COLUMN: Ask the Money Lady – Deduct, defer and divide

Dear Money Lady, I know it’s not tax season, but have you got any tips on how to reduce the amount of taxes I pay every year?

Carol

Dear Carol,

Unfortunately, the more money you make the more tax you pay, thanks to the marginal tax rate system in Canada. Many people make financial decisions based on their gross income; however, from a planning perspective, it’s not good enough to know how much money you make, but rather to know how much money you keep. Making a dollar today doesn’t mean you can count on spending that dollar tomorrow.

We all have two layers of taxation in Canada: federal and provincial. The one thing that is guaranteed with taxation, is that it is progressive. So, over time it continues to go up. Just to give you an example: when RRSPs first came out in 1957, the highest marginal tax rate in Ontario was 11.5 percent, now it is 53.5 percent. Knowing your marginal tax rate is one part of understanding your net income; however, there are specific strategies that you can utilize to help minimize the taxes you pay. The three best ways are to deduct, defer and divide. Let’s talk about each method.

1. Deduct: This would be a deduction or claim to reduce your taxable income. The best way to do this is to have a home-based business, be an independent contractor, or be a self-employed entrepreneur to write off expenses against your gross taxable income. Look for ways to lower your income through various expenses or income-splitting.

2. Defer: Deferring tax means you move the obligation to pay current taxes into your future years. The advantages to deferring taxation works on the premise that it is better to pay the taxation in the future; perhaps when your income is much lower, than to pay it today, when your income is in a higher marginal tax bracket. This can be done through registered pension plans (RPP + PRPP), registered retirement savings plans (RRSP + RRIF), registered education savings plans (RESP), and registered disability savings plans (RDSP).

3. Divide: Income splitting is the best way to divide your income and lower taxation. Now I know that many of you who are single will say that this is not relevant – and you’re right. Dividing income can only be done with your partner (so you will need to have one to do this last taxation step). Here are some of the ways you can split income.

* Spousal RRSPs

* Sharing CPP benefits

* Paying wages to family members through a business

* Using trusts

* Using partnerships or corporations to earn business income

Tax planning is easier than you think. Try to utilize a TFSA (tax free savings account) as much as possible. If you were 18 or older as of Jan. 1, 2009 when TFSAs first started you can contribute up to $102,000 in the cumulated contribution room since inception.

^

Christine Ibbotson is an author, finance writer and syndicated money coach on BNN Bloomberg. She is also part of the everyday lineup on CTV Your Morning in every province. Follow Christine on Instagram @askthemoneylady, or on Facebook (Christine Ibbotson) and join her at her vibrant living speakers events.