Proper tax planning is an important tool to building wealth, because it puts money in your pockets, not Revenue Canada's. The money you save just might be your own.
The two main tools you have to work with are:
- every Canadian has a basic personal tax exemption of $6,456
- there are three income tax brackets. The higher the income, the higher the tax bracket
Simple Tax Planning Ideas
Consider the following example:
A married couple, Jack and Gillian are in two different tax brackets. Gillian is in the highest bracket, while Jack is in the lowest. For the purposes of this example high bracket income is taxed at 50% and the low at 30%.
So for $1000 of investment income Gillian and Jack would pay Revenue Canada $500 and $300, respectively. Get the picture? It is better to have Jack pay the taxes in the lower bracket because an extra $200 stays in the family for every $1000.
Now take the same example but, Jack decided to return to school and in the summer months only earns $5000. Because Jack has not earned more than his basic personal exemption ... he pays NO income taxes. All of a sudden an extra $500 stays in the family.
OK. Jack can not claim Gillian's income, but, what if Jack made all non-RRSP investments. Any income, whether capital gains, dividends or interest would be taxed at the lower level.
The Attribution Rule
Revenue Canada has this funny rule about attributing investment income back to the partner who actually puts up the money regardless of whose name the investment is in. So why not allow the lower income partner make the investments with their salary while the higher income partner uses their money for day-to-day expenses. This way there can be no misunderstanding as to who the money originally belonged to.
Revenue Canada allows a spouse to make contributions to their partner's RRSP thereby reducing their taxable income.
If you are self-employed why not pay your partner or children to perform work for you, such as bookkeeping, filing, whatever. As the employer, you are responsible for the appropriate payroll deductions, but, this can help minimize the profits that are taxable while keeping the money in the family.
Students should file an income tax return every year regardless if they exceed their basic personal exemption or not. For the following reasons:
- the GST credit (available to everyone who is at least 19 years old by the end of the tax year);
- 18% of any earned income can go towards a future RRSP contribution;
- you may be eligible to claim moving expenses;