AFM 206

Common tax deductions

Module C
Week 4 Lecture
Topics: Common tax deductions 2

§ Recap of overall process and overview of deductions

§ Deductions for retirement savings

§ Company pension: RPP
§ Taxpayer initiated: RRSP

§ Childcare deduction

§ Moving deduction
 VIDEO 4(1)
Recap and overview
Recap of process
Key concept #6: Basic structure of computing taxes payable

𝑎𝑙𝑙 𝑠𝑜𝑢𝑟𝑐𝑒𝑠 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 𝑡𝑎𝑥 𝑡𝑎𝑥𝑒𝑠

𝑎𝑑𝑑 𝑙𝑒𝑠𝑠 × − = 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
𝑜𝑓 𝑖𝑛𝑐𝑜𝑚𝑒 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠 𝑠𝑐ℎ𝑒𝑑𝑢𝑙𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑠
Recap of process
Key concept #6: Basic structure of computing taxes payable

𝑎𝑙𝑙 𝑠𝑜𝑢𝑟𝑐𝑒𝑠 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 𝑡𝑎𝑥 𝑡𝑎𝑥𝑒𝑠

𝑎𝑑𝑑 𝑙𝑒𝑠𝑠 × − = 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
𝑜𝑓 𝑖𝑛𝑐𝑜𝑚𝑒 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠 𝑠𝑐ℎ𝑒𝑑𝑢𝑙𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑠

Employment
income
(for example)
Recap of process
Key concept #6: Basic structure of computing taxes payable

𝑎𝑙𝑙 𝑠𝑜𝑢𝑟𝑐𝑒𝑠 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 𝑡𝑎𝑥 𝑡𝑎𝑥𝑒𝑠

𝑎𝑑𝑑 𝑙𝑒𝑠𝑠 × − = 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
𝑜𝑓 𝑖𝑛𝑐𝑜𝑚𝑒 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠 𝑠𝑐ℎ𝑒𝑑𝑢𝑙𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑠

Employment This week:

income RRSP,
(for example) Childcare,
Moving
Recap of process
Key concept #6: Basic structure of computing taxes payable

𝑎𝑙𝑙 𝑠𝑜𝑢𝑟𝑐𝑒𝑠 𝑔𝑒𝑛𝑒𝑟𝑎𝑙 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 𝑡𝑎𝑥 𝑡𝑎𝑥𝑒𝑠

𝑎𝑑𝑑 𝑙𝑒𝑠𝑠 × − = 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
𝑜𝑓 𝑖𝑛𝑐𝑜𝑚𝑒 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠 𝑠𝑐ℎ𝑒𝑑𝑢𝑙𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑠

Employment This week: Next week

income RRSP,
(for example) Childcare,
Moving
What are deductions?
§ Deductions reduce ‘Total Income’ (Step 2 of our Form T1) so that we get to Net
Income (as defined by the Act and as shown in Step 3 of our Form T1)

§ Remember:

§ Generally, any expense is not deductible except for specific items

Key concept #1: Tax laws appear arbitrary

but guided by economics and social goals
Deductions on the T1
Where most deductions
9 are found on a T1
Deductions on the T1
Where most deductions
10 are found on a T1

The tax forms are not

structured to follow the
Income Tax Act

For example
• RPP,
• union and professional dues,
• other employment
deductions
are all part of “all sources of
income”, not “general
deductions”
Key elements in properly applying deductions
§ Software will perform the bulk of the computations

§ Need to know who:

§ What taxpayer is eligible to claim the deduction?

§ Need to know what:

§ What expenses can be claimed?

