The summer I turned 13, I got a job cooking fries at a local fast food joint on the weekends. When my T4 slip indicating my employment earnings arrived in the mail the next February, my dad informed me that I would have to complete my personal income taxes. I remember sitting down at the kitchen table with my paper return, T4 slip, pencil, eraser and a calculator to complete my first personal income tax return. Since my employment earnings were below the basic personal amount, and because I had income tax deducted from my pay, I received a refund that first year.
Having completed a coop term in an accounting firm during my university studies, and given my dual Finance and Accounting majors, I can safely say that I have seen more than my fair share of personal and corporate tax returns. That said, every year when I sit down to do my taxes (along with those of my wife), I end up learning something new. Since I filed my taxes a few weeks ago, I thought I would share this year's lessons with you in case you had yet to complete your personal income tax return. It is important to note that my personal sources of income, family situation, and residency in Quebec Canada make my tax situation unique.
1. Sources of Income are Taxed Differently
One of my goals for 2016 was to add an additional source of passive income beyond dividend stocks. After completing my 2015 tax return and realizing how high my marginal tax rate was last year, I am scrapping that goal. My reasoning being that given my relatively high marginal tax rate on 'Other Income', it is not tax efficient for me to pursue earning more income unless it is via dividends or capital gains. This table of federal marginal tax rates shows that other income is taxed at the highest marginal federal tax rate, while capital gains are taxed at half that rate, and dividends are also taxed favorably. For those of you invested in bonds or REITs (including ETFs and funds), you should consider transferring them into a TFSA or RRSP in order to avoid paying the higher marginal tax rate on the income they generate.
2. Harvesting Capital Losses is Smart Tax Planning
After completing my Schedule 3 to account for the capital gain from selling my shares of H&R REIT in my taxable account during 2015, I realized my capital loss carryforwards from previous years have fallen below $100. Given I have two companies in my taxable account with unrealized capital losses (Corus Entertainment and Bank of Nova Scotia), I am considering harvesting those capital losses in order to help me avoid paying capital gains taxes in the future. In particular, I have been thinking of selling my shares in the Bank of Nova Scotia, waiting a month plus one day in order to avoid tax penalties, and then buying them back. This transaction could prove very beneficial for me in future years.
3. Buying My Wife's Charitable Contributions Paid Off
Since my wife was off work on maternity leave and unpaid leave for eight months in 2015, she had a lower income level than normal. However, she continued to make charitable contributions to causes that are important to her. Given the larger than usual gaps between our income, and the fact that I had contributed over $200 to charities in 2015, I was eligible for a 29% tax credit on additional charitable contributions in excess of $200. When the tax software we use suggested that I claim my wife's charitable contributions, I noticed that by paying her $1 per contribution, I would effectively receive $1.47 in benefits. Although I do not see this situation repeating itself in future years, buying my wife's charitable contributions definitely paid off.
4. Taxes are the Main Downside of Living in Quebec
During my 20+ years of living and filing tax returns in Ontario, I had refunds every year but one. Each of the past four years since I moved to Quebec, I have had to cut progressively larger cheques to our inept provincial government. Do not get me wrong, I enjoy living in this beautiful province, even when being English puts me in an often ignored minority. That said, the sheer magnitude of taxes I pay to the Quebec government each year is depressing. Comparing the marginal tax rates between Ontario and Quebec using these tables, for someone earning around $100,000 per year, there is about a 5% difference of taxation between the two provinces. I have even started to consider if buying myself a cheap shack/apartment/townhouse in Ontario would be worthwhile over the long-term if it allowed me to file my taxes as a resident of that province. To summarize, please carefully consider the advice of all the personal finance writers who suggest you live in a low tax jurisdiction while pursuing financial independence.
With my income taxes filed, I am expecting my notice of assessment any day which will tell me how much I can contribute to my RRSP. Of course figuring out which dividend growth company to buy with my 2016 RRSP contribution will be the subject of a future post.
Have you filed your 2015 income tax return yet? Are you expecting a refund or do you have to pay more?