5 Easy Steps to Reduce your Tax Bill
Peter Katevatis - Jan 28, 2015
There are only two ways to increase your net worth - increase your assets or decrease your liabilities. It is really that simple. If your assets grow (income, dividends, interest, prices increase, etc.) your net worth grows. Also, if you reduce yo
There are only two ways to increase your net worth - increase your assets or decrease your liabilities. It is really that simple. If your assets grow (income, dividends, interest, prices increase, etc.) your net worth grows. Also, if you reduce your liabilities (reduce debt, cut expenses, etc.) your net worth gets larger. If you really want to increase your net worth focus on both.
One of our largest and most frustrating liabilities is taxes. Arthur Godfrey said it best:
I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half the money.
Our government has given us many tools to help reduce our tax bill. This is not solely for our benefit; the more secure and self-sufficient that the population is, the lower the drag they will be on our social system in the future. Here are some easy (legal) steps to help your reduce your tax bill and increase your net worth. Please note: the following information is for general information only and does not constitute tax advice. All investors should consult with a qualified tax accountant. I know several good tax accountants with lots of experience, let me know if you need to find one.
- Make your RRSP Contributions
This seems a little obvious, but the RRSP contribution is the single best way to reduce your present tax bill and shelter your return on your investments. It is particularly beneficial for bond income as that is taxed at the highest rate. Any contributions made by Monday, March 2nd, 2015 can be used against 2014 income. The 2015 limit is $24,930 but I would recommend using your Notice of Assessment or login to My Account on the Canada Revenue Agency (CRA) Website.
- Claim your deductions
When you file your tax return there are a myriad of deductions available to you. Talk to an accounting professional to help you determine if you have missed any. Here are a few that are often missed: Medical Expenses, Children’s Fitness Tax Credit, Children’s Daycare, Eligible dependent amount, Moving expenses, Student Loan interest, Public Transit, and Charitable Donations.
- Income splitting
Income splitting is presently a hot item for the 2015 budget (now to be presented in April). The original plan was to allow a higher income spouse to allocate up to $50,000 of income to their spouse to lower the overall family tax bill. This is particularly important for couples with a large difference in income or for pensioners. By splitting pension income you may lower your income to eliminate the OAS clawback. Another type of income split involves spousal RRSP contributions. In a perfect world, you and your spouse can retire with the same sized RRSP accounts.
- Use your TFSA
The Tax Free Savings Account (TFSA) has all the tax free growth benefits of the RRSP without tying up your capital. It is a perfect place to invest your emergency fund or any excess capital after you have used your RRSP contribution room. If you are born before 1991 and have never opened a TFSA account, your limit is probably $36,500. Check with CRA to confirm your limit and note that it does not change after January 1st. Here are some more tips for you to keep in mind.
- Consider Venture Capital Corporations (VCC)
There are several Venture Capital Corporations that operate in the various provinces of Canada. For British Columbia residents, you can consider the British Columbia Discovery Fund. By making an investment in this fund, the province of BC will give you a 30% tax credit (up to a maximum of $60,000) effectively lowering your breakeven point on your investment. You can use RRSP funds and you still receive the tax credit. Some of the holdings of the BC Discovery Fund include Avigilon Corp., D-Wave Systems Inc., Gatekeeper Systems Inc., Mobidia Technology Inc., Navarik Corp., Paradigm Environmental Technologies Inc., Rx Networks Inc., Tantalus Systems Corp., and Vigil Health Solutions Inc.
Using these steps you can lower your taxes payable and increase your net worth. Now, what will you do with all that extra money?