EPISODE SUMMARY
On this episode we welcome back Luke Hergott, Senior Manager of tax services at EY. Luke brings a wealth of knowledge regarding tax so I would encourage you to listen to this episode prior to filing your return for this year.
Build your financial plan with Evan
✅ DOWNLOAD FREE RETIREMENT READINESS CHECKLIST
TOPICS IN THIS EPISODE
RESOURCES MENTIONED
EY Tax Calculator and Rates
OTHER EPISODES
7. Tax Basics and “The Next Bracket” Myth
14. How to File Your Taxes in 2021 Featuring Luke Hergott, CPA
If you enjoy listening to the podcast, please leave a 5 star review on Apple Podcasts
--
Why bother filing your taxes?
XEQT vs VEQT. Which ETF is better?
Connect With Evan
EPISODE SUMMARY
On this episode we welcome back Luke Hergott, Senior Manager of tax services at EY. Luke brings a wealth of knowledge regarding tax so I would encourage you to listen to this episode prior to filing your return for this year.
Build your financial plan with Evan
✅ DOWNLOAD FREE RETIREMENT READINESS CHECKLIST
TOPICS IN THIS EPISODE
RESOURCES MENTIONED
EY Tax Calculator and Rates
OTHER EPISODES
7. Tax Basics and “The Next Bracket” Myth
14. How to File Your Taxes in 2021 Featuring Luke Hergott, CPA
If you enjoy listening to the podcast, please leave a 5 star review on Apple Podcasts
--
Why bother filing your taxes?
XEQT vs VEQT. Which ETF is better?
Connect With Evan
Evan Neufeld: Hello and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld. Today we are joined by Luke Hergott, manager of tech services at EY and he's going to walk us through some basic tax deductions and tax credits. All right, as I mentioned in the intro, Luke, welcome back to the podcast. This is, maybe we'll call it our second annual podcast with you.
Luke Hergott: Yeah, thanks for having me again.
Evan Neufeld: Awesome. So as I mentioned in the intro, we're going to be talking about tax deductions and tax credits. Now I get a lot of questions from clients and listener emails and things like that, about ways to reduce taxes and unfortunately the only way to meaningfully reduce your taxes is just to have less income. And generally speaking, that's not a good idea and not something that people actually want to do, but there are things that will allow you to pay less taxes based on your specific financial situation. And we would file that under deductions and credits. And Luke's going to talk about the difference between those two, but let's get started here. Luke, where do you want to start when it comes to deductions and credits?
Luke Hergott: Yeah, I think it's important to start this conversation by saying that there's not a lot of voluntary tax planning that you can do just as an industry. There's lots of opportunities when you have a corporation or a partnership that you operate out of, but if you're an employee that earns a salary, there's not a ton that you can just opt into to reduce your taxes. Oftentimes your deductions and your credits are really dictated by your state in life and your financial situation. So I'd like to think of them more as like a little bonus at the end of the year that reduces your financial burden for certain things, as opposed to voluntary things that you're doing just to reduce your tax bill.
Evan Neufeld: Yeah. That's a good distinction. Most of these things aren't going to be things that we are actively encouraging you to pursue to reduce your tax bill, but there are things to be aware of that you might be able to take advantage of based on what you're doing already. So take it away. What is the real difference actually here Luke, between a deduction and a credit that I think there's a lot of misconceptions between what those two actually mean.
Luke Hergott: Yeah. I think oftentimes people just use the word deduction to cover everything, but there is an important distinction. So a tax deduction is something that reduces your taxable income. And taxable income is what drives what tax rate you're going to pay on that income. In Canada, we have our graduated rates. So depending on what tax bracket you're in, you're going to pay a different amount of tax on that income. I know you had a great episode, probably one of your first episodes where you talked about that myth of bumping yourself up into the next tax bracket and how that's not a bad thing. But that's something to keep in mind with your deductions is that whatever tax bracket you're in, is generally what rate of tax you're going to save from those deductions.
