For many, tax planning means the once-a-year mad scramble to organize all the necessary paperwork right before the tax filing deadline. In reality, this is not tax planning. Real tax planning requires a comprehensive approach to your finances and should be tackled year-round, says Grant Diamond, a senior tax consultant with FBC, a tax advisory service with over 60 years of service to the farm and rural small business community.
To reduce the anxiety, careful planning for your tax obligations should be an integral element of a well-crafted financial planning strategy. Essentially, tax planning involves trying to accomplish all of the other elements of your financial plan in the most tax-efficient manner possible.
All financial transactions have some tax consequences. Although the tax consequences of some financial actions might not always take precedence, knowing the options you have will lead to better decision making.
Some decisions that tax planning can help with include:
- Timing of income and expenses
- Selection of which investments are in registered versus unregistered plans
- Filing of common available deductions
Your tax plan should focus on 4 specific elements:
- Tax Deferral
- Income Splitting
- Income Conversion
- Optimization of Tax Credits, Incentives and Deductions
1. Tax Deferral
The basic concept in tax deferral is the idea that it is better to pay tax later than sooner. This is related to the time value of money and also may result in you being taxed at a lower marginal income tax rate at the time the amounts are brought into income in the future. This may involve the delayed recognition of income or the accelerated recognition of expenses. An example of delayed recognition of income can be an RRSP. An example of accelerated expenses is capital cost allowance on farm equipment or rental property.
2. Income Splitting
Canadian federal income tax legislation is based on the application of progressive tax rates. Essentially, this means that taxes payable on a given amount of taxable income will be greater for a single taxpayer than if the amount is split between two or more family members.
3. Income Conversion
You can receive tax-advantaged rates in your non-registered portfolio. Because different types of income are taxed at different rates you want to ensure that your investments are getting the best returns and cash flow on an after-tax basis. It's important to be aware of how the government treats the taxation of different investment vehicles. Interest income is fully taxable in your non-registered accounts, just like any salary, net business income and other regular income. However, Canadian dividends and capital gains receive preferential tax treatment.
4. Optimizing Tax Credits, Incentives and Deductions
Placing yourself in situations to take advantage of existing tax laws requires a certain amount of knowledge of tax laws. It’s not always easy to stay on top of such things and that is why we recommend that you involve the help of a tax specialist.
To make the contribution of your tax specialist more effective, keep all your tax-related documents in one easily accessible location. Also, be sure to keep on top of your bookkeeping and keep your records up to date throughout the year.
There are many more things you can do but a good tax planner can help manage the process and keep more money in your pocket at the end of the day.
Grant Diamond is a tax specialist with FBC, a firm dedicated to providing farmers and small business owners with expert tax services and advice for over 60 years. FBC has branches in BC, AB, SK, MB, ON and NS to serve its 50,000 Members. FBC also provides financial & estate planning. To learn more about FBC, visit www.fbc.ca. If you have any questions regarding this article, email fbc @ fbc.ca or call toll-free 1-800-265-1002.
Accurate as of April 08, 2015