Wednesday, March 4, 2009

Tax Preparation is NOT tax planning

Here comes that dreaded tax filing deadline – and maybe a late night of tax preparation along with it. But don’t confuse your last minute tax prep dash with real tax planning.

Tax planning means taking the right financial steps throughout the year to reduce the taxes you pay. And the time to start is now – using strategies like these:

Keep a record. Use home finance or tax preparation software to track finances for tax purposes. If you don’t have a computer, use a good filing system.

Plan now to make your maximum RRSP contribution for 2009 and beyond. A Registered Retirement Savings Plan (RRSP) is the biggest tax break available to most Canadians. The sooner you get your cash into your RRSP, the longer it has to grow.

Add a spousal RRSP. Whether married or common-law, if one of you is likely to generate more income in retirement, the other should consider contributing to a spousal RRSP – a strategy that can equalize income streams during retirement and lower your combined income tax bill.

Initiate an investment strategy that takes taxation levels into account. Some types of investment income, such as capital gains and dividends, receive preferential tax treatment, while others, such as interest, are taxed at normal rates. Hold heavily taxed investments in an RRSP, where they will grow on a tax-deferred basis. You should also consider investing in a Tax-Free Savings Account that allows your after-tax investment to grow without further tax liability being incurred.

Invest child tax benefit payments in the child’s name. The income earned will then be taxable in the hands of the child, who may not have enough income to generate a tax bill.

Consider borrowing for business or investment purposes. The interest may be tax deductible.
Set aside money to make quarterly personal income tax payments on time. Lateness can result in penalties and interest. Installments are due the 15th of March, June, September and December.

Don’t get a tax refund. A large refund means you’ve loaned your money to the government interest-free. Request a reduction in taxes withheld at source.

If you expect a refund this year and are confident the same thing will happen next year, you can apply to have your employer reduce the amount of tax deducted from your paycheque.

When you were first hired, your employer had you complete a Personal Tax Credits Return form (TD1) that included all the deductions and credits you normally claim in a year. If your circumstances have changed since then, making you eligible for additional deductions (child care expenses or spousal maintenance, for example), your taxable income and your tax bill will be lower now. So reduce the amount withheld from your paycheque each month by filing a T-1213 form. (Available from your local CRA office or from the CRA Website,

Are you turning 71 in 2009? If so, you must wind up your RRSP by December 31. Be sure to investigate your retirement income options well in advance, otherwise you could end up paying a huge tax bill.

Planning to move to a province with a lower tax rate? Make it by the end of the 2009 and you’ll pay taxes for the entire year to the province in which you live on December 31.

Tax planning reduces the taxes you pay. Financial planning makes it possible to achieve your life and retirement dreams. Discuss these and other steps with your professional advisor.

John Scholl B. Mathematics, CGA,
Wealth Management & Financial Planning
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