Evan Neufeld: So think of this as your top line, when you're looking at everything on your tax return and so then credits on the other end, those would show up on the bottom line. Is that correct?
Luke Hergott: Correct. Credits are kind of a direct reduction in your tax liability? That's already kind of been determined by your taxable income and those, they're great, but they're not as tax efficient as a deduction because while deductions you save tax at whatever your marginal tax rate is, credits generally are only the rate that you use on tax credits is generally the lowest tax rate. So for example, in Saskatchewan tax credits, you save 25.5%. Whereas the deduction, you know, if you're in the top tax bracket, you're going to be saving 43.5% on a deduction.
Evan Neufeld: Okay. Well, that's interesting because it could be very easy to say, well, a credit reduces the tax bill once it's already been set. So that seems to be quite efficient. But in reality, you're saying the other might be more so the case that's interesting.
Luke Hergott: Yeah. But you know, tax credits and deductions. There are separate things. You know you get a credit for donations, you don't get a deduction for donations. So it's just the way that the rules have been written as they are, just some are more efficient than others.
Evan Neufeld: So maybe let's get started with some of the more common deductions and I'll let you take it from here.
Luke Hergott: So the most common deduction for sure and this is one that you can voluntarily opt into is contributing to an RRSP. And I know Evan, you've done lots of episodes on RRSPs and they're all great. So I highly recommend that your listeners go back and listen to those.
Evan Neufeld: I did pay Luke to say this, but yes, I would encourage you to go back and listen to some of these RRSP episodes because it's not, as Luke alluded to at the beginning, we shouldn't necessarily just rush out and do any of these things to just get a deduction, but an RRSP is one of the more common ones and It's available to most people to be able to use this.
Luke Hergott: And one of the great things about RRSPs is that it allows for a bit of retroactive tax planning, where you have 60 days after the end of the year to make your contribution. So you can, you know, look at your December 31st pay stub, kind of assess where your income is at and look at what tax bracket you're in, and that can help you determine how much of a contribution you should make. You know, if you're only $5,000 into that next tax bracket. Only make a $5,000 contribution. Don't make $10,000 because that second $5,000 amount isn't going to be as tax effective.
Evan Neufeld: Can you remind us what the annual contribution limit is for RRSPs? Can you just do as much as you want or what are the rules there.
Luke Hergott: Sure. So your annual contribution limit is determined by your earned income. So for most people, that's your T4 income from employment and it's 18% of last year's. Up to a certain maximum and this grows. So if you've been working for a few years, you've been building up your RRSP room. You might already have a sizable amount that you can start to contribute. Oftentimes you find that when you're starting out in your career or, you know, your first job, you're not making a ton of money, so it doesn't make sense to contribute to an RRSP, but you are still building up that room for future years when you're a higher income earner.
Evan Neufeld: Perfect. So it's not a “if you don't use it, you lose it” situation. It just builds up and builds up and you can use it whenever or not too, depending on your situation. But you can find that information on your notice of assessment every year. Is there anywhere else that you can find that information reliably
Luke Hergott: you can find it on your CRA My account, which in my last episode with Evan, I highly recommend it to everyone to get registered for that.
Evan Neufeld: And guess what I did last week, I finally figured out why my account was locked and I got that unlocked. So anyways, now I'm on the right side of my accountant here. Okay so sticking with some investment related deductions, carrying charges. What are those?
Luke Hergott: These are things that you pay in order to earn investment income generally. So fees that you pay to your financial advisor or your broker, any interest that you pay on funds borrowed in order to invest. But it's important to note that these are only for your unregistered investment accounts. So if you have fees on your RRSP or your TFSA account, those are not tax deductible, because you're also not paying tax on the income you're earning. So you only get the deduction if you're also including the income.
Evan Neufeld: Right. And so that's for investment fees and also on interest.
Correct. So, when we're talking about interest or boring money to earn income, if you're borrowing money, we call this leverage. But if you're using leverage to top up your TSA or an RRSP loan or some of these common things you can't deduct the interest on those, is that correct?
