When filing your income taxes, you want to be sure to claim every deduction and credit for which you’re eligible. After all, you don’t want to pay the CRA more than you should. Some tax claims, however, can be carried forward to future years, which could end up saving you even more money.
So, which deductions and credits can be deferred and, more importantly, how do you know if delaying a claim is the smart move for you? Our guide explains when it pays to carry forward claims for Registered Retirement Pension Plan (RRSP) contributions, charitable donations, medical expenses and tuition fees.
Most Canadians can deduct any allowable contributions they make to an RRSP from that year’s annual taxable income. But did you know that it’s not mandatory to claim your deduction right away? That’s right! You can wait until any future tax year to claim part or all of your RRSP deduction.
Why Wait to Claim RRSP Contribution Deductions?
The amount of money you save by claiming an RRSP deduction depends on the rate of tax you pay, which in turn depends on your income. That means you save more money on your deduction when you’re in a higher tax bracket than a lower bracket. So, if you expect to be in a higher tax bracket in the future, you can save more by waiting to make your claim.
Here’s an example. Say you usually contribute $500 per month (or $6,000 a year) to your RRSP. If your annual income is normally around $90,000, that $6,000 RRSP deduction will save you about $1,900 in federal and provincial taxes (assuming you live in Ontario). Each province has unique tax rates. But what if your income fell to $45,000 in 2020 due to the pandemic? Your RRSP deduction would now only save you about $1,200. If you think your income will bounce back to $90,000 post-pandemic, you could save an extra $700 in taxes simply by waiting to claim your deduction in the future.
When you give money to a Canadian registered charity or donate other eligible charitable gifts, you can claim a tax credit for these amounts either in the same tax year that you made them, or up to five tax years in the future. The federal tax savings provided by the credit are the same for everyone regardless of income: for example, you’ll save 15% on contributions up to $200 (or $30 in tax savings) and 29% on any amounts over $200. You also get a credit on your provincial taxes, but the amount varies by jurisdiction.
Why Wait to Claim Charitable Donation Tax Credits?
There are three scenarios in which you can save money by postponing claims on some or all of your charitable donations:
- You don’t owe any income tax. Because this is a non-refundable tax credit, your claim can only reduce the taxes you owe—you won’t get a refund if the credit brings your taxes owing below $0. So, if your total income is very low or you’ve already brought your taxes down to nothing using other deductions and credits, you’ll definitely want to wait until a year that you have taxes owing to claim this credit.
- Your total eligible charitable contributions exceed 75% of your net income. You’d have to be a remarkably generous person to donate three-quarters of your net income to charity but, if you did, you’d want to carry forward claims on any amounts over that sum. Why? Because that’s the most the CRA will let you claim in one year.
- Your total eligible charitable contributions are below $200. If you haven’t contributed enough to get to the second tier of the tax credit (29% federally on amounts over $200) you can save money by postponing your claim to another year. Admittedly, it’s not huge tax savings (up to $28 federally, plus provincial tax savings), but better to have the money in your pocket than the CRA’s.
Note: You can also combine your and your spouse’s charitable donations and claim them all on one return, either in the current year or in future tax years, to maximize your savings. Good online tax software will automatically alert you to these potential savings.
The medical expenses tax credit is a bit complicated, in that you can only claim amounts over a certain threshold. For 2022, that threshold is $2,479, or 3% of your net income (whichever amount is less). You can include medical expenses incurred for you, your spouse or your dependent child(ren), so long as either you (or your spouse) paid out of pocket for them (i.e., you weren’t reimbursed by insurance).
You save 15% of your claim amount on your federal income taxes but, because this is a non-refundable credit, it can only reduce your taxes owing to $0. You also get a non-refundable credit on your provincial taxes, but the amounts vary by jurisdiction.
Why Wait to Claim Medical Expense Tax Credits?
While you technically cannot defer medical expense claims, you do have a bit of leeway when it comes to timing your claim. That’s because you can claim expenses made within any 12 months ending in the taxation year of your claim. So you don’t have to use the calendar year.
Imagine, for example, that you didn’t have many eligible medical expenses in the first half of 2022, but then you lost your job (and your extended medical insurance coverage) due to the pandemic. Perhaps you then had to pay out-of-pocket for a bunch of medical expenses during the second half of the year—but the total is still barely enough to pass the claim threshold. In that case, it makes sense to delay your claim until the next tax year—with your 12-month period spanning from, say, July 1, 2022, to June 30, 2023—so you can be sure to qualify for the credit for all the eligible expenses you’ll incur in the first half of 2023.
When students pay fees to a designated university, college or other educational institution, they can claim a federal tuition credit. This non-refundable credit reduces the amount of federal taxes owing by 15% of the eligible tuition fees paid. (Some, but not all, provinces have additional tuition credits on provincial taxes owing.)
But, because students’ incomes are often relatively low, they may not owe enough taxes to make full use of the credit. In that case, they have two choices:
- Transfer that year’s unused claim amounts (up to $5,000) to a spouse, parent or grandparent; or
- Carry forward the unused amounts to future years to claim for themselves when they do have enough taxable income.
If a student decides to carry forward credits, they cannot later be transferred to a relative.
Why Wait to Claim Tuition Tax Credits?
In many cases, it’s probably best to transfer the credits to an eligible relative to get the tax break right away. However, if a student doesn’t have a spouse, parent, or grandparent who owes enough taxes to make use of the credit, it’s best for the student to carry forward the claim amounts for personal use in the future. These amounts can be carried forward indefinitely—as long as they are claimed in the earliest year that the student has taxable income—so there’s little chance that these tax credits will go to waste.
While most income tax deductions and credits must be claimed in the tax year to which they apply, there are a few deductions that you can—and often should—hold off on claiming to enjoy greater tax savings in the future.
As explained, deductions for RRSP contributions may save you more if you claim them in higher-earning tax years. You can carry forward charitable donations for up to five years and claim them all at once to maximize the amount of your credit. By choosing the 12-month period in which you have the most eligible medical expenses, you could save on taxes by waiting to make a claim. Finally, carrying forward unused tuition tax credits, rather than transferring them to a spouse, parent or grandparent, could be the smart move depending on your circumstances.
But remember, while waiting may work in your favour in terms of deferring specific tax claims, you should NOT dilly-dally when it comes to filing your tax return. If you owe taxes and miss the deadline (May 2nd for employees and June 15th for self-employed individuals), you’ll pay both late filing penalty fees and interest on any amounts owing.