Year End Tax Planning
Tax planning is a year round activity. One that can have great benefits if you spend a little time before the end of the year to put things in order for yourself. Too often, it's April before we start to think of what we need to do and by then, as we all know, it's too late.
In order to minimize the taxes you pay you must structure your tax and financial matters so that you can benefit from the tax rules.
Outlined below are a few common strategies to increase your tax refund.
Invest in an RRSP
There are many good reasons to use RRSPs. First, you get an immediate tax deduction, which pays back the tax on the money you contribute. Second, and more importantly, the income generated within the RRSP continues to grow without attracting taxes. This tax free compounding will make a huge difference in the value of your RRSP over time.
Consider investments that provide significant tax benefits
One popular investment vehicle is Labour Sponsored Venture Capital Corporations. The LSVCC provides investors with a 15% federal tax credit and an additional 15% provincial tax credit. LSVCCs also have the benefit of being an eligible investment for RRSP purposes. As a result, a $5,000 LSVCC investment, put into your RRSP, can cost you as little as $2,000 after all the tax credits and deductions are factored in.
You can also take advantage of the LSVCC tax credits by purchasing LSVCCs from within your RRSP. You would not get a new credit for the RRSP (as it is already in the RRSP) but, you still get the combined 30% federal and provincial tax credits. With this strategy, by transferring $5,000 of existing RRSPs into an LSVCC you get $1,500 in tax credits.
Make use of your child's tuition and education credits
Students can provide valuable tax credits for supporting parents. Too often, the tuition and education credits are not efficiently claimed between the supporting parent and the student. To maximize the tax benefits, students must file an income tax return, taking into account scholarship and moving expense deductions. Up to $5,000 can then be transferred from the student to a parent.
Make charitable donations by December 31
This one has the benefit of helping a good cause of your choice and saving tax at the same time. It’s a two-tier credit. Your first $200 of charitable donations qualifies for approximately 22% in tax credits. After $200, you get combined benefits of about 44%. If you and your spouse donate separately, combine your receipts and claim all donations on one return to maximize the benefit.
Get money for nothing
If you have kids who are over the age of 19, make certain they file a tax return. They may be eligible for the basic GST credit and the provincial sales tax credit.
Deduct all interest possible
This one is often missed by individual tax filers. Interest is deductible when money has been borrowed for business or investment purposes. For example, interest charged on Canada Savings Bond payroll purchase plans is fully deductible.
Claim medical expenses on the lower-income return
You are entitled to claim medical expenses over a certain threshold, which is 3% of net income, or $1,755 for the tax year 2003, whichever is less. By claiming the expenses on the return of the lower-income spouse, the credit available will be increased.
by Steve Watson MA, CFP, FMA
Working Enterprises Tax Services Ltd.