Luke Hergott: Correct. And it's also very important to make sure that there's a direct line of the funds into your investment account. CRA if they ever audited, they want to see that, you know, you took your funds from a line of credit or some form of debt and that went directly into your unregistered investment account and you didn't kind of shift it around or, you know and use that money to pay off your credit card and then invested a different amount of money. You want to have that direct connection between your debt and your investments.
Evan Neufeld: So these are ways that you can potentially get caught. This isn't an episode on how to not get audited or how to survive an audit. Maybe that's a different episode for next year, but yeah. Things to be aware of there, for sure. But those are realistic options for people. So in a non-registered account, if you have what we call a fee for service fee, that can typically reduce your income via deduction. But also any interest on board funds used to earn income in a non-registered account. What about the principal residency exemption here?
Luke Hergott: Yeah. So that's something that every Canadian has available. It generally shelters, any capital gains you realize when you sell your principal residence. So usually the house you live in, it's a pretty broad definition. So things like a cabin or a vacation home can also qualify as your principal residence and they don't need to be located in Canada. However, it's a complicated calculation. But just to give you a bit of a rule of thumb is you can only designate one residence as your principal residence every year. So if you own two properties, you know, at the same time, only one of them is going to get the gain shelter and not the other. But you can kind of play around with which one has the highest accrued value and things like that. Which one is going to have the greater tax liability when you sell it. And you can use the residence exemption to shelter that one, as opposed to the one that hasn't increased in value as much.
Evan Neufeld: Right, and the nice thing about that is that you only have to designate it upon sale. Is that correct? Like this isn't an ongoing designation of like, what am I going to choose this year for my primary residence or anything? When you sell a property, that's when you designate, was this your primary residence? Is that how it works? Okay, so that one can be pretty significant, especially for folks here in Saskatchewan and Ontario, I know there's lake country there as well, but there's a lot of vacation properties that typically will appreciate a bit quicker than your primary residence in the suburbs or whatever the case may be. Okay. So now what about some other common deductions? I had a baby 18 months ago. Don't use your children as just for the tax deduction. I know there's some ways that you can use some expenses once you have kids. Can you walk me through that?
Luke Hergott: Yeah, for sure. And these are the ones where it's going to depend on what you're spending your money on anyways, and it just makes it a bit more financially feasible to do so. So for children, the biggest one is probably the childcare expense deduction. So if your children are in daycare or even if you send them to a summer camp or day camp or things like that, that qualifies So, yeah, these are things that you would have done anyways. We're not going to tell you to throw your kid into a daycare, just so you can get a tax deduction, but you know, if you need to put your children in daycare, you know, you're going to get a nice reduction in your taxes at the end of the year as a result.
Evan Neufeld: Interesting. Okay. Let's move on from, from kids. What about okay. Working from home is still a reality for a lot of people. And I know there was a simplified version of that last year, where are things at with covering employment expenses, especially when it comes to working from home.
Luke Hergott: Yeah. Last year the government introduced the simplified method. You could always claim home office expenses, things like that, but with COVID and basically every Canadian having that available, they decided to simplify it a little bit. So you could get, I think it's $2 a day that you worked from home in 2021, up to a certain maximum.
However, if your expenses are greater, if you get a better deduction by doing the full detailed method, that's still available. So you can claim a portion of your utility and things like that. It depends on if you earn commission or not kind of dictates what types of expenses you can claim, but you might have to do a little bit of math to figure out which one is more beneficial. For myself, I worked from home for a large part this past year, and it just made sense for me to claim the simplified $2 a day because I live in a condo. So I don't have a ton of utilities and expenses. And it also is just easier to just say, yeah, I work from home X number days, I get my credit or sorry, my deduction, be careful of my language here. Instead of having to tally up all of my utility bills for the year.
Evan Neufeld: Gotcha, okay so I assume most people will be in that situation now, is there any information that you need from your employer to file that accurately?
