Tax Planning For Canadians

Let’s just brace the fact. Canada’s taxation system is highly complex and ever-changing. You know that gut wrenching feeling that comes with every tax season – well, it does not have to be that stressful. Through a strategic Tax planning program and a thorough comprehension of government incentives & regulations, you can save money for your company and position it better during the tax season.

These valuable tax tips & strategies will help minimize the tax liabilities, be prepared for the tax season, allowing them to get the most out of their income and savings.

What is Tax Planning?

Tax planning is the process of analyzing a financial plan or a situation from a tax perspective with a clear objective for tax efficiency, reducing tax liability and planning for future. It is a customized strategy that helps minimize how much you pay in taxes. Tax planning strategies can also include saving for retirement or engaging an investment portfolio.

Short Term Vs. Long Term

Tax strategies should encompass both short-term and long-term objectives for a financially secure future. Short-term tax planning is year-end tax planning. This is important for uncovering attractive tax opportunities and many techniques you can do at the end of the income year to reduce taxable income. Effective strategies can include making extra contributions to a retirement savings, prepaying tuition, assessing investment losses to offset capital gains taxes, withdrawing funds or modifying an existing retirement savings account, or maxing out charitable contributions on a yearly basis.

However, long-term planning is a comprehensive framework of strategies that comprise of goals to be met within a four- to five-year (or longer) period.

Understand your Tax Bracket

Canadian income tax rates or brackets vary according to the total amount of taxable income you earn. The Canadian tax system is a progressive (or graduated) system which means low-income earners are taxed at a lower percentage than high-income earners. By understanding what tax bracket you are currently in, it can help you understand changes in your income taxes if, for example, you start a side-gig or have other extra income that pushes you into the next bracket.

Tax Deductions Vs Tax Credits

Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. Tax deductions lower your taxable income by the percentage of your highest federal income tax bracket. Hence, the effect of a tax deduction on your tax liability depends on your marginal tax bracket.

If you’re eligible for both a tax credit and a deduction for the same expenses and you can only apply one of them, crunch some numbers. Assessing your financial situation can help you determine which one will help you to maximize your savings.

Does the source of income affect your taxation rate?

Depending on where your income comes from, it’s taxed at different rates. Straight income earned as a salary and foreign income are taxed at the highest rate of all income sources. Investment income that consists of interest, dividend, capital gains, and return of capital is taxed differently. Knowing where your income is coming from, and at what rate it’s going to be taxed at, is an important step towards effective tax planning.

Knowing What Tax Records to Keep and For How Long

Even if you do not have to attach certain supporting documents to your return, or if you are filing your return electronically, keep your supporting documents for six years in case the CRA selects your return for review. This six-year period starts at the end of the tax year to which the records relate.

Tax records include your tax returns and any supporting documents you used to prepare them. This includes T-slips and any documents or receipts for medical, child-care, charitable donations, moving expenses, and other expenses for which you received a credit or deduction for.

Hiring A Tax Professional Vs Doing Tax Planning Yourself

There are straightforward situations where one can personally handle taxes for themselves. However, often times there are special situations where you need customized planning. While a tax software is convenient and affordable, it cannot give you the kind of advice a professional can. Depending on the complexities of your portfolio, hiring a tax professional might be a good financial decision to ensure you optimize your tax efficiency.

Here are some tips when looking for the right professional for yourself or your business.

  • A quick tax preparation company may offer competitive pricing for short term tax filing but may not be able to offer an overall long-term financial planning options.
  • A Bookkeeper may be more affordable but may not have in-depth tax planning knowledge and specialized tax training.
  • An Accountant has training in accounting and can handle bookkeeping tasks and may be more familiar with tax planning than a bookkeeper.
  • A Certified Public Accountant is a licensed and certified professional who can provide expert advice and efficiency and may also provide audit assistance.
  • A Certified Financial Planner will provide even more value with overall financial planning.

Year End Tax Planning Tips For Small Business Owners

  • Ensuring that your financial paperwork and accounting is properly organized will help you in an efficient tax planning.
  • Knowing what expenses are eligible for deductions will ensure you’re getting the deductions you deserve.
  • Transfer Savings to your Tax Free Savings Account (TFSA) and Registered retirement savings plan (RRSP).
  • It is a great time of year to be generous as that entitles to a tax deduction. onate to your favourite charity.
  • Make sure you know how you are going handle tax reporting relating to COVID subsidies including CERB, CRB etc.
  • File your taxes on time
  • Before you make that big purchase for your business, talk to your accountant.
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