We all know that governments throughout the developed world are taking more and more of our earnings in the form of taxes of various sorts. In Canada we do live a good quality of life, and the taxes we pay help to make our country one of the best to live in. However, we don’t need to give them more than is necessary.
There are not a lot of ways to save taxes, but we do still have a few to draw on. Here is a brief summary of some strategies that are available.
RRSPs – this is an obvious one that everyone has heard of. RRSPs reduce your taxable income in the year they are deposited, and allow your investments to grow tax free until you withdraw them. They are most beneficial for people who expect to be in a lower income tax bracket after retirement than they are during their working lives. They are not for everyone at every point in their lives however. So get professional advice.
TFSAs – these are very useful for a great many people. Although you do not get a tax deduction when you make a deposit, you never have to pay tax on any growth or on the withdrawals – even if your investment doubles, triples or more in value over time.
Interest Deductions – If you have borrowed money to invest (in real estate, stocks, mutual funds, or a business) be sure to track the interest separately from personal borrowing. Interest on investments is tax deductible. Interest on personal debt is not. So pay off your personal debt first.
Investment Income – Interest is the highest taxed investment income, with dividends coming in at number two, and capital gains being preferred (only half of capital gains are taxed at present). So, where possible, keep your highest taxed interest income inside a tax shelter like your RRSP, and keep the capital gains investments outside. There are tax preferred Corporate Class investment options to further reduce the tax on your investment income. Ask your advisor about these.
Advisory fees on larger non-registered investment accounts can be tax deductible depending on the structure of your advisory agreement. Advisory fees are NOT tax deductible for tax sheltered accounts like RRSPs or TFSAs. Talk to your advisor to find out if this is a suitable option for you.
Timing your income – deferring income until years you will have a lower income can reduce your overall tax bill.
Now that your taxes are filed and are still top of mind, it is a good time to visit your financial advisor to ensure your tax planning is optimized.