Ten tax tips to consider
While not many people look forward to tax time (except maybe accountants and financial analysts), taxes are a fact of life. Here are a few principles to keep in mind to minimize your tax hit. They may not affect your current return; however, they can help in years to come.
Be sure to file your personal income tax before the deadline – to find out the current tax return deadline, visit the Canada Revenue Agency web site at www.cra-arc.gc.ca.
- Borrow to invest if you have to borrow at all
Today, almost everyone is carrying some type of debt, whether it be a credit card, a loan, mortgage or line of credit. Debt can, in a small way, help to reduce your tax bill if you incur the right type. A loan for the purpose of investing is tax deductible. The interest on all the other things you buy via credit is not. From a tax perspective, you are better off using cash or savings for these discretionary purchases and then borrowing to invest rather than the other way around. As far as your personal finances go, the less debt the better.
- RRSP loss provisions
The federal government recently made a change in the rules for taxing an RRSP or RRIF after the plan holder's death. The change concerns what happens if the plan loses money while waiting to be distributed. Losses can be carried back to reduce the plan's taxable value at the date of death, saving the estate money. This applies to RRSP/RRIF distributions starting in 2009.
- TFSA reminder
Don't forget about your tax-free savings account (TFSA). The TFSA contribution limit for 2016 is $5,500. Now in its eighth year, the total contribution allowed is $46,500 ($5,000 for each of the first four years, $10,000 in 2015 plus $5,500 for each of 2013, 2014 & 2015). If you withdrew money last year, you can replace it without affecting this limit.
- Taxes and investments
Some investments – such as stocks – enjoy preferential tax breaks on dividends and capital gains, whereas other fixed-income investments don't. Depending on your tax bill and the rate of inflation, holding your money in fixed-income investments that are exposed to tax may actually cost you money. If you are holding a tax-protected retirement portfolio and an income portfolio, consider keeping a smaller percentage of your fixed-income investments in the exposed portfolio.
- Spousal privileges
If there is a large gap between you and your spouse's income, consider splitting your income or contributing to his/her retirement account to help reduce your tax bill. Spousal tax returns are always filed separately; however, when tax returns are prepared using personal income tax return software (e.g., Quick Tax), they will give the option of "coupling" the preparation of both returns. The returns are still printed and filed separately, but the software will usually highlight ways in which taxes may be reduced. Speak with a tax expert for more complex spousal tax considerations.
- Prepare for your children's future
If you have children, consider an RESP for their education. Investments will grow tax-free, plus you can receive up to an additional $500 annually per child through the Canada Education Savings Grant (to a maximum of $7,200).
- Start a business
Running your own business allows you to write off a portion of your car, gas, home office, and utilities. While it is true that a side business will help you reduce your tax bill, it is not for everyone. Obviously, creating a business that loses money will hurt your overall financial situation more than paying taxes does. You can only post three years of consecutive losses as a small business before the Canada Revenue Agency shuts the door. If you have a business plan that you intend to profit from, go for it. If not, look for another strategy.
- Keep detailed records
The tax code allows for a certain amount of back-filing in specific situations or when there has been a change to the rules. For example, if you have been working on a side project that creates income in the future, you may not be able to claim all the write-offs as you incur them. By keeping detailed records, you will be able to back-file and protect more of the income by claiming the proper retroactive deductions.
- Re-invest your return
Once you have filed and perhaps received a sizeable return, try and avoid the temptation to go on a spending spree, and use the money for practical purposes. Some prudent options include paying down high-interest debt, getting a jumpstart on next year's RRSP contribution, topping up your TFSA, or starting an emergency savings fund or education fund. But don't sacrifice your lifestyle for your savings. Set aside a portion of your refund (but no more than a third) to spend on something you want. That's your reward for being willing to save the rest of it.
- Find the right accountant
Keeping track of what write-offs apply to your situation can be difficult. For most people, finding the right accountant is the most important step to reducing your taxes. Look for an accountant through friends and colleagues who have similar tax needs as your own. Most importantly, keep up-to-date with your tax situation and look for anything your accountant may not have thought of. The more you understand about your own tax situation and ways to improve it, the better prepared you will be to utilize your accountant fully.
A financial professional at BlueShore Financial is another expert you should talk to when it comes to your saving, investments and credit strategies. Find out more about our financial advisors today.