The following article was contributed by Ottawa-based financial planner Rick Sutherland, CLU, CFP, FDS, R.F.P.
Everyday Tax Saving Strategies
In Canada we supplement our four seasons of weather with additional seasons to represent major money and tax saving events. We have just passed the “RRSP Season.” It’s the time of year when people who want to save a few dollars on their income taxes will stock a few dollars away in an approved Registered Retirement Savings Plan. We have now entered the “Tax Season.” This is the time of year when everyone has to reconcile his or her income and expenses with the federal government.
It’s too late to make tax-planning decisions that will have much of an impact on your 2006 tax return. Other than RRSP contributions, the time to do that was before December 31. You can however, begin making plans that will have an impact on the taxes you pay in 2007 and beyond.
Decisions to place money into a Registered Retirement Savings Plan, RRSP, will reduce your taxable income and possibly result in a tax refund or reduce the amount of tax owing. The RRSP has added benefits of tax deferral and tax sheltered growth. You can defer this income to a later date, possibly to a time when you are earning much less income and realize a huge tax saving. During the period of deferral your investment grows tax free or sheltered. The name of the RRSP game is immediate tax reduction, tax deferral and tax sheltered growth.
Another tax planning strategy is income splitting. This involves decisions that will shift income from a high-income person to a low-income person. Spousal RRSPs have been the obvious planning opportunity to shift retirement income to a lower income spouse or partner. The federal government announced last fall that pensioners, starting in 2007, could split up to 50% of pension income with their spouse. Due to age restrictions the viability of a spousal RRSP still warrants a close look.
Opening up “in-trust” accounts for minor children could have the effect of shifting income into the hands of your child. Capital gains are taxed in the hands of the child rather than the parent. Watch out though, as dividend and interest income will still be taxed in the hands of the parent.
Plan your retirement income carefully. It may be to your advantage to convert your RRSP into a Registered Retirement Income Fund, RRIF, early. The concept is to reduce the RRIF capital and therefore lower the mandatory RRIF payment in later years. This strategy could be helpful to preserve your ability to receive the Old Age Security benefit without the claw back. The current claw back begins at income levels above $63,511.
Tax planning strategies should not be seasonal but should be considered very carefully throughout the year. Speak to your financial planner to learn more about these and other tax planning strategies.
This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of FundEX Investments Inc. with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca. Website: http://www.invested-interest.ca/