Blog Archives - BMP ACCOUNTING & TAX INC.

Turn Medical Expenses Into Lemonade

3/26/2021

Do you have medical expenses? Wondering if you can use them to reduce your tax owing? CRA has a long list to specify which medical expenses can be claimed on your tax return. Some examples of medical expenses that you cannot deduct are diaper services, non-prescription services, cosmetic surgery, vitamins and gym fees. If you are unsure, the best bet is to keep the receipt and check with us at tax time.

Maybe you did not know about the medical expense last tax season and you encountered the bulk of your medical costs between November and February ending in the tax year. The good news is that the timing for medical expenses does not have to be the same as the calendar year. However, the twelve months we choose to capture in one tax year has to end in that tax year. So, if we are filing your 2020 taxes, you must have paid for the medical expenses during a 12-month period that ends in 2020.

The timing becomes also important when we consider how much your total medical expenses cost you. The rule is that in order to claim medical expenses, they must total 3% of your net income (or $2,352 – whichever is less). One person per household (spouse and dependants) should claim the medical expenses.

Do you have more questions? We would love to chat.

Kindness Wrapped in a Tax Break

3/20/2021

Donating to a charity can make you feel like you are contributing to making a difference in this World, but can also give you some tax advantages. In most cases, you can claim up to a limit of 75% of your income…so the sky is essentially the limit.

Did you forget to claim your donations last year? No problem. You have five years to claim a donation. This may be to your benefit to accumulate multiple years because the charitable credit is greater for donations of over $200. You can also transfer your donations to your spouse (or vice versa) to maximize the tax impact of your donation.

The federal credit itself can make up to 29% of your income while the provincial income can reach up to 21% of your donation.

For example, Derek makes a $500 donation to a registered charity in 2019 and lives in Alberta:

1. The federal charitable tax credit (15% on the first $200 and 29% on the remainder) can be calculated as such: (15% x $200) + (29% x $300) = $117

2. The provincial charitable tax credit (10% on the first $200 and 21% on the remainder) can be calculated as such: (10% x $200) + (21% x $300) = $83

3. Derek’s total charitable tax credit is $200 Derek can use his $200 credit to reduce taxes owed that tax year. If he does not have taxable income in the current tax year, his best bet would be to hold onto those donation receipts for a year where his income is high enough to be taxable or his spouse can use the credit instead.

Do you have more questions regarding donations? Call our tax professionals. We will be happy to help you.

To Incorporate or Not Incorporate...

3/13/2021

To incorporate or not incorporate…that is the question that many clients have asked us. You started a new and exciting business and have been running it as a contractor but people have told you that you should incorporate because you can save on your taxes. The easy answer is, it depends. So let’s dig a little deeper.

Do you have employees? You can run payroll as a contractor. You do not need to be incorporated if you have employees. You do need to make your remittances just like a corporation.

Tax returns for corporations are more expensive than tax returns for a self-employed individual and you need to file an annual corporate registries return. Your losses can be harder to write off. If you are still an employee and self-employed and you incur a loss, this loss can reduce your total taxable income. As a corporation you need to apply the loss to another year that had or will have a profit.

So why incorporate? Being incorporated limits your risk of personal liability. If the corporation goes belly up, the creditors will come after the corporation’s assets. The most common debts are wages, payroll remittances, and GST/HST owed to CRA. If you have concerns about liability, incorporating could be in your best interest.

If you are planning to build a business to sell you may be interested in the lifetime capital gains exemption. This means that if you build a business from the ground up and sell it for less than $866,912 your total gain on the sale would be tax free!

When you compare corporate tax rates to personal tax rates, you will quickly notice that it is substantially lower at the corporate level. When you are running your business through a corporation, you have the choice to choose how much to pay yourself in a given year. For example, if you require $84,000 to support your lifestyle, but your corporation has a net income of $200,000 you can choose to leave $116,000 in your corporation to lower your personal income tax. As an employee of your corporation, you would pay taxes on $84,000 but as a sole proprietor you would pay personal income tax on the full $200,000.

Income splitting might be the most attractive aspect of incorporating. If your spouse is actively participating in your business, they could earn a salary from the corporation. If they are not active, dividends could be used to split the income with a lower-income spouse. This scenario would lower the overall family tax rate.

Could incorporation be for you? Contact us to know more.

RRSP & Your Taxes

3/5/2021

Clients often ask us to advise them on what they can do to pay less taxes. The best way to defer your taxes is to invest in an RRSP. An RRSP lowers your taxable income now so you can enjoy a tax savings in the current tax year.

The philosophy is that you reduce your taxable income by way of investing in your RRSP in years where your earnings should be higher – when you are employed. When you retire, you will be taxed on the money you withdraw. That is why it is called a tax deferral. You defer paying taxes on your income until your income should be significantly lower – when you are retired.

Contributions made from March 2nd to December 31st of the tax year will be included in the taxation year. Contributions made in the first 60 days of year (Jan 1st to March 1st) can count towards the taxation year, but you can elect to defer the contributions. Any contributions made after the first 60 days of the year will count towards the next taxation year.

Do you know your contribution limit? Do you know that you can over contribute to your RRSP? It is important to ensure that you do not contribute more to your RRSP than the balance in your unused contribution room. If you have a spouse and you have contribution room, it may make sense to contribute to a spousal RRSP for your spouse. You can either access this information by calling CRA, through your My Account Services or contact BMP Accounting and Taxes.