If you intend to claim a dependant on your tax return, then you should complete their return first.
Step 1: Get your slips and receipts together and sort them:
The general rule is that you must claim everything in the year that it occurs. But some things (medical expenses, donations, and RRSP contributions) are optional and can be carried forward. People in the lowest tax bracket can play around with these optionals and maybe save a few dollars. People in the higher tax brackets are reduced to a claim-everything-now strategy.
If you have a spouse, then medical expenses, donations, transit passes, and political contributions for both spouses get lumped together and placed on one return (whichever one you think is best, they can be switched around later); everything else is separated as to whom it really belongs.
Income goes to those who did the work or to those who put up the money for the investment. Expenses go to those who did the paying. With investments, theoretically, you're not allowed to swap between spouses to the best advantage, you must follow the money trail; yet surely, can it not be argued that once married all investments are owned 50/50, regardless of who put up the money? However you decide to split things, you must be consistent year after year, so do what is best for the long-term.
Step 2: Transfer all T-slips to the return:
Fill in Persons, open up T1 General and immediately go to Worksheet. Worksheet adds up and processes all the common slips other than investments. Hitting Update calculates CPP, EI, donations, and fills in the tax return.
Now do investments: Go to Schedule 4. Everything of meaning on an investment T-slip should find a home on Schedule 4. If there's other capital gains not on T-slips then go to Schedule 3 and fill it in.
If any slips are left over, they go directly onto the tax return. Go to Page 2.
Step 3: Finish Page 2:
Enter any other income still unaccounted for. When Page 2 is done, then so must be Schedule 3.
Only deductions remain to be claimed.
Step 4: Finish Page 3:
All the entries on Page 3 that come from T-slips should already be filled in. Read through the lines at the top of Page 3 and see if anything seems likely. Common candidates include 208-RRSP deduction, 214-Child Care and 221-Carrying Charges. The deductions at the bottom of Page 3 are rare except for 250-Other Payments, which should already be filled in.
Having Page 3 finished means that the Child Care form and Schedules 4, 7 and 8 are also done. Net income and taxable income are now set.
Step 5: Finish Schedule 1:
Up to line 326, most of the credits that relate to you should already be filled in (300, 301, 308, 310, 312 and 314), but some require your attention now (316, 319 and 323). The other credits relate to someone who either lives with you (305 and 315), or whose income is so low that they can't use all the credits available to them and so can transfer them to you (303, 306, 318, 324 and 326).
Below 326 you must worry over 330-medical expenses, 409-political contributions and 431-foreign taxes paid. Everything else will already be filled in or falls under the category of rare.
Finished Schedule 1? That means that Schedules 2, 5, 9 and 11 are finished too.
Step 6: Finish the Provincial forms:
First do the provincial clones of Schedules 1, 2 and 11. Some provincial lines don't automatically filled in (e.g. 5848, 5852 and 5860). Then, if you got one, do your Provincial Credit form.
For spouses, provincial credits tend to net the same amount regardless of who makes the claim. So whoever most needs the refund should claim the credit.
Step 7: Split pension and play around:
If eligible, go to T1032 and press Find best transfer? and then hit AutoFind (see below for detailed instructions). Even if you can't pension split, now is the time to mess with all the deductions that you can swap with a spouse or carry forward to another year (see below for tips). Remember, if net income changes then you must reset foreign tax credits on T2209.
Step 8: Finish Page 4:
For most, Page 4 will already be finished, but double-check the medical supplement at line 452 and the Working Income Tax Benefit at line 453.
The bottom line is now in sight!
Step 9: Finish Page 1:
(Thought I'd forgotten about Page 1?)
Now that you know everyone's net income, you can claim the GST credit.
Sorting Out Spouses
Once you move beyond net income on Page 3 of the tax return, all that can be transferred between spouses lies on Schedule 1 (and by extension its provincial cousin). Along with the medical expenses, donations, transit passes, and political contributions, Schedule 1 is littered with claims for dependants which could be up for grabs by either spouse. Except for medical expenses, all these claims are not affected by net income, and so all provide the same tax savings to either spouse. Therefore it usually matters little who claims these non-refundable credits, provided they can entirely be applied against both federal and provincial taxes payable.
Medical expenses are special because they are reduced by 3% of net income and can be swapped between spouses. Usually the spouse with the lower net income can make better use of the medical expenses, but this may not be true in cases where only one spouse is eligible to claim the refundable medical supplement, or where the medical expenses are so large that one spouse runs out of tax to apply them against.
Before net income there's only three deductions that can go on either spouse's tax return: Lines 221-carrying charges, 219-moving expenses and 210-elected split pension. These swappable deductions can lower social benefits repaid at Line 235 and net income at Line 236. (Remember that you can also change net income by carrying over some of your RRSP contributions or the business CCA claimed — these are optional deductions.)
A lower net income in turn means a larger old age deduction at Line 301, a larger claim for medical expenses (along possibly with the refundable medical supplement), and it may change who gets to claim the childcare expenses. And if your spouse is claiming you as a dependant at Line 303 (the basis upon which dividends can be transferred between spouses), or claiming amounts transferred at Line 326, then a lower net income for you will increase those claims.
If net income is going down, it's all good news. But a lower net income for one spouse means a higher net for the other, and all the good things go into reverse. My experience is that the poorer you are the more complicated it gets, and everyone is an exception to the rule. The only sure way of getting the best refund is by cutting and pasting between spouses and seeing how tax payable changes.
That is unless there's pension splitting to be done.
Years ago before the split-pension deduction was invented, you were lucky if you could change net income a few hundred dollars and get back a few extra pennies from your medical expenses. Today medical expenses will still be the main bugaboo, but now you can give away half your pension, radically changing your net income, and so everything affected by net income comes into play.
Here's how I split a pension: The Worksheet must be filled in, and I complete everything on both spouse's returns except I never enter the other spouse's net income. This means I'm not filling in Schedule 2 and not claiming a spousal amount at Line 303. I then go to Pension Splitter and hit AutoFind and if necessary I use Search to find the best transfer. If there are medical expenses I switch them onto the other spouse's return and search again. If the other spouse also has pension income to transfer, I repeat the above procedure with the other spouse doing the transferring. I make up a little chart and whichever way comes up with the lowest taxes payable at Line 435 wins.
I then check to see if the best split comes where one spouse has run out of provincial or federal tax to pay. Only if that is so, I then consider switching the other deductions that can go on either spouse's return, like donations and who claims the kids. It's usually when you're trying to make better use of the medical expenses, but often you want to transfer even more pension but you can't because you're already not paying any tax and deductions are being wasted. The solution is to move a deduction over to the other spouse so nothing is wasted. You then have to search again and then maybe swap another deduction, but once you get both spouses paying both federal and provincial tax then there's nothing more you can do.
When I think I have the best split, I exit T1032 letting the program update the spouse's return. Now is the time to enter spouse's net income on Page 1/Schedule 1 and on Schedule 2. But you can't do that until you've gone to the spouse's return so the program can recalculate the new net income. Finally, if there are foreign tax credits, they must be reset and if Line 232, and therefore net income, changes in the process, then it's back to Pension Splitter and do it all over again.
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