While looking into tax credits you may be eligible for is an important step in planning for tax season, efficient tax planning starts with cash flow management. Consider two basic measures to channel your cash flow into tax savings: lowering your taxable income, and sharing the load.
Lowering your taxable income
There are many ways to lower your taxable income.
One of the most common methods, and one that benefits your long-term financial health, is contributing to your RRSP. The maximum amount you can contribute to your RRSP is 18% of your income—all tax-deductible. Getting as close to that as possible will help you now and in your retirement.
Another option is to put your money into a tax-free savings account (TFSA). You can contribute up to $5,500 a year, your investments will be protected from tax, and withdrawals are not taxed either.
You can use some life insurance policies as an essential safeguard when estate planning, and as a sound financial decision now. Permanent life insurance policies provide tax-sheltered savings, as money made within these policies is exempt from taxes.
Giving away your money to registered charities will make Canada a better place, and will also help you save money on taxes. The first $200 of donations is eligible for a 15% tax credit, and you get 29% for all donations beyond that.
And if you’ve never donated to a registered charity —or haven’t since 2007—you can receive an additional credit of up to 40% for up to $200 in cash donations and 54% over $200.
The other key cash-flow management technique for efficient tax savings is to plan with your family to spread your income, thereby lowering your tax bracket.
While only the person generating income can claim it, you can change the way you manage your cash flow through the year.
You should, for instance, prioritize RRSP contributions from the partner with the higher income. He or she can make spousal RRSP contributions to enhance the lower income partner’s retirement savings, and claim the contribution as a deduction.
Other ways to share the load involve splitting your pension income with your partner, paying your partner a salary if you own a business, and using the lower income partner’s money to invest and earn money in their (lower tax rate) hands.
If you have children, it is also possible to split some of your cash flow with them. You can hire them to work for you, or loan them money (ask a professional for the parameters that apply).
Furthermore, while investing money into an RESP for your child is not tax deductible, the money can grow as a tax-sheltered investment in your child’s future and education.
At SafeBridge Financial, we believe that managing your cash flow throughout the year is an essential element to efficient tax planning. Contact us today to find out more about how we can help you save on taxes.