Reduce, Deduce, Surmise

Top 3 strategies to reduce your tax bill

As surely as winter gives way to spring, our thoughts turn to the inevitable, tax filing deadlines. In 2017, the tax community had its fair share of anxiety with federal tax proposals introduced
in July, revised in October, and draft legislation issued just before Christmas in connection with tax measures targeting income splitting and privately held corporations. While Budget 2018 will likely provide us with more clarity in connection with the proposed tax measures, there are still numerous ways to reduce your tax bill.

1. Income Splitting

It is still possible to split income with one’s spouse and reduce your family’s tax bill through a prescribed-rate loan. At the time of writing (February 2018), the CRA’s prescribed rate is 1 per cent. This means that the higher-income spouse can make a loan to a lower-income spouse at a 1 per cent rate of interest, locked-in for the duration of the loan. The lower-income spouse will earn income from the invested loan, and will pay interest annually to the higher-income spouse.

The higher-income spouse can make a loan to a lower-income spouse at a 1 per cent rate of interest, locked-in for the duration of the loan

Increased interest-rate pressure suggests that the prescribed rate may increase to 2 per cent in April therefore there is some urgency to implementing this strategy.

Tax time isn’t a bone-chilling nightmare if you follow these simple tips

2. Maximise your investments in RRSPs, RESPs, and TFSAs 

Individuals can contribute 18 per cent of their earned income to their RRSPs, up to a maximum of $26,230. A contribution made up to and including February 28, 2018 can be used to offset 2017 taxes payable. The limit to contribute to TFSAs is $5,500 for 2018 but a cumulative amount of $57,500 (starting from 2009 when TFSAs were first introduced), can be contributed if you were 18 or older and a Canadian resident during all those years.

A contribution made up to and including February 28, 2018 can be used to offset 2017 taxes payable

If you are saving for your children’s post-secondary education, an annual contribution of $2,500 will result in an annual grant from the Canadian government of $500 up to a lifetime maximum of $7,200.

Charitable donations: One of many ways to lower your tax bill

3. Make charitable gifts of public company stock 

If you make charitable donations and you have shares of public companies with large unrealised accrued gains, consider donating those stocks to charity. An in-kind donation of shares will not only provide the donor with a tax receipt equal to the fair market value of the donated property, but the donor will pay no tax on the capital gain. This can significantly enhance the tax benefits arising from the donation.

It is a well-established principle of tax law that taxpayers are entitled to arrange their affairs to minimise tax. There are many valid and legal strategies which can be implemented by Canadian taxpayers through effective tax planning.

SABINA MEXIS is a tax partner at Devry Smith Frank LLP specializing in tax and estate planning for individuals and business owners. SABINA.MEXIS@DEVRYLAW.CA

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