1. Contribute to an RRSP

It's not too late! To be eligible for the 2008 tax year, RRSP contributions must be made by March 1, 2009. All contributions are fully deductible and are not taxed until withdrawal. The contribution limit for 2008 was $20,000 minus adjustments related to membership in a registered pension plan or deferred profit sharing plan. For the 2009 calendar year the contribution limit will increase to $ 21,000.

2. Keep Receipts

Probably the number one reason individuals pay more taxes than they should is because they fail to keep receipts for expenditures made to earn income.

Sales or commissioned staff and the self-employed often provide tax advisors with insufficient source documents for purchases, or submit spreadsheet summaries suggesting that purchases are lower than normal. Failure to submit $2,000 worth of receipts when the taxpayer's tax rate is a low 23%, for example, adds $460 to the tax bill.

3. Cash in RRSPs

RRSP withdrawals are taxed when the funds are removed from the RRSP. If, as a single taxpayer, your taxable income from self-employment or employment is $50,000, the tax before non-refundable credits approximates $8,400 of federal tax plus provincial tax. Withdraw $10,000 from your RRSP in the same taxation year and the tax before non-refundable credits rises to federal tax of $10,600 plus provincial tax. The $10,000 withdrawal has actually cost $2,200 of federal tax plus provincial tax.

4. Keep Track of Kilometres Driven

Each year taxpayers are asked by the CRA to provide proof of the kilometres driven to earn income. In many instances the taxpayer is unable to provide documentation to establish the number of kilometres driven on business. If you are self-employed, keep a log of the kilometers travelled and the business purposes of your trips in order to create a supporting document for the expense. If you receive a set monthly car allowance, maintain a similar log to establish that the funds received are reasonable for the work done.

5. Interest Deductibility

Owner/managers borrow funds for a plethora of reasons. Whether the loan is for investments, capital assets, or everyday purchases made with charge cards, interest is usually deductible if the purpose of the loan is to earn income. To avoid controversy, ensure the loan is easily traceable to a specific purchase. For instance, if the taxpayer borrows $20,000 personally and purchases $20,000 worth of shares of XYZ Co. Ltd., the taxpayer should be able to produce documentation attesting to that fact. The deductibility of interest becomes problematic, however, in the case of a charge card used to purchase goods or obtain cash advances, if the same card is used for both personal and business purposes. Since it is difficult to differentiate personal and business expenses on the monthly statements, it is best to make business purchases with a card dedicated specifically for business expenses.

Taxpayers who borrow on house equity or finance their business with funds drawn from a personal mortgage should ensure the audit trail indicates the principal amount placed into the business. This record combined with the terms of the mortgage and the interest rate will allow the computation of interest expense deductible to the business.

6. Pay your Children and your Spouse

A spouse or other family members often work for self-employed individuals. Payment to family members working in the business is a legitimate form of expense, if the individual actually works and is paid a reasonable amount for the task performed. To avoid future problems with the CRA, it is prudent to have an employee/employer contract establishing the duties and responsibilities and the pay to be expected.

Employers should pay with a cheque to establish payment was made or, if cash is paid, the employee should sign a receipt for funds received. You may wish to ask your accountant whether a formalized payroll system should be established.

Income splitting within a business certainly saves personal income tax. Given that a couple needs $60,000 a year to live, an individual with a dependent spouse would pay combined federal and provincial (Ontario) taxes approximating $11,600. If each spouse earned $30,000 the combined income tax would approximate $9,015. This difference (based upon 2007 tax rates) establishes a tax savings of approximately $2,585. Provincial and territorial tax rates as applied to differing personal situations will dictate the actual savings. Nevertheless, it may be worthwhile for you to discuss the possibility of income splitting with your chartered accountant.

7. Purchase a Capital Asset before the End of the Year

If an asset is purchased before the end of the year, half of the capital cost allowance normally permitted in the year of purchase may be deducted. That is, a $5,000 asset with a tax write off rate of 30% would normally reduce taxable income by $1,500. In the year of purchase this would amount to only 15% or $750. Thus, if the asset is purchased near the end of the year, the business receives a write-off of $750 for the end of the first year and an additional $1275 in the year following. The taxpayer not only gains a $1,275 accelerated tax deduction advantage by purchasing in December, but also is able to claim the GST-ITC of $250 at the time of the December purchase (calculation assumes no PST on $5,000).

8. Investment Related Expenses

Taxpayers who invest through brokers may be charged fees for safekeeping, investment counsel, accounting and a myriad other services. Ensure all monthly and other statements are retained for presentation to your tax advisor at the end of the year. Statements provided by investment brokers can be confusing. If there is uncertainty as to whether service charges have been added call your broker for an explanation before the end of the year.

9. Claim Loss Carryovers

Many taxpayers have self-employed income in addition to a day job earning T4 income. Unfortunately, losses in the early stages of a new sole proprietorship are often a reality. Losses from self-employed businesses and property can, however, first be deducted from other income sources for the year. Many individuals are unaware that, to the extent they exceed other income in the year, their part-time business losses can be carried back three years and carried forward 20. It is not mandatory to apply non-capital losses carried forward simply because the year following the loss has taxable income. Thus, if you knew your T4 income was going to be higher two years from now, you could decide to defer application of the loss rather than apply it in year one. A word of caution regarding non-capital losses. Changes to the carry forward dates mean that non-capital losses incurred in taxation years that ended after March 22, 2004, and before 2006 can be carried forward for only 10 years; losses incurred during taxation years that ended before March 23, 2004 can be carried forward only seven years. So, for example, losses incurred in 2003 expire in 2010 and should therefore be used as soon as possible.

10. File T1-Adjustments

Many taxpayers discover additional deductions or expenses after filing their income tax but decide not to request an adjustment from the CRA. You may feel it is not worthwhile to request an adjustment for a $10 expense; keep in mind, however, that if the CRA unearths $100 that you have not reported they will reassess and add interest on the unpaid balance. Thus, if you discover expenses, union dues or other tax deductible items that were not submitted, do not hesitate to inform the CRA of the changes.

By providing full and correct information to your chartered accountant you ensure the deductions you are entitled to are maximized and your taxes payable are minimized.