Do you ever wonder whether you are paying more tax than you need to? Do you hear stories about people claiming all kinds of deductions or about rich people being able to avoid tax?
At tax time each year, these questions are foremost in Canadians’ minds.
Preparing your tax return carefully can have some effect. Years ago, the newspapers often had stories where a reporter took his tax details to 3 different tax preparers and received vastly different refunds. However as a tax filer with Canada Revenue Agency for 20 years, we’ve learned that even if your return was carefully prepared, you still could be paying too much tax.
The largest tax savings come from tax planning. It’s about what you do during the year, not about how your record it in the end.
What is tax planning? It’s planning ahead to setup your finances in a way to minimize your tax.
Why bother with a financial and tax plan? When you have a plan, you do everything differently.
For example, your retirement plan should tell you how much you need to invest each year and what rate of return you need to have the retirement you want. In addition it should also tell you:
- Is RRSP or TFSA better for you?
- Should you contribute to your RRSP, your spouse’s RRSP or a spousal RRSP?
- How much can you contribute without going into a lower tax bracket?
- What is the optimal amount for you to contribute into each account?
To be confident that you have the right answer to these questions, it’s important to know your tax brackets today, over the next few years, and after retirement.
Your plan can also clarify whether advanced ideas make sense for you. One example is the Smith Manoeuvre, which converts your mortgage over time into a tax-deductible credit line.
Working with a financial planner who has an accounting background can be a very effective way to include tax planning in your financial plan. Tax and the rest of your plan need to be considered together. You should never do an investment strategy only for tax reasons.
You can remove those questions at tax return time by developing a financial plan that includes minimizing your tax. You’ll gain confidence that you’re doing the right things to achieve your financial goals.