Each year Canadians are required by law to file taxes calculated and payable by April 30th based on the income accumulated from all sources the previous year. Gathering historical income from the past year is known as tax preparation. There are tax planning strategies that can help you save for the future.
“The hardest thing to understand is income tax” Albert Einstein
What is Tax Planning?
Tax planning is developing both short-term and long-term strategies to minimize tax owing in the future. The goal is to give individuals or couples the opportunity to implement these strategies for planning into the future;
- Reduce tax owing
- Increase net income
Tax planning is that extra step to help plan for the future towards an ultimate destination of financial freedom. A Certified Professional Accountant (CPA) expertise helps individuals and couples develop a strategy that works for their needs.
Tax Planning Three D’s
Tax planning strategies include three sections; deduct, defer, and divide. In order for your tax planning strategy to function at full capacity, it is important to understand how all three can work for you individually and together.
The purpose of any deduction is to reduce your taxable income. Deductions help to reduce your tax bill and lower your marginal tax rate. A few common deductions include;
- Pension plan contributions
- Interest expense
- Union/professional dues
- Alimony/maintenance payments
- Employment expenses
- Moving expenses
- Professional fees
- Child care expenses
Deferral strategy is to postpone paying tax into future years. This means you might be able to eliminate paying taxes in the current year but eventually pay tax in later years. Defer tax strategy has two advantages;
- Hold off paying taxes till a later date
- The control is with the tax payer instead of Canada Revenue Agency (CRA)
The most common forms of deferred tax are investment income strategies. Most well known are Registered Retirement Savings Plan (RRSP) and Registered Educational Savings Plan (RESP).
More commonly known as income splitting, the strategy to divide taxes provides the ability to spread income among a number of individuals. There are several strategies tax payers take advantage of splitting income and stay within the CRA rules;
- Spousal RRSP help future retirement plans
- Splitting Canada Pension Plan (CPP) spousal retirement benefits
- Pension Splitting benefits for retired couples
- Invest child tax benefits for your children
- RESP contributions
- Paying reasonable wages to family members from a business based on their contribution to the business
- Inter-vivo or testamentary trusts
- Partnership or corporation business income earned
A good strategic tax planning goal is to develop future financial freedom which can be more beneficial then investment planning. Make your money work for you by understand the basic concepts of tax deductions, tax deferred, and dividing by income splitting. To learn more how tax planning may help your financial future contact Banka & Company, CPA today. Click here to visit our Tax Planning Services