Most people are unfamiliar with the many medical expenses that can be claimed beyond dental bills, prescription drugs and living aids, such as prescription glasses and wheel chairs. You are able to include any medical expenses not paid for by a provincial or private plan. In fact, even if you have private coverage, the premiums you pay are eligible medical expenses.
Canada Pension Plan (CPP)
If you are retiring early, it’s generally better to begin taking your CPP as soon as you are eligible (i.e. age 60) versus waiting until age 65. The extra five years between age 60 and 65 when you haven’t made CPP contributions may mean that you won’t receive the full amount even if you do wait. Because you will receive benefits, even though reduced, for an extra 60 months, you could be in your 80’s before you start to reap the benefits of waiting.
Focus on Family
Some tax credits can be claimed by either spouse. Medical expenses and charitable donations are two examples. Generally, it is almost always better for the spouse with the lower net income (provided he/she is in a taxable position) to claim medical expenses because the credit reduces by a percentage of net income. The credit for charitable donations is a two-tiered federal credit of 15 per cent (2008) on the first $200 and 29 per cent on the balance (plus provincial credits). Spouses are allowed to claim the other’s donations and to carry forward donations for up to five years. By carrying forward donations and then having them all claimed by one spouse, the first $200 threshold with the lower credit is only applied once.
Optimize Holdings Inside and Outside Your RRSP for Tax Efficiency
Consider tax efficiency as one factor when deciding which investments to put inside your RRSP and which to keep outside. Consider putting funds inside your RRSP that generate interest, or have a history of large taxable distributions. Keep funds outside your RRSP that you expect will pay relatively fewer taxable distributions or that generate more dividend and capital gains returns.
Salaries to Family Members
One effective income-splitting technique for individuals with a business is to pay family members a salary or wages for any services they provided in the year. The services must have genuinely been provided and the salary or wages must be reasonable. A family member could also be a director for a corporation and receive reasonable director’s fees. This also generates RRSP contribution room for your family members.