Top ten Canadian tax tips for filing 2006 returns to Canada Revenue Agency

Tax specialists at Ernst & Young Canada have come out with a list of ten commonly missed deductions and other useful hints for reducing your 2006 Canadian income taxes if you are preparing your own tax return for the Canada Revenue Agency (CRA-ARC). (To help you prepare your taxes online, consider NetFiling using the secure tax preparation website of Dr. Tax). Here is E&Y's best tax advice for Canadians:

1. Charitable donations: One spouse should claim all the family donations

The federal tax credit for donations is available in two stages. A low-rate credit is available on the first $200 of donations made in the year and a high-rate credit is available on the remainder. Spouses and common-law partners can claim donations with respect to one another. Therefore, it makes sense for only one spouse to claim all of the family donations. A tax saving results because the low-rate credit is only used once.

Another way to benefit from the high-rate credit is to accumulate donations made over a few years and claim them all in one year. The donation credit is available for donations made within the five preceding years. Remember, if you donated stocks, bonds or mutual funds, only 25% of the resulting capital gain must be included in your income.

2. Medical expenses: Lower-income spouse should claim all medical expenses

The lower your net income, the more you can claim in eligible medical expenses. Because one spouse or common-law partner can claim medical expenses on behalf of the entire family, claim all expenses in the lower-income spouse's return. But remember, this credit is nonrefundable; the spouse who is making the claim should have sufficient income to absorb the entire credit. If you cared for an elderly parent, grandparent or infirm dependant in your home, you may be entitled to claim a caregiver tax credit.

3. New 2006 Tax Credits and Deductions: Take advantage

Take advantage of the new 2006 tax credits and deductions, which include the employment tax credit, credit public transit passes, textbook tax credit, and deduction for trades-people's tools. 

4. Business owners: Ensure you benefit from the many available deductions

As a self-employed individual, ensure that you have taken advantage of all available deductions, including automobile expenses, parking, business association fees, home office expenses (if you qualify), entertainment, convention expenses (a maximum of two per year), cell phone, depreciation on your computer and salaries paid to assistants, including family members. In most cases you can deduct private health-care premiums as a business expense instead of a medical expense and one-half of CPP paid in respect of self-employed earnings is deductible instead of creditable.

5. Old receipts: Certain deductions can be carried forward beyond the year incurred

In sorting through your papers, you might stumble across older receipts you think are garbage, but that actually still have value in your 2006 return. Charitable donations can be carried forward and used in any of the five years after the year the gift is made. Medical expense receipts can be claimed for any 12-month period that ends in that year if they have not been claimed previously.

6. Moving expenses: The cost of travel, meals and lodgings if you moved to a new job or went away to school can be claimed

If you moved during 2006 to start a new job, a new business or go to university or college, you might be able to claim expenses relating to the move. In addition to the actual cost of moving your personal effects, you can claim travel costs, including meals and lodging while en route. Lease cancellation costs, as well as various expenses associated with the sale of your former residence, are also deductible, including up to $5,000 in costs associated with maintaining a former residence that was not sold before the move. The expenses are only deductible to the extent of income from the new work or business location and if this income is insufficient to claim all of the moving expenses in the year of the move, the remaining expenses may be carried forward and deducted in the next year.

7. Tax returns for kids: Filing a return for children establishes room for RRSP contributions for future years

It is often not necessary for your children to file a tax return, but in many cases it makes sense to do so. If they had part-time jobs or have been paid for various small jobs, such as baby-sitting or snow removal, by filing a tax return they report earned income and thus establish contribution room for making RRSP contributions. Contributions can be made in any future year.

8. Business investment losses: Money lost investing in a small business corporation may be claimed

If you've invested money in a small business corporation, perhaps to help a friend or family member get started, and all you have to show for it are shares or a note of a worthless corporation, you may be able to claim a loss on the invested funds. This loss, referred to as a "business investment loss," is like a capital loss in that only one-half is deductible; unlike a capital loss, however, it can be claimed against any income in the year, not just capital gains.

9. Capital losses: Carry them back

Capital losses can only be applied against capital gains-and if you have a net capital loss for the year, it can be carried back three years and/or carried forward indefinitely, to be applied against capital gains realized in those years. If you realized a net capital loss in 2006 and have realized net gains in any of 2003-2005, file a form T1A to carry the loss back to those years and recover the related tax.

10. Go digital: Use tax preparation software to save time and maximize deductions

There are a number of inexpensive income-tax software packages you can use to prepare your return. I recomment uFile from Dr. Tax . These programs often provide step-by-step instruction and helpful tax-filing hints based on the information you input.

E-file: Electronic filing is as much as three times as fast as submitting a hard copy.

Electronically filed returns are generally quicker and easier to prepare and are less prone to mechanical errors. The processing time of electronically filed returns is substantially shorter than that associated with paper returns. If you are getting a tax refund, you can expect it within two weeks if you file electronically (as opposed to six to eight weeks for a paper return).

Electronic filing options include Net File, Efile and Telefile. In order to Netfile, you will have to use approved tax-return software . Alternatively, you can have your return filed electronically by using an approved Efile agent who will charge a fee for this service. Telefile is available for simple returns.

And here's a bonus suggestion:

Most people who report more than just employment income on their annual tax return can benefit from having the return prepared or at least reviewed by a professional adviser. Tax-return information can alert an adviser to a number of potential tax-savings opportunities.

These and other tips and information are included in Ernst & Young's Line-by-Line Guide to Preparing the 2006 Personal Tax Return. Designed for professional tax return preparers, the guide is a combination of Ernst & Young commentary and Canada Revenue Agency (CRA) guidance. Available as a book with a bonus reference CD or as a searchable Internet edition (in English or French), the guide is meant to complement any tax preparation software like uFile from Dr. Tax.

 The 2006 tax guide is available by contacting The Canadian Institute of Chartered Accountants (CICA) at 1-800-268-3793 or online.