Taxation

Investing and Taxes go hand in hand. Taxes are a major expense for every household. It is important to ‘pay the right amount’ of tax.

Taxes are also complex to understand. We suggest seeking the help of a professional at least once. We have seen many cases where people have forgotten to take advantage of tax reductions. Interpretation of rules applicable to a tax item can be very important and this where a professional can provide help. It is beyond the scope of this site to explain all the line items included in the tax form but we do request you to contact us and we will provide this assistance free. What we will be doing in this section is providing general guidelines in minimizing taxes using legal means.

There are 4 ways to minimize taxes. These strategies can be represented by 4 Ds: Deduction, Deferral, Distribute and Donate.

Deduction

This the best and most effective way of reducing taxes as it reduces your taxable income. The best example is an RRSP contribution. For example if a person is in the 40% tax bracket (most people) then a contribution of $1000 towards an RRSP results in a tax saving of $400.

Deferral

This method defers the payment of taxes to the future. It is also very effective way of reducing taxes since you can decide to pay taxes at a possiblylower rate in the future. The RRSP is an example here as well. If you contribute $1000 to an RRSP and then withdraw after turning 71. then hopefully your tax rate will be lower at that time then today. Growth in permanent insurance policies can be another example of tax deferral strategy. Growth in RESP plans can also be part of a Deferral strategy as withdrawals are taxed by the child’s tax rate.

Distribute

This is not an easy strategy to use for average person. For this strategy it is better you seek the help of a tax professional. This strategy uses transferring of items from a lower income person to a higher income person so that higher income person can minimize payment of taxes. A good example is charitable donations. Another example is Education expenses incurred by a child who is enrolled in post secondary education. There are number of such cases which only a professional should suggest. Contact us for free advice.

Donate

This strategy is for those people who have a good income or money to spare. The key thing to remember here is that first $200 reduces taxes by 15% and the next $200 by 29%. Therefore, if one is making a $200 donation every year, then it is better to deduct every other year. Also, it is better to help needy people rather than paying more taxes. In taxation there are 2 forms of deduction. One is called a refundable tax credit and the other is called a non-refundable tax credit. A refundable tax credit results in getting money back but a non-refundable can bring your taxes to zero but does not result in getting money back. Therefore, you should be careful in using tax reduction strategies as there is no advantage. Lets look at some very common items that one can use to reduce taxes.

Moving

When you move to take a job or move closer to a job then there are 2 important taxation factors. One, the place of work should be 40km or less and second your income must be generated from the new place of work. There are a number of items that qualify for this deduction and we are not going to list them here but the most important moving expenses pertain to food and transport. Check out if the simple method is beneficial or the actual method. You will be surprised that in most cases the simple method is better.

Medical

Pick the calendar year that will give you the greatest benefit. Also, check if it makes sense to use higher income earner or the lower income earner.

Education

If a child cannot utilize these credits then ask the child to transfer them to the parent if the parents are in a higher tax range. A child can carry forward unused credits but it will make more sense to reduce the parent’s taxes.

There are other areas like professional dues, care giver expenses, fitness expenses and public transit expenses that can be used to reduce taxes and you should check with a professional or contact us for free advice.

Analyzing taxes is the most important component of developing a comprehensive financial plan. Therefore understanding personal taxes is critical. We will be adding more information on this topic later. Keep checking this site. We believe that everyone can find some room for improvement in this area.

We should also add – do not think that CRA people are bad. If you think that you have a legitimate claim then put it in the form with a proper explanation. Let them make the decision. We have seen this personally.