The following tax tips and updates should not be relied upon to replace the requirement for advice from a Tax Professional. Please consult with our office before implementing any tax strategy.
Deferred Tax with Life Insurance
Permanent life insurance products, such as whole life and universal life insurance can have a cash value. Normally the cash value accumulates on a tax-deferred basis. While any cash withdrawal by the policy owner may be taxable, proceeds payable to a beneficiary on the death of the insured are tax-free.
The RRSP contribution limit for 2011 is $22,450, and will be $22,970 for 2012 and $23,820 for 2013. Your deduction limit is found on your Notice of Assessment or Notice of Reassessment from Canada Revenue Agency. You can find your 2011 limit on your 2010 Notice. The deduction limit is calculated as:
While contributions to a Registered Education Savings Plan (RESP) aren’t deductible, the investment earnings accumulate on a tax-deferred basis. And there’s another significant benefit; if you meet the conditions, the federal government will contribute money into a Canada Education Savings (CES) Grant on behalf of your child. When your child starts post-secondary school, your contributions can be withdrawn from the RESP, tax-free. The RESP investment earnings and CES Grants will be taxed in the hands of your child.
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Be aware that your RRSP contributions have to stay in the RRSP for at least 90 days before you can withdraw them under the Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP) (otherwise, the contributions may not be deductible).
Incorporate your business
There are tax advantages to incorporating a sole proprietorship or partnership business. One of the biggest is the Small Business Tax Deduction, whereby the income of qualifying Canadian-held corporations is taxed at a reduced rate. Contact HOTAY Chartered Accountants for information on this year’s rate. However, there are significant costs to incorporating your business, and to benefit from corporate tax deferral, you need to be prepared to leave a percentage of your business earnings in the corporation. Seek professional advice before using this as a tax strategy.
If you are retired, be sure to take advantage of:
Tax law dictates that you must collapse your RRSP and pay tax on the fair market value of the plan’s assets BY DECEMBER 31 of the year in which you turn 71. When you collapse your RRSP, you may purchase an annuity or transfer your RRSP assets to an RRIF. You will not be expected to pay tax at the time purchase of an annuity or conversion to an RRIF. If you will generate RRSP contribution room in the coming year, will have earned income in the coming year(s), and have them money, consider making an over-contribution to your RRSP in December, immediately before collapsing it. For 2011, for example, the amount of the over-contribution should equal $2,000 plus this year’s contribution limit. The basic over-contribution will become deductible when you generate additional RRSP room in the future and will never attract the 1% over contribution penalty tax.
Contributing to an RRSP is one great way of reducing your annual tax bill. Say, for example, that your marginal tax rate is 40 per cent, and you have $10,000 to contribute and sufficient RRSP contribution room. By putting that money into your RRSP, it becomes fully deductible from income, reducing your tax bill by up to $4,000 (40 per cent of $10,000). Plus there’s another major tax benefit: Every dollar of investment income earned inside your RRSP is tax-deferred as long as it stays in the plan.
Maximize family members
If you run a business, consider employing family members (full time, part time or some of the time), and pay them a reasonable salary. This way, you can reduce your business tax owing, and benefit a family member. You will, of course, need to be able to show that the amount was reasonable, and for actual work done. Say, for example, you employed your 19-year-old daughter in your business, paying her a salary totaling $10,000. Because of the basic personal income tax exemption, she would pay very little income tax, and would have a nice nest-egg to help pay for her education. Meanwhile, you’ve taken $10,000 off your income for the year, decreasing the amount of income tax you owe.
By splitting you income with your spouse, you can take full advantage of the difference of your marginal tax rates (the higher the income, the higher marginal tax rate). By transferring a portion of your income to a spouse or child (a person with a lower income), you can reduce the marginal tax rate on your income. This is an especially powerful tax strategy for small business owners with children of post-secondary school age. Suppose that you employed your 19-year-old daughter in your business, paying her a salary totaling $10,000. Because of the basic personal income tax exemption, she would pay very little income tax, and would have a nice nest-egg to help pay for her education. (If you paid her an income equaling the personal income tax exemption, she would pay no tax at all!) And meanwhile, you’ve “lopped” $10,000 off your income for the year, decreasing the amount of income tax you personally owe.
If you will have excess tax deductions or non-refundable tax credits this year, fill out form T1213 early in the year to have withholding taxes reduced on your regular paycheques. This will allow you to keep more money in your pocket during the year, instead of waiting to get it back as a tax refund early next year.
Mutual Funds Purchase
Avoid purchasing mutual funds in non-registered accounts late in the year. If you do, you will be taxed on year-end distributions that include gains received by investors before you bought your units. Remember when you file your tax return, you must pay capital gains tax not only on the amounts recorded on T3 or T5 slips as part of distributions, but also on capital gains realized from your personal sale of funds in non-registered accounts. Where possible, postpone making non-registered investments until the New Year, also.