Reducing taxes for 2010 and beyond

David Christianson, BA, CFP, R.F.P., TEP

You have now (hopefully) filed your 2009 tax return, and can now give some serious thought to using that fresh tax knowledge to reduce your taxes for 2010. Now that the deadline has passed, you can step back and think a bit about strategy.

Next week, we will talk about how to develop a personal financial plan to reach your goals. Reducing your income taxes may certainly be high on your list, so let’s start with that today.

Some aspects of your tax strategy will depend on your personal situation – whether you are self-employed or an employee, married or single, receiving pension and investment income, and other factors.

Therefore, it’s likely that only some of these tips will fit your situation. Focus on those ones, but be aware of the other rules as well, since they could help you in the future.

  1. Contribute to RRSP, especially if your taxable income is above $38,000. Below that, the TFSA may be your first choice.

    Your RRSP contribution limit is 18% of your earned income (reduced by any Pension Adjustment, if you are a member of an employee pension plan), plus any unused contribution room from past years.

    Your RRSP deposit reduces your taxable income by an equal amount, reducing taxes at your marginal tax rate. For example, a $1,000 contribution at a 38% tax rate will reduce taxes by $380.

  2. Reduce tax on investment income. If you are currently paying a significant amount of tax on interest income, that’s good news, as it means you have substantial investment capital and lots of room for improvement.

    Placing some of that investment capital into an RRSP or into a TFSA shelters some investment income from tax. However, there are specific limits.

    For the money that stays outside a registered plan, investing in common stocks or preferred shares will produce dividend income, taxed at a fraction of the rate of interest income. For example, a Manitoban with total taxable income of $40,000 will pay almost $350 tax on $1,000 of interest income, compared to less than $70 tax on $1,000 of eligible dividend income.

    While this introduces more risk of capital fluctuation, it may be appropriate for some of your portfolio.

  3. Tax credits – read through the list of all available credits to see which might apply to you, then investigate those ones. Here are a few prompts for you:

    1. Canada employment amount
    2. Pension income amount
    3. Age 65 amount
    4. Spouse or common-law amount
    5. Equivalent to spouse (amount for an eligible dependant)
    6. Child amount
    7. Children’s fitness amount
    8. Donation tax credit
    9. Medical expenses tax credit
    10. Disability tax credit
    11. Caregiver amount
    12. Infirm dependant 18 or over
    13. Tuition, education and textbook amount
    14. Interest paid on student loans
    15. GST/HST credit
    16. Working income tax benefit
    17. Public transit (monthly passes)
    18. First-time homebuyers amount
    19. Apprenticeship job creation credit
    20. Provincial credits, like property tax and primary caregiver

A number of credits can be transferred from a dependant or spouse, whose income is too low to utilize the full benefit. Some tax reduction measures still come in the form of a deduction from taxable income. We mentioned RRSP contributions. Also on this list are:

  • Childcare expenses
  • Investment carrying charges, like investment counsel fees, interest on loans made for the purpose of earning investment income, accounting fees to calculate investment income, safety deposit boxes for storage of securities
  • Employment expenses (where required by your contract of employment, and employer completes Form T2200)
  • Annual union, professional or like dues

That’s a long list of items that can provide some tax relief. Use it to make sure you claimed everything relevant on your recent tax return, and then plan to expand your list for next year.

Post questions and comments.

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David Christianson is a fee-for-service financial planner and portfolio manager, whose team at Wellington West Total Wealth Management Inc. provides comprehensive financial advice and management. You can e-mail him at dchristianson@wellwest.ca or visit his website at www.davidchristianson.com.