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Keep more of what you earn

There's no tax on smart thinking. Yet.

It's no secret we pay a significant amount in taxes. While we all recognize the need to pay our fair share, there's no need to pay more!

Here in Canada, the more you earn, the higher your tax rate. It seems the moment one tax break is proudly announced, another loophole is quietly stitched shut. The average Canadian now pays half his or her income in some form of tax, while the highest earners can pay as much as 75%! No matter what you earn, some serious tax planning is necessary to try and reduce your taxable income. These tips can point you in the right direction.

Maximize your deductions and tax credits.

Check last year's tax return to make sure you won't miss out on any deductions and credits this year. A deduction allows you to subtract an expense and lowers your overall taxable income. A tax credit is a direct reduction of the actual tax you pay, no matter what your income is. So a $100 credit means you keep $100 in your pocket.

Minimize your payroll tax deductions.

Did you get a big tax refund last year? Nice, but it means you paid too much and gave the government a tax-free loan instead of keeping the cash and investing it to your benefit. If you expect another large refund, ask your employer to reduce the amount of tax deducted from your paycheque, then invest the extra money as you earn it.

Use all your tax shelters.

There's no need for a numbered Swiss bank account when you can use two excellent tax shelters we have available right here at home: RRSPs (Registered Retirement Savings Plans) and TFSAs (Tax-Free Savings Accounts). Before you put money elsewhere, make sure you consider contributing here, especially in an RRSP since it has the greatest tax benefits. Check last year's tax return for any unused amounts from your RRSP or TFSA; they can be carried forward and used this year. Loans for the purpose of investing are tax deductible, so depending on your situation, it may make sense for you to borrow the money to contribute. Be sure to also participate in any employer-sponsored retirement plans.

Explore income splitting.

If you are in a high tax bracket, consider transferring a portion of your income to someone in a lower tax bracket. Normally it's your spouse, but it could also be your children. If the difference between the two tax rates is 20%, your family will save $200 for every $1,000 transferred to the lower rate family member.

There are many legal ways to share your income. Use the lower income spouse's money for investing, and reserve the higher income for paying the bills. That way, any income earned from the investments is taxed at the lower rate. Make a spousal loan or set up a spousal RRSP. The higher earning spouse doesn't have to pay taxes on their contribution and when the money is withdrawn, it will be taxed in the lower income spouse's hands at a lower rate, even if it's taken out before retirement.

In some cases you may want to consider more complex strategies, such as setting up a family trust. Ask your financial advisor or accountant for more information.

Consider life insurance plans.

Thanks to special laws governing the life insurance industry, many Canadians are investing in special Life Insurance Tax Shelter plans that allow either tax-deferred or tax-free returns on their invested dollars. For example, permanent life insurance is a single product that provides long-term insurance protection while the policy's cash value can build reserves for long-term goals.

You maintain the flexibility to adjust your monthly premiums and increase the death benefit, while the cash value of your policy can grow within the tax-sheltered investments of your choosing. Your financial and insurance advisors can tell you more.

Make your investment portfolio tax-efficient.

Many investors max out their RRSP and TFSA contributions, but use these registered shelters wisely by keeping their most heavily taxed investments such as bonds and GICs inside them and keeping more lightly taxed vehicles outside, like the capital gains on stocks and dividends from Canadian companies.

Invest in your kids.

Gifts of cash to your children, minors or adults, can result in significant tax savings if invested in their name. Although dividends and interest earned are attributed to you and taxed at your rate, capital gains are not. They're taxed at your child's (presumably) lower tax rate.

You can also contribute up to $5,000 a year to your adult child's TFSA. They won't have to pay any tax when they withdraw it.

Setting up a Registered Education Savings Plan (RESP) for your kids lets you save in a couple of ways. Your contributions aren't tax deductible like an RRSP's, but the investment earnings do accumulate on a tax-deferred basis. The government will also kick in up to $500 a year in a Canada Education Savings Grant (CESG) – a nice way to get some of your tax dollars back.

Start a small business.

Running your own business allows you to write off a portion of your car, gas, home office, and utility expenses. It's not for everyone, but it is certainly worth considering.

Some of these suggestions are fairly simple, but many more are quite complex. It's wise to talk to your financial advisor, who can also set you up with tax professionals if need be.

†Insurance services provided by BlueShore Wealth.