Luke Hergott: For the simplified version, no. Okay. If you're going to do the detailed version, there is a form that your employer needs to fill out that basically says, yes, we required this employee to work from home or to incur other expenses. For example, if you're required to maintain like a personal smartphone or you're required to travel for work, things like that, you need the statement from your employer that basically gives you the go ahead to deduct those.
Evan Neufeld: Okay. So staying with work here, my wife is a nurse and so she's part of a union. And so I always see this little professional dues box on her T4. That's a deduction too?
Luke Hergott: Correct, union and professional dues that you incur to earn employment income are deductible. I find that often times, you know, your union dues are just taken out of your paycheck so it'll show up on your T4 and it automatically gets deducted onto your tax return. But if there are things that you're paying out of pocket and are not being reimbursed by your employer, that's an important distinction. You actually need to be out the money in order to get the deduction. Then you can claim those separately.
Evan Neufeld: Okay. So professional dues, say for example, I'm a CFP. When I pay my CFP licensing fee every year, would that fall under professional dues then?
Luke Hergott: Correct. And same with myself as a CPA. If my employer didn't reimburse them, I would be able to deduct those.
Evan Neufeld: Okay. So I think according to your document that you sent me here, that's probably a lot of the typical deductions and if we want to move over to credits, donations is a big one or a really common one anyways, can you walk me through how donations work? We could probably do a whole episode just on charitable giving here, but just yeah, high level.
Luke Hergott: Rich topic that we can discuss. donations are great because you get a better tax credit. Earlier in the episode, I mentioned that tax credits generally get the benefit at the lowest tax rates. For donations, that's not the case. For the first $200 you pay, you get the tax credit at the lowest rate, but anything over that, you get the tax credit at the top marginal rate in the province. So for example, in Saskatchewan, any donations you make over $200, you get a 43.5% tax credit. So it makes it a really lucrative tax credit compared to the other ones that we're going to discuss later. But at the same time, this isn't something that you just do for the tax credit. I had a client recently who we were discussing some tax planning for him and myself and his financial advisor, both brought up the idea to give charitable giving as part of this. And he came back and said, but I kind of not to sound greedy, but I worked hard for this money. I kind of want to keep it. If I donate just for this tax credit, I'm still out money. And so that's totally true. You know, if you don't want to put yourself into these situations just for the tax credit, because if you compare dollar for dollar at the end of the day, you would have been better off just keeping your money in your pocket in the first place.
Evan Neufeld: Right. But at the same time, if you are looking to make a charitable gift, know that your out of pocket cost, isn’t one for one either, right? Because of the significant value of the credits there. So you can do a lot of good by giving your money to a charity. I often say you can give your money to the government or you can give it to charity. It's obviously not as simple as that, but I think the point still stands that there is significant value in making charitable donations.
Luke Hergott: Yeah. That's a good way to frame it because there's a ton of benefits that come from charitable giving that aren't financial, you know, you're supporting your community or cause that you love and if this is something that you already do. It makes it much more financially feasible to do that because you are only paying for example, like 60 cents on the dollar at the end of the day.
Evan Neufeld: Right. Okay. I don't want to get into a political thing about the recent political upheaval here in Canada. But GoFund me and other crowdfunding platforms for charitable giving have been in vogue quite recently. Even for people raising money for friends who've been sick and things like that. The unfortunate reality with these programs is that they are not registered in the same way so that you won't actually get a charitable receipt for it, even though you were giving charitably, if that makes sense. So can you walk me through the criteria there for when you're going to get a credit.
Luke Hergott: So basically they need to be a registered charity. And this is something that you can search online. The Government of Canada keeps a full database of all of the registered charities in the country, and they also need to be a Canadian charity. Unless you have, for example, like US sourced income, you can claim US donations against that. But if you just earn income in Canada and you give to a non-profit in another country that you support, you're actually not eligible to claim that as a credit.
