Year-end tax planning – some steps to take before December 31 (December 2016)

While tax planning is best approached as an ongoing, year-round activity, the fact is that for most Canadians the subject of taxes becomes top of mind only a few times a year. Typically, that happens when the annual tax return is due, when the annual RRSP contribution deadline is looming, and for some, at the end of the calendar year.

There is, in fact, good reason to spend some time considering one’s tax situation as the end of the calendar year approaches. With the notable exception of (in most cases) contributing to one’s RRSP, any steps taken in order to reduce one’s income tax bill for 2016 must be finalized before December 31^st of this year.

What follows is a list of the most common tax considerations that arise as the end of the calendar year approaches.

Timing of medical expenses

Where Canadians incur medical expenses which aren’t covered by government health insurance or by a private medical insurance plan, they can often claim a tax credit to help offset those expenses. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. The basic rule is that qualifying medical expenses (a list of which can be found on the Canada Revenue Agency (CRA) website at www.cra-arc.gc.ca/medical/#mdcl_xpns) in excess of 3% of the taxpayer’s net income, or $2,237, whichever is less, can be claimed for purposes of the medical expense tax credit.

Put in practical terms, the rule for 2016 is that any taxpayer whose net income is less than $74,600 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $74,600 will be limited to claiming qualifying expenses which exceed the $2,237 threshold.

The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2016 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred, so there is, unfortunately, no universal rule of thumb which can be used.

Medical expenses incurred by family members – the taxpayer, his or her spouse, dependent children who were born in 1999 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower-income spouse, where that spouse has tax payable for the year.

As December 31 approaches, it is a good idea to add up the medical expenses which have been incurred during 2016, as well as those paid during 2015 and not claimed on the 2015 return. Once those totals are known, it will be easier to determine whether to make a claim for 2016 or to wait and claim 2016 expenses on the return for 2017. And, if the decision is to make a claim for 2016, knowing what and when medical expenses were paid will enable the taxpayer to determine the optimal 12-month waiting period for the claim.

Finally, it is a good idea to look into the timing of medical expenses which will have to be paid early in 2017. It may make sense, where possible, to accelerate the payment of those expenses to December 2016, where that means they can be included in 2016 totals and claimed on the 2016 return.