Reduce Taxes and Maximize Your Wealth
Paying the least amount of tax yearly is critical to building your wealth. Consider the following proven tax tactics.
Leverage self employment
Roughly a third of Canadians have a side hustle. The extra money is valuable for paying down debt or powering up an investment portfolio.
Claim that cash. It might bump you into a higher tax bracket, but the dozens of credits and deductions for ‘business income’ can erase the taxes owed. These include home office costs, advertising, business supplies, licensing, consultant fees, and travelling or entertainment costs.
You must track your income and keep all receipts. When sales reach $30,000, you’re required to remit GST/HST; but register early to get back the GST/HST from business-related expenses and supplies.
Borrow to invest more
If you borrow money to buy non-registered Canadian dividend stocks, you can deduct the interest from your taxable income. This sophisticated strategy requires careful planning to ensure the numbers work to your benefit. Ask your Financial Advisor to help develop your approach.
A lot depends on your level of risk. With a shrewd plan, you can enhance your investments and reap a tax deduction from your effort. The dividends must be declared as income on your tax return. But you can also claim a dividend tax credit.
Work a career-long RRSP strategy
During your peak earning years, Registered Retirement Savings Plan (RRSP) contributions reap valuable tax deductions to bring down your marginal tax rate. You will pay less income tax now, while deferring the tax on your RRSP until retirement. Carefully plan this opportunity for maximum results.
In the early stages of your career, when your income is modest, you will need the tax breaks less. Focus instead on building a Tax-Free Savings Account. Your RRSP contribution room will constantly accumulate.
Or begin developing your RRSP, to leverage lots of time to build a healthy retirement fund. Then defer claiming those contributions until your career success means you need the tax deduction more.
You can also borrow money to max out your RRSP contributions in a year where your income has been very high. The resulting tax deduction can save you a lot of money while accelerating development of your investment.
It’s smart to also forecast your marginal tax rate at retirement. For example, if you expect your income to be generous, you will be withdrawing RRSP funds from a high tax bracket. Talk to your Financial Advisor about a plan to reduce that future tax bill.
Pension income splitting
Income splitting is common in retirement for couples with very different income levels. If you withdraw your pension from the same pot, the marginal tax bracket will be mutually high.
Instead, agreeing to split your income for tax purposes will reduce the marginal tax bracket of the higher income spouse. The lower-income spouse is likely to pay a lower tax rate when the money is withdrawn.
Also, the federal government allows a tax credit of $2,000 on retirement income. If you split your income, it ensures a spouse with no income can also reap the Pension Income Tax Credit.
This agreement must be renewed yearly by completing this form. Many pensions are eligible for income splitting include RRSPs and life annuity income. Government pensions don’t qualify.
Do the details
Those devilish details. They are all important for smart financial planning, so develop a great tax strategy and be sure to track that plan with good record keeping. Your Financial Advisor can help you find more ways to maximize your wealth and minimize your taxes.