Evan Neufeld: Right and there's still nothing wrong with doing that. You just have to know that it's not going to be eligible for the credit. You can still give to other charities out of the goodness of your heart, but you can also look up to see if a charity has a similar mandate here in Canada. Like for example, my wife and I wanted to support a clean water initiative. and we had heard of something called Charity Water based out of the U S and they don't have a Canadian arm, but Water Aid is another charity that we've supported in the past that does much the same thing with a similar strategy. So this can be one of the fun parts of doing charitable giving is. Looking up all the different organizations out there to support, but we're going off topic here a little bit along with being a registered charity, other ways that you can get a credit for making a donation. What about to a political party?
Luke Hergott: Yeah. So those are formerly called political contributions and these actually dollar for dollar.
Evan Neufeld: Donation probably doesn't sit as well with the politicians, maybe political contributions, sorry.
Luke Hergott: Yeah, these are the best tax credits that you can actually get up to a certain amount. Different between the provinces and federally, depending which type of political party or campaign that you're giving your money to. But for example, if you were to have given money to a federal political campaign, The first $400 you contribute, you get a 75% tax credit. So your out of pocket cost is only a hundred dollars.
Evan Neufeld: Wow. That's pretty significant.
Luke Hergott: There is a maximum amount of a credit that you can get federally at $650. And that's, if you contribute just about $1,300 in total. In Saskatchewan, it's the same amounts, but I know in Alberta they are different limits and so you might have to check which province you live in, if you're going to contribute to a provincial political campaign.
Evan Neufeld: Very interesting. So maybe donation, wasn't the right word there, but if you have a political affiliation or a party that you're wanting to support, or they're actively seeking out your money as a, as a contribution take a look and see if you would qualify for these credits based on what they're looking for there.
Luke Hergott: The only downside is that they'll never stop emailing you.
Evan Neufeld: Yeah, there's always a risk. Okay, so then some other common credits here, tuition, that's a big one and especially for many of my listeners here. So how does a tuition work?
Luke Hergott: So federally, there used to be provincial credits as well but I think a lot of provinces have phased them out, so it's just a federal credit. Basically for any tuition that you pay and this doesn't include those extra fees you pay as a student is just straight up your tuition for your classes. You also can get some extra amounts based on the number of months you were in school and whether it was full-time or part-time, but you'll get a slip at the end of the year that kind of states your eligibility for these. As well, if you have a dependent who is going to school. So for example, you have a child, you, as their parent can claim a portion of their tuition on your tax return up to $5,000 a year, as long as your child isn't using the credit themselves. Right?
Evan Neufeld: Okay. So in a hypothetical situation where you're the one you, as the parent are paying for your child to go to school. You can actually use some of the credit then as a result. However, if your child is paying for school out of pocket themselves, and they're earning income to be able to afford to do that, they would probably be able to use that credit then. So, this isn't a parenting podcast. Like there is a little bit of give and take there.
Luke Hergott: I've heard a lot of situations where the parents will just automatically take the credits from their children, even though, you know, the children are paying them out the pocket because who's the one that's handling the tax preparation for their kids, probably the parents. And they're going to do what's best. And like the financial family interests, but not always, maybe what is equitable and fair.
Evan Neufeld: Some other common credits would be for medical expenses. I know we have universal health care here, but occasionally there are things that come up that would be allowable medical expenses. What if I'm going for a massage or I need to get glasses or things like that, what would actually qualify for a medical expense?
Luke Hergott: So there is a laundry list of items that qualify as medical expenses and I don't have it memorized no. But things that not everything is eligible and it also depends on the province. So for example, in Saskatchewan, you cannot claim massage therapy. Even if you have a doctor's note, it's not a eligible expense, but for example, in Alberta, I believe it is. So if you ever needed to look at that, the CRA has some really great websites and searchable databases where you can find out if it's eligible, if you need a prescription or not, things like that,
Evan Neufeld: You don't have to guess look it up and make sure because everything works until it doesn't and you don't want to start claiming things and then get an audit later and have to pay back taxes and whatnot. Just look it up first. If you're unsure.