§ Need to know how much:

§ What limitations apply
 VIDEO 4(2)
Saving with an RRSP
RRSPs
RRSP deduction
§ RRSP = ‘registered retirement savings plan’

§ Why??
§ Often company pension plans (RPPs) don’t provide enough savings for retirement
§ many companies don’t have pension plans at all

§ so the government created RRSPs—they are usually funded by the individual

taxpayer only (although not always) and you can set them up at most banks and
financial institutions
§ RRSP = a tax incentive to save for retirement, income earned inside an RRSP is
not taxable until later when the $ is taken out of the RRSP (ideally at retirement…)
Why is it a tax incentive?
§ Assume Ling, a 25 year old recent grad heard that she should invest for retirement
early, and she has $1,000 to invest (after tax).
§ If she invests directly in an ETF with an average expected return of 10%, at a 40%
tax rate, she will earn 6% after tax each year.
§ This will grow to $10,286 at age 65

§ If she invests in an RRSP, she gets an immediate tax deduction, so she can actually
invest $1,667 today.
§ This will grow to $75,432 because the 10% return
is not taxed while the investment is in the RRSP
§ Everything is taxed on withdrawal, leaving her $45,259.
Who: RRSP who and contribution timing
§ Who: any taxpayer who has contribution room (earned income in a prior
year)
§ CRA provides contribution room calculations on the Notice of Assessment and MyAccount

§ Deadline: An RRSP contribution for a tax year must be made within 60 days after
the end of the tax year
§ BUT CRA does not have the deadline on Saturday or Sunday, so the deadline is typically
March 1 but may be February 29, or March 2 or 3 in a particular year

§ Be careful of contributions made in the first 60 days because they could be

claimed on either the prior year or the current year
How much: Calculation of RRSP Contribution Limit
§ Unused RRSP deduction room from prior year (from PART D of Schedule 7)

§ Plus the lesser of: 2020 2021 2022

§ RRSP dollar limit, and RRSP Dollar limit $27,230 $27,830 $29,210
Max Earned Income @ 18% $151,278 $154,611 $162,278

§ 18% of the prior year’s “earned income”

§ Minus ”pension adjustment” for the prior year

Many of you have RRSP

room already! Check!
What is RRSP “Earned Income” ??
Key concept #1:
The total of: Tax laws appear
§ Employment income arbitrary but guided
by economics and
§ Business income These all represent social goals
sources of income
§ Rental income from “work”
§ Royalties

§ Support payments included in income

§ Less business loss, real property rental loss, and deductible support payments

CRA calculates it for us, so does tax software

What is the Pension Adjustment (PA)?
§ RRSP plans and RPP plans have an integrated overall limit (18% or the year’s
dollar amount)
§ The PA represents the value of RPP contributions, derived from being a member
of a company pension plan
§ generally hard # to calculate depending on the pension plan
§ actuaries or pension experts calculate, not us

§ The PA amount is reported on an individual’s T4

§ If you (or your client) are NOT in a company pension plan, there won’t be a PA on
the T4!
Simple RRSP Example 20

§ Taxpayer is not in a company pension plan, has no RRSP carryforward room and
had earned income of $175,000 in the prior year
§ 2022 contribution limit is???

§ Answer:

§ Lesser of:

§ RRSP limit of $ 29,210

§ 18% * prior year earned income $175,000 = $31,500

§ Final answer: taxpayer can contribute $29,210!!

RRSP Carryforwards & Excess Contributions

§ Unused contribution limit can be carried forward indefinitely (so you can make
contributions when you can afford to, BUT…)

§ Excess contributions have a limit

§ Taxpayers pay penalties if they overcontribute!
§ Allowed $2,000 of excess limit during lifetime
 VIDEO 4(3)
Childcare deductions
Child Care Expenses - Who
§ 1st rule: need to have children! And remember even newborns
qualify so pay attention to whether your clients have new
children in the year
§ 2nd rule: need to pay someone else for childcare!

