and non-refundable tax credits, so you’ll need to have your spouse’s net income figures from Line 236 of the federal T1 return available as well to determine your eligibility for those benefits.

Maximizing the Canada Child Benefit. This lucrative credit will be sent to one parent (usually the mother), although it is possible for a father to apply for this if he is primarily responsible for the care of the child. To establish this, a Form RC66 Canada Child Tax Benefit Application must be completed. The clawback of the available CCB starts when family net income is $30,000. Another, less severe, clawback level begins at $65,000.

Tax software helps. With tax season coming, you’ll want to look into the purchase of tax software, which will automatically calculate the refundable tax credits you are entitled to, provided you have correctly indicated that you have a spouse or common-law partner and what that person’s net income is. In the meantime, use the Knowledge Bureau’s Income Tax Estimator to determine the total amount of net income for 2016. You can also project for taxes and benefits for 2017 using the Income Tax Estimator.

RRSPs do, too. It’s a good idea for couples to prepare their returns together to determine whether an RRSP contribution can help to reduce family net income. This is true for married as well as common-law relationships. In fact, when it comes to claiming tax credits, many single parents can make an important mistake; you may not know that your “live-in” relationship has tax consequences.

What if marital status changes? If your marital status changes, you must tell CRA about this on Form RC 65 Marital Status Change by the end of the month following the month of the change, so they can adjust your claim for your refundable credits. Both spouses must sign the form and submit their Social Insurance Numbers. However, if you become separated, they don’t want to hear from you until you have been separated for more than 90 consecutive days.

Correct errors and omissions now. There are lots of details that can affect who gets these credits, as you can imagine. If you have a guilty conscience about over claiming credits, you can voluntarily choose to correct errors or omissions on your tax return, thereby avoiding penalties and interest. Or perhaps you missed claiming these credits altogether by failing to file a return. File that missing return now to claim those credits.  If you need to correct the return you’ve already filed, simply adjust your return using Form T1-ADJ, which you will find in your tax software, or go online to communicate with CRA using My Account.

Remember, you can go back to recover missed provisions for up to 10 years in many cases. But if you’re going to adjust the 2006 return, do so before December 31, 2016.

Moving Soon? Keep Receipts for a Lucrative Deduction

If December is moving month for you, three pieces of advice: tax a deep breath, treat yourself to some extra eggnog, and keep those moving expense receipts handy. They will be worth a lot of money when you file your tax return.

To be eligible, the move to your new home must be at least 40 km closer to the new work location than the old home. Generally the move must be within Canada, although students may claim moving expenses to attend a school outside Canada if they are otherwise eligible. Expenses may be claimable on moves to or from Canada if the taxpayer is a full-time student, or a factual or deemed resident.

Moving before the end of the year to a lower taxed province will bring another pleasant surprise: income for the whole year will be taxed at that province’s lower tax rates.

Do I have to earn income at the new location to qualify? The answer is yes and it must be actively earned. That means moves to a retirement home won’t qualify unless you work or are self-employed at the new location. Certain students may also make the claim. Income includes:

  • salary, wages (including amounts received under the Wage Earner Protection Program Act in respect of work at the new location); or
  • self-employment income.

In addition, the taxpayer must establish a new home where the taxpayer and family will reside. For the purposes of claiming moving expenses, the following income sources are not eligible:

  • • investment or pension income
  • • Employment Insurance benefits
  • • other income sources, except taxable student awards (see below).

What this means is that if you are unemployed and move to get a job in another province, you’ll have to earn qualifying income before moving expenses are claimable. In another example, those who move and retire will need to get a job or start a business, at least for a little while, if they want to have qualifying income against which to deduct moving expenses.

If the taxpayer’s income at the new location is not sufficient to claim all moving expenses in the year of the move, they may be carried forward and applied against income at the new location in the following year or years.

Expenses relating to the move that are not paid until the next taxation year may be deducted in the year they were paid if income at the new location is sufficient or they may be carried forward to the following years.