Luke Hergott: Exactly. One thing to also note for medical expenses is that you need to have spent a minimum amount before you can start claiming the credit. It's a bit of a greater than test, but generally if you're making over $80,000 in a year, you need to spend at least $2,400 before you can start claiming them. So I find that for most Canadians, you know, have universal healthcare. We're not spending $2,400 on you know, routine medical expenses throughout the year. So this is more common I find with older individuals as your medical expenses start to increase, or if you have some sort of medical emergency or God forbid cancer treatment that you go down to the Mayo clinic in the states for, or things like that. It's more common to see it when you have those larger medical expenses.
Evan Neufeld: Okay. Good to know. Speaking of large expenses, home renovations, especially now when prices are so expensive on materials. Here in Saskatchewan, I know this is relatively new and I won't ask you to speak for other provinces necessarily, but these might exist elsewhere. A home renovation tax credit.
Luke Hergott: This is a Saskatchewan specific one, and I'll caveat this by saying, you know, there's tons of credits and these are things that provincial and the federal government will introduce quite frequently or take away. And so it's important to kind of pay attention to those budget announcements. They might highlight something that you're now eligible to claim a credit for. One thing that Saskatchewan government introduced in its budget last year is this Saskatchewan home renovation tax credit. It's only going to be around for two years, 2021 and 2022. For 2021, you can claim expenses that you incurred from October 2020 through to December 2021. And it's a pretty broad range of things that you can claim, like building a fence or finishing your basement. Painting your house, things like that, all qualify for 2021, if you spend a minimum of $1,000. I guess it's like the threshold, you don't get a credit for the first thousand.
Evan Neufeld: Not on the first can of paint. You need a few cans.
Luke Hergott: and then up to $12,000, you'll get a tax credit. And then for 2022
Evan Neufeld: Is that one to one, or how is it calculated?
Luke Hergott: So basically, if you spent $12,000, minus that thousand dollar threshold, you have 11,000 times the provincial tax credit rate, which in Saskatchewan for 2021 is 10.5%. Okay. So you'll get, you know, thousand bucks back. And then for 2022 if you spend up to $10,000, you'll get a credit on $9,000 of that. And then the program is done unless they, for whatever reason, extended in one of the next budgets,
Evan Neufeld: Not likely
Luke Hergott: Probably not likely. I find that oftentimes credits are things that the government tries to incentivize people to do. So for example, the donations credit is so lucrative because the government wants to encourage Canadians to give charitably. That's probably also why the political contribution one is the best one is because they probably want more money for their campaign. But you know, the Saskatchewan government wanted to encourage people to stimulate the economy likely with home renovation costs and so they introduced this tax credit.
Evan Neufeld: So speaking of investing locally, labor sponsored venture capital corporations, or labor sponsored investment funds, some provinces have these available. They're a little bit more of a niche investment, but can you walk us through that one a little bit?
Luke Hergott: So these are investment funds that you can invest in, and most of them are also RRSP and I think TFSA eligible as well. The benefit of these is that you get a tax credit for investing with them. Federally, I believe it's a 15% credit, in Saskatchewan another credit, I think it's 20% if memory serves correct. Up to a certain amount, I think in Saskatchewan, the maximum amount you can contribute in a year is $5,000 and other provinces have these as well. I know Manitoba does, Quebec does, I'm not sure about other ones, some provinces have phased them out. So that's one thing to keep in mind is that with any tax credit it's not guaranteed, it's not a guaranteed thing for life.
Evan Neufeld: So then beyond there, this is a big one that is a little bit tricky, a little bit more sensitive, but the disability amount there, the disability tax credit.
