Tax Planning Review

Most people know ways to reduce taxes – this article provides a general overview of the common ways to put more money in your pocket.

 Reduce Tax Withholding On Employment Earnings

If you normally receive a large refund, adjust the TD1 form from your employer to have less tax taken off. You can also file form T1213 with the CRA and, if approved, have less tax deducted by your employer. This form covers things such as RRSP contributions, child care expenses, support payments, employment expenses and charitable donations

Contribute to an RRSP

RRSP contributions are deductible. RRSP contribution can also increase refundable tax credits like the Child Tax Benefit, which is based on family net income. Money inside the RRSP earns income tax free until you take it out, which is usually at retirement and hopefully at a lower tax rate

Contribute to a Spousal RRSP

Contribute to a spousal RRSP when it makes sense to. For example, you are the higher income earner and have a company pension plan and your spouse does not. If so, contribute to your spouse's RRSP (up to your own RRSP limit). You get the tax deduction and when withdrawal’s are made, they get taxed in your spouse’s hands (and probably at a lower tax rate)

Split income with family members

The higher income spouse should pay all the household expenses and the lower income spouse should use their income to investment. Then the investment income will be taxed at the lower income spouse’s rate.

Hire your spouse and children as employees. As long as the wages paid for services performed are reasonable, they will be taxed in their hands and your business will get the deduction

Split Pension income and the CPP between you and your spouse

If your marginal tax rate is higher than your spouse and you receive pension income and CPP benefits, you can choose to split the payments between you and your spouse

Child Care Benefits

If you receive this, invest it in the child’s name. Any income will be taxed in his or her name and this is usually at a lower rate than yours

Investments get taxes at different rates

Interest income and foreign income is taxes at the highest rate because it is considered regular income. Canadian dividend income is given a more favourable treatment because of the dividend tax credit. Capital gains receive the most preferential tax treatment because 1/2 of the gain is tax-exempt.

These general tax planning tips are meant to be used as a guide only. The tax rules are complex and all the details you need to be aware of cannot be reproduced in this limited space.