You may not need to pay as much as you think
“We have no choice but to pay tax,” says Stacey Cooper, JR Shaw School of Business instructor, “so we have no choice but to realize that it affects us.”
So, she adds, we might as well learn a little about how it works. With knowledge, after all, come savings. By investing a bit of time in reviewing your sources of income over the past year, you can legitimately slim down Canada Revenue Agency’s piece of your pie.
Year end is a great time to make adjustments to your finances – and pick up tips you can apply year after year.
“Tax impacts you from the point where you start working until the day you die,” Cooper points out. “So why not do something about it?” Here’s how.
1. Reap your losses
When it comes to the stock market, you win some, you lose some. What you win, called capital gains, are taxable. If you sell stock at a loss, however, those losses are deductible. Should you have a feeling those stocks aren’t about to become hot commodities any time soon, “Why not trigger these losses right now so that you offset the tax that you’ll have to pay on those gains?” says Cooper. Just aim to break even.
That said, beware of creating what’s called a superficial loss, she warns. Basically, if you purchase, sell and continue to hold the same stock within a 60-day window the losses may not be deductible.
2. Delay your gains
Once Dec. 31 is in sight, hold off billing, invoicing or selling stock at a gain until the new year. At this point, you’ll likely have a good sense of your year’s total income and be able to use that number for working out other tax-saving strategies below. No need to complicate that now.
Cooper also points to the time value of money. Whatever you retain you can invest. The longer you invest, the more that money earns. So keep it and use it. Overall, “A good strategy is to trigger gains early in the year and losses late in the year, if possible.”
"A good strategy is to trigger gains early in the year and losses late in the year."
3. Give it away
Christmas is the time for giving, so get donating. Besides it just being the right thing to do, “This is one of the easiest ways to reduce the tax you’re going to pay,” says Cooper.
Alberta is a great place to donate, offering some of the highest credits in Canada. For the average family, the first $200 donated is credited at 25%, with the remainder credited at 50% (for a total of no more than of 75% of your income). For example, donate $500 and you’ll get $50 back on the first $200 and $150 on the remaining $300, for a total credit of $200.
Within families, the payback can get even better. “Maximize your donations by claiming all of them on a single taxpayer,” says Cooper. Make the most of that 50% credit by bundling all the donations onto a single return. “You’ll get more of the tax credit and more money back in your pocket.”
4. Keep it in the family
If you’re working but your spouse isn’t, the household income – according to Canada Revenue Agency – is technically yours, even if you’ve got a joint bank account. That means if your spouse were to invest any money, the earnings are taxed according to your (higher) income bracket – unless you set up a spousal loan.
Set up a spousal loan.
Basically, this is an agreement that includes a reasonable term for repayment and an interest rate. Write it down, sign it and you’re done – your spouse can now claim earnings at his or her own income tax bracket, which is likely much lower. Use a prescribed interest rate from Canada Revenue Agency, currently two per cent.
“At the end of every year there’s always the chance those rates are going to come up, so it’s nice to lock it,” Cooper advises.
5. Roll back your earnings
Knowing your personal (federal) tax bracket is an essential part of your tax-saving strategy. For 2017, this is how they work:
- the first $0 – $46,605 is taxed at 15 percent
- the next $46,606 to $93,208 is taxed at 20.5 per cent
- the next $93,209 to $144,489 is taxed at 26 per cent
- the next $144,490 to $205,842 is taxed at 29 per cent
- and anything over $205,842 is taxed at 33 per cent
If you know you’ve earned $50,000 by the end of the year, a combination of donations, delaying other earnings or planning for a lump sum RRSP contribution before the February deadline could bring you down to that 15-per cent bracket, lowering your tax bill.
Whatever you choose to do before year’s end, an investment adviser or an experienced accountant is a valuable ally in your money-management strategy. And don’t delay: some transactions take a few days to settle. Either way, a simple rule of thumb goes a long way when it comes to taxes: Invest the time in exploring your options, says Cooper, and above all, “Be smart about it.”