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I want to pay less tax

December 27, 2011

So you want to pay less tax. So do most people. It is possible to accomplish and not very complicated. Here’s a few things that you can do:

1) Contribute to an RRSP. An RRSP (Registered Retirement Savings Plan) is a special account that is set up to fund your retirement. The government does not want to have a bunch of poor old people that will require government support, so it decided to create incentives to ensure old people have their own money. In a nutshell, CRA (Canada Revenue Agency) allows people who earn income to contribute up to $22,500 (or 18% of the prior year’s earned income – whichever is lower) to the plan. The money can be invested in virtually any investment vehicle. There are two benefits. The first is that the investment income (interest, dividends, capital gains) in the plan is not taxed at all. The second is that the taxpayer can deduct all contributions from the taxes owed in the year. However, once contributions are made to the plan, they cannot be removed without facing penalties, except for the purchase of your first home and for certain higher education needs. Make sure to contribute to your RRSP by no later than March 1, 2012 in order to get the benefit this year.

2) Crystallize unrealized capital losses. When you have investments that are worth less than you paid for them, you have an “unrealized capital loss”. Selling the investment crystallizes the capital loss and turns it into a “realized” capital loss. All realized capital losses are offset against realized capital gains thus reducing the tax that would otherwise be owed on the capital gains. Note that in Canada, capital gains are only taxable at 50% of the actual gain, so capital gain income is much preferred over other kinds of investment income such as interest and dividends. One caveat – capital losses in an RRSP cannot be crystallized. Make sure to crystallize your unrealized capital losses by December 31, 2011 in order to get the benefit this year.

3) Donate to charity. You might tell me that giving money away is not a good tax plan. I would agree, unless you plan to donate, anyway. If you were already planning to donate, make sure to do so by no later than December 31, 2011. Donations to registered charities are eligible for “tax receipts” which are used to reduce your taxes.

4) Pay your expenses. In many cases, valid expenses can reduce your taxes IF PAID BY DECEMBER 31, 2011. These can include vehicle expenses, home office expenses, meals and entertainment, supplies, phone charges, safety deposit box fees, broker fees and others. These can only reduce your taxes if they are paid by December 31, 2011.

These things tend to get a little complicated, so if you plan to utilize them, please contact me first (danielydiamond@gmail.com).

As always, questions and comments (on this or any other issue) are welcome.

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From → Personal tax

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