Arthur Godfrey, a successful radio host and entertainer early last century, once said: 'I'm proud to pay taxes… but I would be just as proud to pay half as much.'"
Tax planning is a year-round challenge. So, here’s a bit of a checklist to help you plan – so that you can proactively initiate steps that are applicable to you, as timing and cashflows permit. Who knows, maybe you can pay half as much!
Keep in mind that when it comes to tax planning, the overarching objective is to minimize your tax burden and maximize your financial position. It goes without saying that this planning must be within legal boundaries. Tax avoidance within the confines of the law is perfectly legal, as everyone has the right to align their financial affairs in the most tax-efficient manner possible. However overaggressive tax planning that goes beyond legal boundaries is illegal. Can you spell “j-a-i-l”?
Here’s some perfectly legal tax planning tips that you can implement to improve your financial position… and I promise you that you won’t go to jail:
- Contribute $5,500 to your TFSA for 2017. Last year's limit for TFSAs was also $5,500 so if you did not maximize your 2016 contributions, you can still do so this year or in any future year. If you have never contributed to a TFSA (bad girl!), and you were at least 18 when TFSA’s were introduced in 2009, then you have accumulated $52,000 in “room”, meaning you can contribute up to $52,000 into your TFSA whenever cashflow permits. By the way, TFSA’s are an incredible savings tool that everyone who can afford to should be taking advantage of.
- If you expect to be in a lower tax bracket when you retire than the one you are currently in, consider making a RRSP contribution. That way you’ll shift income from a higher-taxed environment today, to a lower-taxed environment tomorrow. Plus you’ll get a tax deduction. The RRSP limit for this year is the lesser of 18% of your reported earned income for 2016 (or $26,010, whichever is lower).
- Although much of the focus at this time of year is on the 2016 RRSP contribution deadline of March 1, why not get a head start on your 2017 RRSP contributions (i.e. next year’s contribution)? Next year’s limit is 18% of your reported earned income for 2017 (or $26,230, whichever is lower). You are allowed to contribute into your RRSP room for 2017 beginning January 1, 2017 – even though you haven’t yet earned your income for the year. You would still deduct the contribution from your 2017 tax filing (in April, 2018), but you can get your money invested and working for you a year in advance. This is a very wise approach for those who know what their room will be for 2017, and who have adequate cashflow to take advantage of early investing.
- If you have children, be sure you contribute at least $2,500 to each child's registered education savings plan (RESP) this year to take advantage of the $500 Canada Education Savings Grant. You may also be able to catch up on missed CESG’s (grants) from prior years.
- Consider opening up a registered disability savings plan (RDSP) if you have a family member who has a disability. You are allowed to contribute up to $200,000 over the disabled beneficiary's lifetime, which may be augmented by up to $90,000 in Canada Disability Savings Grants and Bonds. This is truly a remarkably generous program, and if you have a disabled dependent, you would be wise to consider this program.
- The new home accessibility tax credit (HATC) may be available to you if you are a senior or have a disability. The HATC is worth up to $1,500. It's a non-refundable credit that provides federal tax relief of 15% on up to $10,000 of eligible expenditures per calendar year, per qualifying individual.
- Although income-splitting for families, formally known as the Family Tax Cut, was eliminated soon after the Liberals won the last federal election, you may still be able to do some income-splitting by taking advantage of the historically low prescribed rate (the CRA-mandated lowest borrowing rate permitted between non-arm’s length individuals). If you have a spouse, partner or kids in a lower tax bracket, consider a prescribed rate loan strategy whereby the higher-income spouse or partner loans funds to the lower-income spouse or partner to invest at the record low prescribed rate, which is set at 1% until at least March 31. Once the loan is extended, however, the rate is locked in for its duration – meaning that you needn’t worry about charging more as rates rise. Do be mindful however that interest must be paid at least annually, if not more frequent.
- For those with a charitable bent, remember that when planning your charitable giving for 2017 it may be more tax-advantageous to donate appreciated securities directly to your charity of choice, as opposed to a cash gift. Donating securities will eliminate taxes on any accrued capital gains.
- If you have maximized your RRSP and TFSA contributions and have paid down all of your debt, look at investing in a permanent life insurance policy. Even though certain tax rules changed at the start of this year, permanent life insurance policies continue to provide significant tax-sheltering opportunities – and in the right circumstances can provide compelling tax advantages for wealth-building and/or estate planning purposes.
- Make sure you have updated your wills to take into account any changes in your personal, familial or financial circumstances. Make a pledge to yourself to complete this in 2017.
- Lastly, if you get a large tax refund each spring, consider applying for a reduction of taxes withheld at source, using Canada Revenue Agency's Form T1213, which must be completed anew each calendar year. The increased cash flow can be redirected into your RRSP, TFSA or RESP. No sense giving the government a free loan every year, when your money could be much better applied working for you!
Hopefully one or more of these tips will prove beneficial to you. For additional explanation or information, I recommend that you communicate with your accountant or tax filer.
Joel Attis is a Senior Financial Advisor with AttisCorp Wealth Management and IPC Investment Corporation. Comments or questions may be submitted to Joel at email@example.com, or he may be reached at 855-1155.