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Contents 1 Introduction 2 Do 3 Don't 4 Resources 5 Tax-Efficient Investing 6 References

Introduction

The Income Tax Act imposes taxes on the income of every individual resident in Canada. The Act is enormously complex but detailed knowledge is not required. The average person will be well served by knowing and taking advantage of some simple and common tax saving opportunities.

Do

• Avoid taxes: Profits from the sale of a principal residence, and up to $750,000 of capital gains from the sale of an active business you own, are tax free. Starting in 2009, adults can avoid income taxes on investment income in a TFSA.
• Defer taxes: Contribute to pension plans or an RRSP, and an RESP if you have children. Investment income and gains are not taxed until withdrawal, which allows investment returns to compound tax-free over long periods of time. Consider the incorporation of small businesses in order to use the deferral opportunties inherent in the special low tax rate available to CCPCs.
• Split income: Canada's tax system has progressively higher rates as you earn more, so having income taxed in the hands of lower income family members saves money. Consider employing your spouse or children if you have a business. Contribute to a spousal RRSP. Split your CPP entitlements^[1] and, since 2008, pension payments^[2]. Consider setting up a spousal testamentary trust. Income in a spousal testamentary trust can be taxed on a graduated separate basis from your spouse. ^[3]
• Generate tax-preferred investment income: Dividends from Canadian corporations and capital gains on the sale of investments get preferential tax treatment relative to earned income and interest. Earning $80,000 at a job in 2008 would cost an Ontario resident about $23,000 in income tax and CPP/EI premiums. The same income, half in dividends from Canadian public companies and half in capital gains, is liable for about $6,000.
• Keep the least tax-efficient securities (e.g. bonds and high yielding foreign equities) inside your RRSP/RRIF/TFSA and the most tax-efficient outside.

Don't

• Cheat on your income tax returns by falsifying your income or expenses.
• Buy an investment that is being touted more for its tax benefits than its returns.

Resources

If you want to estimate income taxes payable, there are a few online tax estimators available.

Tax-Efficient Investing

• Tax-Efficient Investing

References

1. ↑ Service Canada, "Credit Splitting", Viewed July 3, 2009
2. ↑ Service Canada, Sharing your retirement pension, Viewed July 3, 2009
3. ↑ GlobeAdvisor.com, Pitfalls of JTWROS Accounts--Scenario B