As much as we’re sure you love the CRA, we know you love money in your pocket more. That’s where tax planning comes in.
Tax planning is pretty much exactly what it sounds — it’s how accountants arrange your business and personal matters to reduce and defer your overall burden.
It’s all legal, of course. In fact, it’s almost your duty as a citizen to figure out the most efficient way to structure your taxes so that you’re paying what you need to pay, and not a loonie more.
We follow two strategies to reach this goal:
A. Pay less tax now
B. Pay your taxes later
To pay less tax now you have to take advantage of any and all deductions and credits. The CRA has a handy list, which includes medical care costs, moving expenses, donation credits, mortgage interest on an investment property etc.,
Once you knock-off any eligible deductions/credits you can move on to the next step, which is to actually create opportunities to get them.
For example, the government has a fantastic Scientific Research and Experimental Development program where a Canadian business or individual can get up to a 35% refundable investment tax credit.
Any business can apply as long as they’re trying to advance science by generating new knowledge — you may be surprised to find that it’s not that hard to become eligible.
You don’t have to try to find a long-lost particle or develop a new smartphone. What if you, for example, owned a kebab shop and tried to develop a new type of preservative that kept meat fresh longer?
Thinking outside the box will net you results.
Once you’ve done all you can to reduce your current tax bill, it’s time to postpone paying as much of your taxes as you can.
Now you may think, why bother paying my taxes later? I might as well pay them now!
But then you’d be missing out on the relationship between time and money — a dollar in your pocket now is worth more than a dollar in your pocket in a year, and certainly in 10 years.
That’s because invested capital can accumulate with time.
So if you decide to use that dollar to pay taxes today, that dollar is not only gone but so is any potential growth on that dollar. Why not delay paying taxes and instead focus on building up your investment and business assets?
Most people intuitively understand this when they contribute to an RRSP, but stop there.
That’s a shame since there’s plenty of room to get creative here! Here are five ideas:
1. Stash cash in a corporation
The small business corporate tax is a fraction of personal income tax, leaving you far more funds with which to reinvest.
2. Buy a life insurance policy
Almost all permanent insurance policies fund a reserve which is invested tax-free.
3. Capital cost allowance with rental properties
You can claim an annual depreciation on your rental property, which is recaptured only when you sell.
4. Replacement property rules
You may be able to postpone a capital gain by selling a business property and replacing it with a new one.
5. Loss-harvest your stocks
You can offset capital gains tax on successful stocks by selling your losers.
Of course, these are just a small sample of the tax planning techniques available, and not all of them will be applicable to your particular situation. Some of these tactics are quite complex and so it’s best to hire professionals to execute them properly.
That’s where we come in. Our bread and butter is figuring out how to use what would have been the government’s money and instead redirect it to invest in yourself and your business.
But tax planning is just a small slice of your overall financial plan. We view it holistically — how does that tax plan integrate into your overall financial plan?
If you’re interested in learning more about the many ways we can help you keep your money with you or your business, you can reach us by email at firstname.lastname@example.org or by phone at (289) 813-0097 ext. 101