Tax Planning is a Year-Round Exercise

Saving Tax is a Year-Round Exercise

Spring is the time when taxes are top of mind as personal income tax returns are due. Did you take action to reduce your tax bill in 2019? Perhaps you can do better this year. Here are four ways to help minimize payables to the Canada Revenue Agency (CRA):

  1. “Reduce” Your Refund — If you receive a tax refund from the CRA on a regular basis, this shouldn’t be a cause for celebration. You’re effectively providing an interest-free loan to the government. If you have an employer, consider updating Form TD1, which is used to calculate how much tax to deduct from your pay cheque. If you will have significant deductions in a given year, file CRA Form T1213 to reduce the tax taken from your pay.
  2. Maximize the RRSP & TFSA — Consider setting up a monthly Registered Retirement Savings Plan (RRSP). By providing an employer with confirmation of the deductibility of contributions, it may reduce the amount of tax withheld at source. While Tax Free Savings Account (TFSA) contributions won’t impact your 2020 tax bill, don’t underestimate the future value of tax-free compounded growth.
  3. Split Income with Your Spouse — If your spouse (common-law partner) is in a lower tax bracket than you, consider income-splitting opportunities. Contribute to a spousal RRSP. There may be an opportunity to split investment income through a prescribed rate loan strategy with a spouse. Seniors may consider splitting Canada Pension Plan benefits or eligible pension income.
  4. Optimize Asset Location — Different types of income (i.e., interest, dividends, capital gains) may be taxed differently depending on the type of account from which income is generated. For example, dividends paid on foreign investments held in a non-registered account may receive a foreign tax credit to help reduce or eliminate foreign withholding taxes. If this same asset is held in a TFSA, no foreign tax credit is available. Having a comprehensive view of your assets may identify opportunities to optimize asset location across different accounts.

2019 Tax Filing Reminders

Sold a home? If you sold property in 2019, and in order to claim the Principal Residence Exemption, it must be reported on an income tax return. The CRA continues to crack down on tax compliance for real estate transactions.

Held foreign assets? If you held “specified foreign property” (SFP) with a total cost in excess of CA$100,000 (outside of a TFSA, RRSP, RRIF) at any time in 2019, you are required to file Form T1135. For a full list of assets considered to be SFP, see the CRA website.

Of course, these ideas and others depend on your personal situation. Seek the advice of a tax professional and call with any questions. Now is the time to take action to maximize tax savings for 2020!