A Sure Thing In 2009 – Paying Less Tax

Ah…the days are getting longer, the sun is higher in the sky, and there is that unmistakable smell of…fresh ink as tax slips are being removed from envelopes.

With the markets and the economy in turmoil, let's focus on a sure thing for 2009, reducing your income taxes and maximizing government grant money.

You will have now received many of your income tax slips for your 2008 return, so you can start to assemble them and get a clear picture of where your income and tax liabilities are coming from.  This will give you the information you need to put the following tips in context.

Not all of these tips will fit in your situation, so you must discriminate and get appropriate professional advice.  For example, only contribute to an RRSP if it will result in a tax saving equal or close to the tax cost of the future withdrawal.

As well, taking advantage of some of these strategies will require cash, which you might not have available.  However, remember that existing investments (instead of cash) can also be moved into a TFSA or RRSP.  (May be subject to capital gains tax).

  1. Start now to maximize your 2009 RRSP contribution. Contributing monthly has lots of advantages, including buying low throughout the bear market.
  2. Open a TFSA and fund it with $5,000, to eliminate tax on the investment income earned.
  3. Contribute $2,500 per child to an RESP, to maximize the 20% government grant and shelter investment income.
  4. If you have non-registered investments for the long term, consider investing to earn dividends and capital gains, rather than heavily-taxed interest. This means buying company shares or equity mutual funds.  The dividend yields are currently very high, due to the market crash.
  5. If you have non-deductible debts and also have cash or investments, use these to pay off the debts and then borrow to buy back investments, making the loan interest tax-deductible.
  6. Donate to charity, setting up monthly plans now to avoid a year end scramble.
  7. If you have investments with large accrued capital gains, donate them “in-kind” to charity, to avoid the tax on the gain.
  8. For people in the top tax bracket with risk capital, consider an investment in flow through shares. A $10,000 investment gets you a deduction of roughly $12,000, plus discounted mining or oil & gas shares with a zero cost base for tax purposes.  These make a great donation vehicle or method to sop up capital losses from other investments.
  9. Monitor your income to stay under the next higher tax bracket or the tax credit clawbacks.  This requires some research into your own situation and the tax rate charts.
  10. Remember to claim all allowable credits and deductions, like Children’s Fitness, Public Transit, the new renovation tax credit and old standards like medical expenses.
  11. Read a book, like Evelyn Jacks’ latest, Master Your Taxes, to make sure you have caught everything available for your situation.
  12. If you can reduce your taxes through any of these methods, have your tax withholdings reduced. This gives you more cash flow to use now, rather than waiting for a refund (unless that refund is your best technique for saving J).

    If one spouse has higher income than the other, consider these strategies:

  13. Contribute to a spousal RRSP to move capital into the name of the spouse who will be in the lower tax bracket at time of withdrawal.
  14. Accumulate non-registered investments in the name of the lower income spouse.  This may mean saving his or her income, borrowing money from the higher income spouse at 2%, the current CRA prescribed rate, or gifting capital and having the lower income spouse pay tax on second-generation income. (This one really needs professional advice.)
  15. Split pension income you are receiving, to transfer some from the higher income spouse tax return to the other.

*  * *

David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc.