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Do You Pay Too Much Tax?

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I am facilitating an information session for ESL students about taxes; why we pay them and how to fill out simple tax forms. So with income taxes on my mind and given the time of year, I thought a post would be appropriate.

 

Why everyone should pay their fair share.

Taxes are important to our country; they help pay for health care, education, roads, and so much more! I know a lot of our money is wasted, but a lot is put to good use. By paying your fair share you help make Canada a better place to live. Notice I said fair share, wonder what you can do to make sure you only pay your fair share?

 

Tax saving strategies:

There are many strategies you can use to minimize your tax bill and thus pay only your fair share. Most of these will provide tax savings now, some are more long-term. Here are just a few ideas:

 

Invest in RRSPs where it makes sense. This provides a tax break now, but you will have to pay tax later on withdrawals, so don’t let your RRSP get too big. You could end up paying more tax than you saved

 

Give to charity. By giving to charity you get a tax credit. Click here to use the charitable giving calculator and see how much you can save in taxes.

 

Take a capital loss – do not buy back the same investment within 30 days though! If you have investments that have lost money, consider taking a tax loss, this does not mean you get out of investing or are running scared, it could mean you are just cleaning up your portfolio.

 

Get income from capital gains or dividends instead of interest or foreign income on your investments. In Canada the government encourages us to invest in Canadian companies by taxing capital gains and dividends at a lower rate than employment income or interest income.

 

Sell investments that have capital gains. If you have investments that have done quite well and are perhaps no longer suitable, consider selling them and taking your gain, pay the taxes on it and start over with a more suitable investment. This works very well if you do have losses. If you do not have losses you may not save taxes today, but could in the future.

 

Contribute to TFSA for tax free growth. Make use of your Tax Free Savings Account, it is the best thing the government has done for Canadians in a long time. Please note, that you can invest in your TFSA, not just save. For business people or those with smaller incomes, this may be better for you than RRSPs. You don’t get a tax deduction today, but you wont have to pay taxes on your money later either.

 

RESPs and RDSPs allow tax deferred growth and get incentives, if they are appropriate for you, make full us of them. Registered Education and Disability Savings plans let you invest your money and receive grants/bonds from the government and get tax deferred growth. When you take money out, you only pay taxes on the growth. The incentives for these programs alone are great reasons to use them. The Disability Savings plan especially has VERY good grants/bonds.

 

Consider using Corporate Class funds for income, especially in retirement. The most tax efficient income is return of capital. With corporate class mutual funds you can get years of income and pay little or no taxes and possibly avoid Old Age Security clawbacks. There does come a time when your income is taxed as capital gains, but capital gains are taxed at a lower rate than other types of income.

 

Some or all of these strategies can help reduce your tax bill. I have only very briefly touched on each subject as they are far too complicated to cover in a post. Also, there are many more strategies available. So, talk to an advisor who understands these things. Not all do! Find out which strategies will work for you and put them to use.

 

If you wish, contact me at 250-847-4686 or cathy.stanton@manulifesecurities.ca and I will be happy to explain in more detail. You might be pleasantly surprised at what can be done.

 

As with all tax related information, you may want to also discuss with your accountant.