Luke Hergott: Yeah, if you or a dependent and the dependent can be anyone really that you support financially. So a child, a spouse, a parent, a sibling if they have a disability, there's a lot of additional tax credits that you can be eligible for. The biggest one is what's called the disability amount and it's just a tax credit that you can get every year, but it also makes you eligible for additional things. Like you can claim some home renovation costs to make your home more accessible under the medical expense, you can claim like part-time or full-time caregiver amounts, things like that. One thing to note is that you need to get approved for this credit. And it's often a process that involves a doctor, or I think registered nurses are eligible to fill out this paperwork for you as well, but you kind of need to be pre-approved for this. So I find it lots with clients where they had an incident over the year, or a lot of my older clients, you know, if they say had a stroke or some sort of other life incident where now they're considered disabled. We can't claim it when we're filing their tax return until they get approved, but then we can go and backdate that. One important thing to note on the backdating is oftentimes, you know, you are considered disabled for many years before you get around to doing the paperwork and things like that, especially for older individuals. You just need a doctor who will say that you need assistance or, or things like that. If your doctor will attest that say you've been considered disabled since 2015, you can actually go back and amend your returns and claim this credit for the past six years as well.
Evan Neufeld: Interesting. And so along with qualifying for this disability tax credit, then you become eligible for something called a registered disability savings plan, which hasn't been around for that long, but there's also a lot of grant money associated with that. That could be another episode that I could dig into a little bit more to go through the details of that, but it's just another way for folks who are disabled, that don't necessarily have the same means to be able to save for themselves for their own retirement and that there be additional grants and specific rules on income later on in life there. So we'll keep that one in mind. Finally here, the last credit that you're mentioning is the first time home buyer credit. Anyone out there buying a home for the first time? Yeah, I'm sure there's a few probably a couple yeah.
Luke Hergott: But federally and some provinces I know for sure, Saskatchewan, you get a credit if you buy a house for the first time. There's certain rules where say you have a spouse, either common law or married and they've owned a house before, but you're buying a house for the first time. You won't be eligible. There's certain rules around that. But if genuinely, this is your first house that you've purchased, you can get a $5,000 credit federally. And whenever I say the amounts, that's like pre the tax rate inclusion.
So $5,000 credit at the 15% federal rate Saskatchewan, you can get $10,000 credit. There are some funny rules where if you don't own a house for five years, you can like requalify for this credit. But that would kind of mean selling your house, renting for five years and then buying a new house just for this tax credit, which probably isn’t the best financial advice.
Evan Neufeld: What I am hearing from you, Luke, is that I should be selling my house and go live on a beach in Australia for five years and come back and buy another house so I can get this first time home buyer credit. Is that what you're saying?
Luke Hergott: I won't say no to that because living in Australia sounds wonderful, after this weather we’ve had.
Evan Neufeld: Okay, great. Before we go any further, when it comes to credits, I've heard this term called refundable and non-refundable credits. What does that actually mean?
Luke Hergott: So refundable credit. Let's start with non-refundable actually.
Evan Neufeld: Because the vast majority of them are non-refundable.
Luke Hergott: Basically non-refundable credit means that you can't use credits to reduce your tax liability beyond zero. So say you owed $2,000 in tax otherwise, and you have credits that are worth $2,500. You're only going to be able to use $2,000. Because they're non-refundable, the government's not going to pay you extra for these credits. Right? However, if it's a refundable credit, they allow you to go quote unquote, in the negative for your taxes and actually get like almost have like a negative tax bill where the government owes you money. A big example for this one is the Saskatchewan graduate retention program. Used to be a refundable credit. So even if you weren't earning any income, you would still be eligible for say you're a $2,000 graduate retention amount and you would, the government would essentially pay you for not having earned enough money in the year, essentially. Whereas they changed that generous deal. It was a sweet deal, which is why they changed it to now it's non-refundable. So if you have this credit, you can never reduce your Saskatchewan tax payable beyond zero.
Evan Neufeld: Right. And for the vast majority of people that are earning full-time employment income, that's not a problem anymore. The difference is going to be minimal. But for those who were unemployed after graduating with no tax paid that stings a little bit. Okay. We can, we can move on from that, but know that most credits are non-refundable. You're not just going to get checks from the government. Now the last way to meaningfully reduce your income is through something called income splitting. And that's a little bit more nuanced than the news the listener might think here, but what are some of these ways that you can split income between yourself and a spouse.
