Thomas Johnson is a monthly columnist writing for Interlake Publishing on financial issues. (File photo)
As fall approaches, the last thing on most Canadians’ minds is our income tax bills. After all, this is the furthest point in the calendar from a filing deadline.
However, there are a few things you should be doing now if you want to keep more money in your pocket next tax season.
There are three main methods of easing personal income taxes in Canada. You can convert an income into a type taxed more preferably, you can defer taxes until a future year, or you can avoid taxes altogether.
Income you earn from working, interest income from savings, and rental income are all taxed highly at your marginal tax rate.
Comparatively, dividends from Canadian companies and capital gains, the profit on the sale of property, are taxed preferentially.
Dividends earn you a tax credit and only half of a capital gain is taxed. An easy conversion from interest income to dividends or capital gains can be achieved by rebalancing your investment portfolio.
A dollar today is worth more than a dollar tomorrow. You’re better off to pay taxes in a future year than this year, thanks to inflation and the opportunity to invest that money in the meantime.
The most common deferral technique in Canada is to invest in an RRSP. This allows you to defer the tax on that income until the year you withdraw it, which could be decades from now.
Avoiding income tax doesn’t mean you lie on your tax return or avoid filing one at all. It means taking maximum advantage of the credits and deductions available to you in our tax code. The best way to do this is to safely store all receipts for eligible expenses throughout the year like medical costs, charitable donations and childcare.
Smart tax planning doesn’t just take place once a year. Taking a few small steps now to convert, defer or avoid income taxes will add up to big savings in the long run.
- Thomas Johnson is a Financial Advisor with Cascade Financial Group - ThomasJohnsonMB@outlook.com.