Tax planning is about organizing your affairs to minimize (or reduce) your tax burden. Taxes are one of the biggest expenses to the Canadian investor. The Income Tax Act imposes taxes on the income of every individual resident in Canada. The Income Tax 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.
If you are a Canadian resident who earns income you are required to file a tax return. Filing a tax return is a one-time annual event. However, throughout the year you should take the time to consider the tax implications of your financial and investment decisions.
- Be aware of your marginal tax rate so that where possible, you can make effective financial decisions.
- 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 Tax Free Savings Account (TFSA).
- Defer taxes: Contribute to pension plans or a Registered Retirement Savings Plan (RRSP), and a Registered Education Savings Plan (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 opportunities inherent in the special low tax rate available to a Canadian controlled private corporation (CCPC).
- 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 Canada Pension Plan entitlements and, since 2008, pension payments. Consider setting up a spousal testamentary trust. Income in a spousal testamentary trust can be taxed on a graduated separate basis from your spouse.
- 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, Canada Pension Plan (CPP) and Employment Insurance (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/Registered Retirement Income Fund (RRIF)/TFSA and the most tax-efficient outside.
- File a Foreign Income Verification Statement, Form T1135 if holding over $100K in foreign investments.
- 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.
Key dates to remember
- Mar 15th - tax instalments due.
- Jun 15th - tax instalments due.
- Sep 15th - tax instalments due.
- Dec 15th - tax instalments due.
When a due date falls on a Saturday, a Sunday, or a holiday recognized by the Canada Revenue Agency, your payment is considered to be paid on time if they receive it or if it is postmarked on the next business day.
- Dec 24th, 2012 - final trade date for Canadian equities for settlement in 2012 tax year.
- Dec 26th, 2012 - final trade date for US equities for settlement in 2012 tax year.
- Dec 28th, 2012 - final trade date for Options for settlement in 2012 tax year.
Other CRA important dates
If you want to estimate income taxes payable, there are a few online tax estimators available.
The Chartered Accountants of Canada (CICA) has an annual publication, 'The Personal Tax Planning Guide 20xx-yy'. Each year, the CICA prints this helpful client guide so that firms can distribute copies to their clients in the early fall in preparation for the next tax season. Many accounting firms make this guide available not only to their clients, but include links to an electronic copy of their website. Similar guides are also available from provincial Certified General Accountant associations, such as Certified General Accountants of Ontario - Information Booklets and Brochures.
- Service Canada, "Credit Splitting", Viewed July 3, 2009
- Service Canada, Sharing your retirement pension, Viewed July 3, 2009
- GlobeAdvisor.com, Pitfalls of JTWROS Accounts--Scenario B