§ 3rd rule: purpose of paying someone was to allow the taxpayer to earn income (as
an employee or as a business owner) or go to school
§ Generally if there are “spouses”, it is the lower income “spouse” who claims the
deduction (which may be zero if one spouse does not work)

Form T778
Eligible children
Age test:
§ A child who is under 16 years of age at some time during the tax year (unless child
has an impairment in physical or mental function and was dependent on you or
your spouse or common-law partner)
Relationship test:
§ Child must be yours, or your spouse’s or common law partner’s child OR

§ Must be a child who was dependent on you or your spouse or common-law

partner and whose net income is less than the basic personal credit amount
(discussed next week)
What is Childcare “Earned Income” ??
Key concept #1:
The total of: Tax laws appear
These all represent arbitrary but guided
§ Employment income
sources of income by economics and
§ Business income from “work” that social goals
require being away
§ Taxable scholarships, etc. from the home

Deduction is limited to 2/3 of the earned income of the lower income spouse

Different from the RRSP definition

What: Eligible Expenses 26

Includes payments made to any of the following (common examples):

§ Caregivers providing childcare services

§ Day nursery schools and daycare centres

§ Educational institutions where part of fee relates to childcare services

§ Day camps and day sports schools where the primary goal is to care for children

§ Boarding schools, overnight sports schools or camps where lodging is involved

§ Overnight “childcare” fees are subject to weekly limitations dependent on the child’s age
(e.g., $200 for children under 7)

What does this list not include????

Watch out! Key concept #3:
There is constant
The expenses can’t be paid to:
tension between the
§ The child’s mother or father gov’t and taxpayers
§ A person under 18 related to you (so no babysitting fees paid to minor siblings!)

The expenses can’t be for:

§ Medical or hospital care, clothing, or transportation costs

§ Tuition fees for regular school or a sports study program

§ Fees for leisure or recreation activities (soccer, Girl Guides, etc.)

How much: Limit (cap) on expenses 28

The limits on expenses are tied to the child’s age (or infirmity):
§ $8,000/year for kids under the age of 7 at year end

§ $5,000/year for kids under 17 but 7 or older at year end

§ $11,000/year for kids for whom the taxpayer can claim the disability amount

Limit is applied at the family level, not child-by-child

Income liimitation is 2/3 of earned income of lower income ”spouse”

§ Lower income spouse has some exceptions (e.g., lower income spouse is in school)
VIDEO 4(4)
Moving deductions
Moving expenses - Who
§ Must move to a new home to work at a new work location (including a
new business location), OR
§ Must move to be a student in full-time attendance in a post-secondary
university, college etc., and receiving a taxable scholarship

§ New home must be at least 40km closer (by the

shortest usual public route) to your new work
location or school
What: Eligible expenses
Expenses are listed on the
T1-M
§ Travel while moving only

§ Temporary living

§ Costs of getting out of old

home
§ Costs of purchasing new
home
§ Some dollar limits apply

The moving expense calculation on Form T1-M

How much: Limitations 32

§ Some individual expenses have limitations

§ For example, a max of 15 days of temporary living

§ For travel costs (meals and vehicle), can either keep all receipts or claim
§ Meals at $23/meal/person (up to 3 meals a day)
§ Driving your car at $0.575/km for Ontario (varies by province and over time)

§ Limited to income subject to tax at new work/school location

§ Claim in year of move
§ Allowed to carry forward the amount for one year (to allow for late-year moves, for example)
How much: Employer paid the moving expenses 33

§ Employer paid (or reimbursed) moving expenses are generally NOT a taxable
benefit (and so not reported on Form T4)
§ Includes most expenses that an employee could deduct if they paid the expenses
themselves (see previous slide and Form T1-M) (but there is a list of course!)
§ CRA has a special rule that a non-accountable allowance for incidental moving
expenses of $650 or less is considered a REIMBURSEMENT and therefore is not
taxable. The employee needs to certify in writing that they incurred expenses for at
least the amount of the allowance. If they do, it does NOT need to be reported on
Form T4.
Summary of Deductions
§ Focused on 3 common deductions

Deduction Who What How Much

RRSP RRSP EI in prior year or Contributions in Dollar limit or
carryforward room year or 60 days 18% of prior year RRSP EI
following
Childcare Parents with children Fees paid to care Dollar limit or
≤16; lower-income by external person 2/3 of lower-income
“spouse” has childcare EI or organization “spouse’s” childcare EI
Moving Taxpayer moved at least Specified expenses Full amounts with some
40km closer to a new directly relating to limitations, in excess of
work location relocation employer reimbursements