Tax Credits – use them or lose them – but sometimes you can save them for later

There are a number of tax credits available to reduce your personal income tax bill.  An understanding of how they work can be very helpful in planning to pay the least amount of tax.

 Non-refundable tax credits are used to reduce your taxes, but once your current year taxes equal zero they are of no further benefit as the money is not refunded to you.  Any unused credits are wasted.

 There are, however a few exceptions.  Some credits can be transferred to other people while others can be used in future years.  Those that can be carried forward include donations, tuition, student loan interest, and to some extent medical expenses.

 Donations

 Donation receipts offer you a tax credit, but you don’t have to claim them in the year you made the donation.  They can be saved for up to 5 years.  Furthermore, if the donation receipts you claim in any given year exceed $200 that portion above the $200 gives you a much higher credit (almost double the part under $200).  If you only donate a few dollars a year this may not be much help to you, but if donate regularly you can achieve notable tax savings by accumulating your receipts for a few years.  Also, you can combine your donations with those made by your spouse.  This can result in bigger tax savings for the family unit.

 While donations are usually cash, this isn’t necessary.  There is also a limit to the amount of donations you can claim in a given year.  If you are considering making a large cash donation or donating non-cash items you should seek professional advice to be sure that you gain the maximum benefit.

Tuition

Tuition, education and textbook amounts must first be used by the student to reduce their taxes to zero.  The option then exists to transfer up to $5,000 of any remaining  amounts from the current year to the student’s spouse,  parent  or grandparent.

 If some of the tuition amount is still unused it can be carried forward to a future year, but this carry forward amount can only be used by the student.  There is no limit as to how many years the excess can be carried forward, but it is prudent to use it as soon as possible as there is no tax benefit to using it later.

 Student Loan Interest

Only the student can claim this credit, even if someone else actually made the interest payments.

The loan must have been made under the:

• Canada Student Loans Act
• Canada Student Financial Assistance Act,  or
• Similar provincial or territorial government laws for post-secondary education.

If you are already in a non-taxable position, you can carry the interest forward and apply it on your return for any of the next five years.

A Word of Caution 

If you finance your education through a different type of loan, if you renegotioate your loan through your bank,  or if you consolidate it with any other kind of loan the interest will no longer qualify for this tax credit.

In addition, you cannot claim interest paid in respect of a judgment obtained after you failed to pay back a student loan.

Medical Expenses

You can claim medical expenses for yourself and your dependants on your tax return, or on the return of your spouse/common-law partner.  They do not necessarily have to have been paid in the calendar year.  You can choose any 12 month period that ends in the calendar year, so if you don’t have enough expenses to claim in one year you should save your receipts in case you can use them the following year.

  In the vast majority of cases it is more beneficial for the partner with the lower net income to claim the medical expenses.  This is because only expenses exceeding 3% (or over $1962) of net income are claimable.  The person with the lower income will have a lower threshold and therefore have a bigger claim.