What is tax planning?
It means using all the strategies authorized by the laws of your province to reduce the taxes you must pay on your investment income.
Who is tax planning for?
If you have some wealth or own your own business (large or small), tax planning is for you.
4 basic principles of tax planning
Deduct as much as possible
To reduce your tax bill, be sure to take advantage of all the tax credits and deductions to which you are entitled.
If you haven’t contributed the maximum to your RRSP in previous years or if you earned income last year, you have unused contribution room. Compare your current tax rate to future years and consider making the maximum contribution to your RRSP.
Contributing to your RRSP now can save you money on taxes. Indeed, when you retire, you will probably be in a lower tax bracket than you were when you were working. Your contributions will be taxed at a higher rate than the money you withdraw from your RRSP later.
You get the double benefit of tax deferral and tax savings. You may also want to borrow money to contribute. Your IG Advisor can help you maximize your contributions and take advantage of all the benefits.
There are two ways to contribute to an RRSP. You can either contribute to your own plan or to a spousal plan for your spouse or common-law partner. In both cases, you benefit from tax deductions, but the person who pays the tax on the withdrawals is not the same in both cases.
Generally, your spouse or common-law partner will be taxed on amounts withdrawn from a spousal RRSP, but there are some exceptions. If you have not contributed to a spousal RRSP in the year of withdrawal or the two preceding calendar years, you will not be taxed. But if you have contributed, then you will be taxed because of the attribution rules.
If you plan to contribute to a spousal RRSP, make your contribution before the end of the year. This will reduce the possibility that the attribution rules will apply to future withdrawals. If your spouse died this year, you can still make a final spousal RRSP contribution if the deceased had unused RRSP contribution room. The contribution can be deducted from income on your spouse’s tax return.
Your IG Consultant can help you understand your options for withdrawing money from your RRIF. For example, you can choose to withdraw money based on your spouse’s age. This will help reduce the taxable amount that must be included in income.
The retirement income tax credit could allow you to receive your first $2,000 of retirement income without having to pay tax on it. The amount of the credit may vary depending on the province in which you live. If you have eligible retirement income, you may be able to use certain planning strategies, such as splitting your pension income with your spouse or common-law partner.
Here are some federal tax credits you can’t get your money back for:
Medical expenses (TIP: Combine all family expenses on the tax return of the lower-income spouse)
Donations (TIP: combine your donations with those of your spouse or carry them forward for up to 5 years)
Including capital gains and losses in your tax planning is a good idea. This will help you pay less tax when the time comes.
What happens with capital losses?
When you sell an investment for less than you paid, you incur a capital loss. This is important to understand from a tax point of view. If you sell non-registered investments that made $200 and own other ones that lost $50, by selling those, the $50 capital loss will reduce the amount of tax owed on the gain others. The capital gain that will be taxed is $75 ($200 – $50)/2).
No capital gain
You will only be able to deduct capital losses on your gains of the same nature. However, upon the death of a taxpayer, your liquidators will be able to claim this deduction against any type of income in the year of death and the preceding one. You can also apply these losses against the capital gains of the three years before the death via the issuance of an amended tax report.
Here are some tips for paying less tax:
For example, if the value of your cottage increases more quickly than that of your house, you could sell it without paying taxes. But this exemption can only be granted once, so you will have to pay taxes when you sell your house.
If you donate your investments to charity, you won’t have to pay any capital gains tax. This is better than selling the investments and then donating cash because you would have to pay taxes on the money you earned from the sale.