10 February, 2021 Total Client Experience

Paul’s “Do’s” and “Do Nots” of Tax Planning

Paul’s “Do’s” and “Do Nots” of Tax Planning

Are you Prepared and Ready for Tax Season?

It’s that time of year- gathering receipts and waiting for tax documents to arrive in the mail, so we can file our tax refund before the end of April. Are you ready for it this year? Hopefully my list of Do’s and Do Not’s will assist your better prepare.

According to the Fraser Institute’s “The Canadian Consumer Tax Index, 2016 Edition”.

1

From 1961 to 2015, all forms of tax have increased by 1,939%, shelter by 1,425%, clothing by 746%, and food by 645%.

2

The 1,939% increase in taxes has greatly outpaced the 706% increase in the Consumer Price Index.

3

The average Canadian family earns $80,593 and spends 42.4% on all forms of tax vs. only 37.6% on food, shelter, and clothing combined.

 

Those whose family income is higher than the average will pay a greater, (sometimes much greater), percentage to tax.

Those whose family income is higher than the average will pay a greater [and sometimes much greater] percentage to tax.

With tax statistics like this, one would think that most Canadians would be doing almost anything to reduce their hefty tax bills. Unfortunately, many put off serious tax planning for another day that often never comes.

To assist and guide your tax strategy below is my Do’s and Do Nots of tax planning. 

Don’t Do This!

1

Expect the government to help you save taxes.

2

Procrastinate about tax planning until the last minute: it's usually too late.

3

Think that having an accountant do your taxes is tax planning; it is tax preparation.

4

Miss maximizing your RRSP when you are in a high tax bracket.

5

Miss maximizing your Canada education savings grants (CESG).

6

Have non-deductible debt (like a mortgage) while owning a non-registered investment portfolio.

7

Invest your TFSA into low yielding interest accounts while investing for higher returns in a non-registered portfolio.

8

Generate dividends from US companies inside a TFSA.

9

Believe that there is little you can do to reduce your taxes.

10

Wait until you are either close to, or already, retired to plan for tax-efficient retirement income. It’s often too expensive (pay tax on realized gains) to change.

11

Consider hope as an effective tax reduction strategy.

 

Do This!

1

Understand the difference between average and marginal tax rates & know what your marginal rate is.

2

Understand how different income is taxed at your marginal tax bracket [i.e. interest, eligible dividends, capital gains, net rental income].

3

Understand that it is almost always better to defer tax vs. paying it now.

4

Split income whenever possible using spousal RRSP’s, spouse loans, transferring capital losses to spouses and family trusts.

5

Understand that tax planning is integrated with your retirement, investments and estate plans and should be dealt with together.

6

Maximize RRSP (or Individual Pension Plans for business owners) contributions every year while in high tax brackets.

7

Plan for a tax-efficient estate. That is where the biggest tax savings can often be found.

8

Plan well ahead of time to structure your financial affairs to save tax just like high net worth individuals do.

9

Seek the guidance of an experienced Advisor who is well-versed in tax reduction strategies.

 

For those who may feel it’s too late to start tax planning or are just procrastinating just think of the old Chinese proverb “The best time to plant the tree was 20 years ago, the second-best time is now”.