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Four transferable tax credits to lower your household tax burden

Family members may transfer or defer non-refundable tax credits if they can't fully use them

Couple planning their finances on the kitchen
Transferring or deferring non-refundable tax credits can help further reduce a family's overall tax burden, experts say. (kate_sept2004 via Getty Images)

One of the biggest benefits of doing tax returns as a family is the ability to transfer or defer certain non-refundable credits to lower the household's overall tax burden.

Non-refundable tax credits can be used to lower your taxes owing or bring the amount down to zero, but as the name implies, they do not provide a refund.

If one taxpayer in the household can't take full advantage of the credit, it's worth considering transferring eligible credits to another family member or spouse or deferring the credit to a future year, says Tony Salgado, president and founder of wealth advisory firm AMS Wealth.

Here are four common tax credits that can be transferred or delayed to optimize a return.

Donation credit

"The donation tax credit is something that can be grouped among spouses and one person can claim the credit as opposed to two people claiming the credit. This generates more money in the household pocket," Salgado told Yahoo Finance Canada in an interview.

He advises investors or business owners to consider donating insurance or publicly-traded securities rather than cash because it can have a better tax impact.

The bigger the donation, the larger the potential credit. Unlike most tax credits, which are calculated using the lowest federal tax rate of 15 per cent, donation credits are tiered.

The first $200 of donations are based on the 15 per cent federal credit, and donations above that are based on 29 per cent. Charitable gifts that surpass the $200,000 threshold come with a 33 per cent credit.

"Donation credits do have a carry-forward period. So if you don't use it in one year, you can carry forward the donation to use it in a subsequent taxation year, up to five years," said Silvia Jacinto, a tax partner at Deloitte Canada.

Tuition credit

Families with post-secondary students can use the tuition tax credit to optimize their returns.

"If you have a child in post-secondary education, they may not have any sources of income. Or their income may be below the minimum threshold, or the personal tax credit threshold, which is about $13,000 now, so, federally, you can transfer up to $5,000 a year in tuition credits to a parent, regardless of who paid the tuition," Jacinto said.

If the student earned taxable income in 2022 however, they would be required to use the credit on their own return and can transfer the unused portion to a parent, she adds.

Medical expenses credit

The key aspect of the medical expenses credit, Salgado says, is the fact that expenses are based on a 12-month period ending in the calendar year, rather than only including expenses racked up between January and December.

That means, for the 2022 taxation year, medical fees paid for in 2021 could be claimed, as long as they haven't been claimed in the past.

To use the tax credit, medical expenses must exceed a threshold of either $2,479 or three per cent of your (or your dependent's) net income, whichever is lower.

"​​If you don't pass the minimum hurdle rate, you may not get any benefit for your medical expenses in that year. So you may want to hold on to those and group them for the next year," Salgado said.

He gives the example of medical expenses that might have begun accumulating in late-2021 and continued into 2022 – pooling them and claiming it on the 2022 tax return could help get the individual above the minimum threshold to qualify for the credit.

"The medical tax credit is transferable between spouses when filing tax returns, so, for example, you would probably want the higher-income spouse, the one that's going to have more taxable income, to use up those credits, generally speaking," Jacinto said.

"But if there is a limitation because of the 3 per cent of net income rule for medical expenses, you may want to consider putting those on the other spouse's return if that limitation does not apply."

Disability credit

Canadians with both physical and mental impairments can qualify for the disability tax credit, if the impairment is verified by a medical professional and it's accepted by the Canada Revenue Agency.

If the person with the disability doesn't make enough money to take full advantage of the tax credit, some or all of the credit can be transferred to an eligible family member, Salgado says.

Determining when to use credits

When considering the best time to use tax credits, Salgado says Canadians need to weigh the present value of money.

"Within a family household, if you're going to have to wait five, six or four years before that person generates an income to make use of the credit, why not make use of the credit today as opposed to waiting?" he said.

Having more money in your pocket now can be beneficial because those funds can be used to invest or pay down debt sooner.

If an individual opts to wait, Salgado says the benefits of waiting until a future year to make the claim need to outweigh the benefits of having the funds sooner.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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