Taxes. Pay less, Keep more; with after tax planning.

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Who doesn’t want to pay less tax?  But, how do you do that?  Do you know what tax strategies you should consider for your personal situation?

Understanding Canada’s tax laws can go a long way towards helping you minimize the taxes you pay.  Learning more about the income tax act makes sense in theory, but in reality, most of us find the topic a bit of a bore.  You may already be dis-interested and planning to stop reading now.

David Chilton was once quoted as saying, “The biggest financial mistake people make is not taking advantage of tax deductions that are available to them.  Why?  They do not know about them.”  There is truth in his words as it pertains not only to tax deductions, and income tax returns but also tax planning in general.

While you may think you need to be a wealthy business owner, or corporation to require tax planning, this isn’t true.  The average person saving and planning for retirement can benefit from tax planning more than you may realize.

So what is after-tax planning anyway?  Simply put, you create a plan where tax payable is purposely taken into consideration, and the most tax efficient strategies are used so you keep as much of your hard earned money as possible.

We all need to pay taxes.  That’s a given.  Taxes are key to our economy and it’s important that all Canadians pay their share.  But are you paying more than you should be?  With careful planning you should be able to structure your income and portfolio to pay the least amount of tax required.  This will ensure you pay your fair contribution without over paying.

At the stage of life when you are saving and investing, there are different tax strategies which can be used to make the most of your savings potential.  It involves taking into consideration marginal tax rates, tax preferred savings vehicles, and tax rates on different types of investment income. 

Many years down the road, once you’ve grown your nest egg, you will need to draw on it in retirement.  This is arguably one of the most critical times in your life where you want to make sure excess tax doesn’t eat up your hard earned savings on the way out. 

Most retirees draw from multiple income sources including, CPP, OAS, work pension plans, and often multiple investment accounts like RRSP’s, TFSA’s and sometimes locked in accounts like LIRA’s.  Deciding how to best draw this income in a tax efficient manner becomes critical to how far your nest egg will go in retirement.

Just as we create registration strategies (use of RRSP’s and other registered vehicles to defer taxes) to build savings, we also need to consider de-registration strategies (efficiently drawing on RRSP’s and other registered accounts) as the money goes out and taxes are due.  The amount of tax payable in different scenarios becomes very important when choosing which path to take.

There are so many questions for each personal situation:

  • How are capital gains income, dividend income and interest income taxed differently?  How can I make the most of these differences in my portfolio?
  • Which savings strategies will give me the best long term tax savings?  Should I use a TFSA or RRSP or both?
  • Are there tax credits or deductions I should be considering that I’m not aware of, or currently using?
  • Should I take CPP early or later?  Should I draw on RRSP’s now or later?  Which way will I pay the least amount of tax?
  • How do I structure my retirement income to make sure I do not get clawed back on my OAS?
  • How can I best co-ordinate my RRIF income to keep me in a lower tax bracket?

Not interested in learning about the Income Tax Act in your spare time?  I can’t blame you.  If the topic of taxes and after-tax planning puts you to sleep you are not alone.   There is no catch-all, quick checklist that can accurately capture everything you need to do to save on taxes.  If there were, we wouldn’t require tax professionals.  There are countless variables, and everyone’s personal situation is different. 

Work with your accountant or tax consultant, and financial planner, who have made it their business to know the in’s and out’s of tax and financial strategies.   They can help structure your financial plan with the best after-tax end result in mind.

 

Link to column as it appeared in Elgin This Month, April 2016 edition (page 27)

 

Related:

TFSA or RRSP?  Which makes the most sense for you?

Not everyoneneeds an RRSP.  We are each unique.

Stopping your RRSP contribution can sometimes be a good idea.

Retirement Income.  Why new RRIF rules might matter to you.

 

Stephanie Farrow, B.A., CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning, and a Certified Financial Planner designation.  Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010.  Stephanie and her husband Ken Farrow own Farrow Financial Services Inc.  Our Financial Services Team.

 

Visit us on Facebook or follow Stephanie on twitter @farrowfinancial.