Luke Hergott: So income splitting is really attractive when one spouse earns more money than the other, because then you can kind of push some income into a lower tax bracket by putting it on your spouse's return instead of your own.
However, there are a lot of rules around this, however, always consult with a tax professional in most of these situations. Some of the most common ones are pension income. If you're in pension income, you can split up to a certain amount with your spouse every year. And that's something that essentially happens automatically when you file your tax return, you just in most tax systems, I think you just kind of check the box and the program will figure out the best split for you.
Evan Neufeld: One thing to mention there, pension can also, for the purposes of pension income, splitting can also be a RRIF. So that’s when your RRSP is a bucket and your bucket turns into a bucket with a hole in it, that's called a RRIF. You can split your RRIF income as if it's pension income, even though it isn't explicitly a pension. What about the Canada pension plan?
Luke Hergott: Not eligible
Evan Neufeld: Unless you do it upfront, that one's a little bit convoluted too. When you start getting your CPP payments, you can choose to split them before you start receiving them. But then after the fact, if you're just receiving payments, you can't just divvy them between two spouses, correct. So pension income splitting, and then the next one is a spousal RRSP.
Luke Hergott: And this is something I know you talked about in your last episode as well, but this allows you to contribute to your spouse's RRSP. You still get the deduction, but when your spouse takes the money out in the future to fund their retirement, it's taxable in their hands. So it's more of a long-term strategy, but it's a way that you can shift income from one person to another over your lifetime, essentially.
Evan Neufeld: Can you give me the big however there?
Luke Hergott: However, you can't just use it to say contribute to your spouse's RRSP and then take it out the next year. You need to wait at least three years after the contribution
Evan Neufeld: Three years and there's another little wrinkle too, where you can get it out in their name. If you convert it to a spousal RRIF and only take the minimum, the minimum amount comes out in the spouse's name without the income attribution rules. So again, Do this with some proper planning, this isn't an easy no-brainer way to reduce your tax bill, but with some proper planning, it can be a really good tool.
Luke Hergott: Yeah. It's not one size fits all, but there's usually some consideration when you get to that stage in life.
Evan Neufeld: Okay. Anything else here when it comes to income splitting?
Luke Hergott: One thing that I find most people try to do, which usually actually isn't feasible, is try to share certain income earning properties between spouses. So for example, if you earned a rental income or rental income property, get married, and now you want to share that rental income with your spouse, you just say, yup, we're each just going to claim 50% of this rental income. Watch out, that's usually not allowed unless you do some sort of bonafide transaction to get the property into joint names and know oftentimes you can go to your lawyer and just add people to the legal title. There's a difference between legal title and kind of beneficial tax ownership. So just because you can add somebody on title to a property or say a of farm land that you rent out doesn't mean that you can now income split the tax with the other. This is something that gets quite complicated. There's a lot of rules around it because. The government wants to make it difficult to do this for obvious reasons. So always consult with a tax professional. If you're looking to income split between spouses.
Evan Neufeld: That is a good way to leave it off because a lot of these things can be complicated and potentially misunderstood. Some of them are really straightforward of course, but if you do have questions, I wouldn't hesitate to reach out to a tax professional. Someone like Luke or someone in your local community. Looking for things online is always dangerous because as Luke mentioned, these things change, even if you're listening to this podcast because depending on when you listen to it, things might be out of date too.
So if you were learning about deductions, tax credits and the specific amounts, especially as it relates to your province of residence, double check and look with a tax professional, who's going to have the most up-to-date information for your situation.
Luke Hergott: Yeah, I can't recommend that enough.
Evan Neufeld: Perfect. Well, that was really informative for me as well here, Luke. Thanks so much for taking the time to come on the podcast today. I appreciate it.
Luke Hergott: You're welcome, It was my pleasure.
Evan Neufeld: Thanks for listening to this episode of the Canadian Money Roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal, and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and Registered Investment Fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.