Tax. What a lovely word. It stirs the soul…or is that the bowels? Do you know the origin of income tax in Canada? In 1917 the first income tax act was passed into law. It was a “temporary” tax to help pay for the cost of WWI. Well, here we are 99 years later and it is still “temporarily” in place. Hmmm, I’m not holding my breath that it is going to be repealed anytime soon.
One definition of tax is “to put a strain or heavy demand on someone.” Does that not sum up how most of us feel this time of year? Before you file away your 2015 tax returns and never look at it again, take another look right now. How can you reduce this strain or heavy demand in 2016?
Here are a handful of things to consider.
Contribute to your RRSP. This is the most obvious tax deduction available to all Canadians of any age. Even if you are older than 71, if your spouse is younger you can still contribute to a Spousal RRSP. Not always a good idea though as RRSPs are really just tax deferral. Do the math to make sure this makes sense.
Did you have any interest income on T3s? Interest income is the least tax favourable form of investment income to receive as it is fully taxed. If possible, hold investments like bonds and mortgages which produce interest income in tax sheltered accounts like RRSPS, RRIFs and TFSAs. Hold dividend paying and capital gain producing investments outside. Finally, consider investments like REITs that give you ROC (Return of Capital) as part of their income stream.
Max out your TFSA. All Canadians over age 18 now have $46,000 of TFSA room. Make sure you are taking advantage of this. The “TF” stands for TAX FREE!
Make sure you are deducting your investment management fees. If you are working with an advisor they are getting paid somehow. Make sure you are deducting their investment advisory fees. This can save you thousands in tax over the years.
If you have a mortgage and nonregistered investments, consider swapping things around to make the interest on your mortgage tax deductible. There is little cost to do this but it can save you thousands over time as well.
Consider an investment in Flow Through Shares. These are very cyclical investments that have their time in the sun where they really work well. They have been lost in the dark for the last 5 years in the unrelenting bear market in resources but all signs point that they are coming back out into the light. Take a second look.
Give to charity. There are very generous tax credits on charitable donations. However, much more than that, you will be helping out others in need which is worth immeasurably more than the tax savings.
A quick word on things to not consider. Don’t try to hide taxable income. If you have been following the “Panama Papers” scandal you will know what I am talking about. It’s not worth the risk. No one wants to fear receiving those nice brown envelopes we get from CRA.
Bottom line - Start planning now to pay less tax on your 2016 tax return. It’s too late next April to make any difference at that point. The time to start reducing that “heavy demand” is now!
Mike Hayhoe, Canaccord Genuity Wealth Management
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