Tax Tips for Individuals
Income Tax Planning Tips
Any taxpayer can get in the practice of tax planning. Below is a list of some of the best Canadian tax planning strategies that are recommend by us and income tax lawyers.
RRSPs allow taxpayers to obtain a deduction for the amount contributed, while also allowing the capital to accumulate tax free until the point you retire.
Taxpayers should contribute to their RRSPs as quickly as possible to allow their amounts have to more time to increase in value to achieve more compounded growth. The deadline for RRSP contributions is end of February each year.
Open Tax Free Savings Accounts
The tax free savings account is a relatively new tax saving measure, but it can be used to generate large tax savings. While deposits to a TFSA are not tax deductible like RRSPs, the accrued capital gains, interest and dividends earned in the account are not subject to income tax when earned or when withdrawn.
Use Family Members to Expand TFSA Limit
Normally, when a taxpayer gifts a spouse or child shares or other investment, attribution rules in the Income Tax Act apply, meaning that any income earned on the gifted shares accrues to the parents personally. However, because income earned inside a TFSA is free of tax, taxpayers can gift shares and other investments to family member’s TFSA account without having the income attribute back to them. This is a boon for planning around the TFSA personal limit. Note that gifting shares may results in tax on any accrued gain. In the case of gift to a spouse, any loss will be denied.
Registered Education Savings Plans are a great way to save money for a child’s education with the added benefit of a tax break. Though direct contributions to the plan are not tax deductible, however the funds themselves grow tax free. The Canadian government also provides a grant equal to 20% of your contribution to the RESP to a maximum of $500 each year with a lifetime limit of $7,200 per account. The funds are permitted to accumulate tax free. The maximum account contribution is $50,000 over the duration that you have the account.
Dispose of Non-Qualified Assets in RRSPs
Many taxpayers manage their own RRSP through discount brokerage accounts and other similar products. The danger in doing so is that not all taxpayers are aware that not every type of investment are permitted for RRSP investing purposes. Non-qualifying investments are taxed at 50% of the value of the investment when placed into an RRSP.
Taxpayers can claim a credit on this onerous tax providing they dispose of the offside investments within the taxation year that they are purchased. Proper advice should be sought to ensure that all non-qualifying investments are disposed of before they trigger adverse income tax problems.
Retirement RRSP limitation
Taxpayers who are nearing retirement and have an RRSP account will need to pay special attention to the rules of the program. When a taxpayer reaches 71 in the current taxation year, they must convert their RRSP to a Registered Retirement Income Fund (“RRIF”) no later than end of that year, December 31st.
Top Income Tax Tips for Charitable Deductions
As with any deductible expense, taxpayers should review their anticipated donations for the first quarter of 2016. If a taxpayer normally gives to specific charities in the early part of the year, they should consider donating before the end of 2015.
Donate Shares Instead of Cash
Taxpayers can also validly donate shares of publicly traded corporations to charity and still reap the tax benefits. Not only will they receive a charitable donation deduction, but the added benefit of donating in this way means that the shares will not be subject to the capital gains tax upon disposing of the shares to the charitable organization.
First Time Charitable Donor Tax Credit
New rules in the Income Tax Act offer an additional 25% of credit for charitable donations made by a taxpayer who is a first time claiming charitable donations. This credit applies only for the taxation years 2013-2017, so taxpayers should plan accordingly.