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November 4, 2014
If you want to save money on taxes, you don’t need to master every esoteric trick or loophole in the tax code. In most cases, it’s really just a matter of organization and the good news is that it’s relatively straightforward.
Start your year off by contributing to your Registered Retirement Savings Plan (RRSP). Doing so lowers your taxable income and sets the stage for a well-funded retirement.
Many people wait until later in the year or even February of the following year to make their contributions, but if you’re in a position to make a contribution, there’s no reason to delay it.
Follow that up with contributions to your Registered Retirement Income Fund (RRIF), Tax Free Savings Account (TFSA), and other registered funds if possible. These accounts will protect your investments against taxes, and allow you to save funds efficiently for the future.
If you’re married, there are a number of ways you can avoid taxes by planning together.
For interest-bearing accounts, make sure that they’re held in the name of the spouse with the lower income. You can typically do this by making sure all household expenses are taken care of by the higher-paid partner.
Because the interest you earn is taxed at the same rate as other income, being in the lower tax-bracket means paying less tax on the same amount of interest.
Pension income from an RRSP can also be split in this way. Move up to 50 percent of this income to the spouse in the lower tax bracket and you can avoid paying the higher tax rate.
If you’re contributing to an RRSP, contributions should be prioritized for the person in the higher tax bracket. This will save on taxes by lowering this spouse’s taxable income â€” and subsequently the tax burden of the entire family.
If one of you earns a much higher income than the other, consider a spousal RRSP. Under this arrangement, the spouse in the higher tax bracket can make a contribution in the name of the other spouse. This will reduce taxable income for the spouse with the higher income while allocating the assets to the other spouse.
Giving money away not only helps make Canada a better place, but it can help you save money on taxes.
If you give over 200 dollars to a charity, you can deduct 29 percent of the donated amount. Under that number, it’s 15 percent.
You can continue deducting all or part of your donations up to 75 percent of your net income, with capital property gifts deductible up to 100 percent. Deductions on cultural or ecological gifts can be made without limit.
In addition to this, you may be eligible for other tax credits, depending on your province. In Ontario, it’s been possible to get 40 percent of your donation back as a tax credit on provincial taxes.
If for some reason, you don’t want to take the deduction in the year you made a donation, you can carry it forward up to 5 tax years into the future.
Charities are another area where spouses can work together.
Assuming your combined giving is above 200 dollars, merging your gifts with your spouse means that more of your charitable giving will be measured at the 29 percent rate. Consider, then, giving in the name of the spouse with the higher income.
When making capital gifts, like bonds, stocks, or mutual funds, make sure to donate them as a physical gift and not liquidate them first. This will allow you to avoid the taxes on capital gains that you would otherwise have to pay.
If you’re retired, take money out of your non-registered accounts before your tax-sheltered registered accounts.
This will allow them to grow for a longer period of time without being reduced by taxes. Once you turn 71, though, you will need to start converting your registered accounts into income.
You can also share the income from the Canada Pension Plan (CPA) with your spouse, with the outcome being similar to splitting income on a registered pension.
If you have children, there are a few tactics for splitting income with them, as well.
You can, for example, hire them to work for you if you have a business a tactic that also works for a spouse. They will need to be doing legitimate work, however.
You can also avoid the capital gains on some investments by gifting them to minor children.
Finally, by making contributions to a Registered Education Savings Plans (RESP), you can reduce your family’s overall tax liability when your children withdraw funds.
Though your children will have to pay some income taxes, it won’t be as much as you would have to pay, since they will likely be in a lower tax bracket.
In the meantime, RESPs act as tax-deferred accounts that also give your children access to certain government grants.
Life insurance, while sometimes unpleasant to contemplate, can also serve as a great way to save on taxes.
A life insurance policy can actually act as a sheltered account, with the funds inside accumulating value without being taxed.
You also donâ’t have to wait until you die to take advantage of these accumulated funds. There are two key ways you can capitalize on the value of your policy.
First, you can withdraw money directly from the life insurance policy. If you do this, though, you will likely have to pay some taxes on some but not all of the fund you’ve withdrawn.
You can also use the value of your life insurance policy as collateral for securing a loan from a bank. The amount you receive is not counted as income, and so won’t be taxed as such.
Of course, a life insurance policy can also used to pass on wealth to your children or other family members. The benefits they receive will be tax-free.
Life insurance, in fact, can serve as a surprisingly flexible tool in helping you avoid taxes all while helping you meet the contingencies associated with the end of life.
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