Doesn’t everyone think about taxes at the beginning of the year?
Tax planning must include four D strategies – deduct, defer, divide and deposit.
Since everyone’s situation is very different, consult with your advisors, bookkeeper and accountant. Government tax legislation changes every year, so we need to stay on top of our tax strategies.
Some strategies bring immediate benefits. But often, the benefits of tax planning take time to see the rewards.
A deduction is a claim to reduce your taxable income. Let’s take an RRSP contribution. You contribute to your RRSP and claim the amount on your tax return. This reduces the amount of tax you pay.
Other deductions include Pension Plan Contributions, Union/Professional Dues, Employment Expenses, Moving Expenses, and Child Care.
Be sure you or your Bookkeeper is recording all your deductions.
This strategy is to try to defer having to pay tax now into future years.
Deferring means you may eliminate a tax this year but you will eventually have to pay the tax. Tax deferrals have two main advantages.
An RRSP is a type of deferral, as well as a deduction. The deferral part is that when you take the money as income from your RRSP or RRIF, you will pay tax. You have hopefully deferred the tax until when you are in a lower tax bracket and need retirement income
This is often called ‘income splitting’. Take one income and spread it among a number of different taxpayers. An example of this is a Spousal RRSP. If there is one person earning and paying tax on $70,000 versus two people earning and paying tax on $35,000, you would rather be the couple earning $35,000 each. A Spousal RRSP can help with this.
Three other strategies are splitting CPP retirement benefits, Pension Splitting for retired couples and investing in the name of the lower income spouse.
There are two effective tax strategies for depositing money to save tax – TFSAs and Life Insurance policies.
If you deposit money into a TFSA, the investment growth on the money is tax-free. The 2021 TFSA maximum deposit is $6,000. This strategy is definitely worth taking advantage of each and every year. It is simple and straight forward. Would you rather pay tax on your investment growth or not?
Certain life insurance policies provide an investment account to deposit money and allow tax-free growth. There are maximum amounts that you can deposit, however the room is generous.
To implement this, you apply for a life insurance policy (for example whole life or universal life). Once approved, the insurance company gives you a range of how much you can deposit. You can pre-plan your deposits and apply for an amount of life insurance accordingly. There is a large selection of investment funds to choose from. If you leave the investment funds until death, this account value is paid out to your beneficiaries tax-free, along with the life insurance amount. A win-win tax planning strategy.
If you are confused with all the different tax rules, then seek help from a qualified Advisor, Bookkeeper or Accountant to help you with effective tax planning.
Good tax planning far exceeds good investment planning. With every budget, taxation gets more and more complicated. It is wise to understand the basic concepts of tax deductions, tax deferrals, income splitting and where to deposit your money to gain the best tax advantages.
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