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 The Three Ds of Effective Tax Planning
While people are scrambling to get their taxes done for the
current year, they may not realize this time of year is also the best
time to develop a tax strategy for the upcoming season. Using the three
Ds of effective tax planning; deduct, defer and divide, people can reap
benefits next year by establishing a good plan ahead of time instead of
hoping to find more taxable deduction at the end of the following year.
Deduct: A deduction is a claim to reduce
taxable income. A deduction will reduce a tax bill by an amount equal to
the marginal tax rate. Common deductions are as follows:
- RRSP
contributions
- Pension
plan contributions
- Safety
deposit box fees
- Interest
expense
- Union/professional
dues
- Alimony/maintenance
payments
- Employment
expenses
- Moving
expenses
- Professional
fees
- Child care
expenses
Defer: A deferral strategy attempts to delay
when tax will be paid. Deferring tax means eliminating the tax this year,
but it will have to be paid eventually. Generally tax deferral has two
advantages: It is better to pay a dollar of tax tomorrow than it is to
pay a dollar of tax today; and tax deferral typically puts the control of
when to pay the tax in the hands of the taxpayer instead of in the hands
of the Canada Revenue Agency (CRA). The most common forms of tax deferral
for the average Canadian is RRSPs, RESPs and various investment income
strategies.
Divide: Dividing taxes (or income splitting)
implies taking an income and spreading it among numerous taxpayers. For
example, it is better to have two people (say a husband and wife) pay tax
on incomes of $35,000 each than one person pay tax on an income of
$70,000. Unfortunately, this cannot arbitrarily be decided as to who may
claim what amounts for income. There are, however, strategies to divide
income within the rules of the CRA:
- Contribute
to a spousal RRSP to help split income in retirement;
- Split CPP
retirement benefits with your spouse; Invest non-RRSP savings in the
lower income family members;
- Invest the
child tax benefit in your children's name;
- Contribute
to a registered education fund;
- Pay wages
to family members (through a business);
- Use
partnerships or corporations to earn business income;
- Use either
inter-vivo or testamentary trusts.
"Anyone
who believes that Canada's only two official languages are English and
French has never read the Income Tax Act."
Marc Denhez, lawyer and consultant
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