With 2008 done and over with, it’s that time of year to start thinking about the dreaded T word… taxes. On one hand, I enjoy strategizing about legitimate methods to reduce income tax. On the other hand, I don’t enjoy paying them.
Below are 9 ways I reduced my income tax in 2008 which can also be used for tax planning in 2009.
- Maximized my RRSP – This is perhaps the easiest and most common method for the everyday Canadian to reduce income tax. With higher income this year, I made it a point to maximize my RRSP this year. How does this tax deduction work? Check out this post on how to calculate the tax return on your RRSP contribution. If you have a spouse that isn’t working, then a spousal RRSP might be something worth looking into.
- Opened an Investment Loan for my Non-Registered Equities – We’ve all heard the advice to never invest purely for the tax benefits. This is no exception. In this case, I opened an investment loan to take advantage of my home equity and invested the proceeds in strong dividend paying companies. I’m hoping that over the long term, the dividends will provide a steady stream of income beyond the interest payable. In other words, I’m started a modified Smith Manoeuvre investment strategy. What are the tax benefits? The interest charged on the loan is tax deductible. The larger the investment loan, the larger the tax deduction. The higher the marginal tax rate, the more appealing this strategy becomes.
- Claimed my Home Office – With a home based business there is an opportunity to claim the home office as an expense. What can be claimed? A portion of home expenses as a percentage of the entire living space along with equipment purchased for the business. For example, if the home office is 10% of the living space, then 10% of the mortgage interest, property tax, insurance, and utilities can be claimed as a tax deduction.
- Kept my Medical Receipts – Even though we have free health care in Canada, prescription medication costs can add up! With the pregnancy and baby this year, we had higher than normal medical bills which can be claimed if they exceed a threshold (~$2000 or 3% of your income, whichever is less). Eye glasses, dental visits, physiotherapists, chiropractors etc. also count.
- Donated to Charity – Philanthropy not only has the benefit of helping others who need it most, it can also provide tax benefits. Money or stock donated to a registered charity is eligible for the donation tax credit. I’m personally trying to increase my charitable donations on an annual basis.
- Tax Loss Selling – Any equity sold in a non-registered account for a loss is eligible to claim the capital loss. I took advantage of this strategy this year to raise cash to pay down my mortgage in addition to reducing capital gains tax paid in the previous three bull years. Note that capital losses can only be claimed against capital gains 3 years back or carried forward indefinitely.
- Invested in Business Growth – Buying “stuff” for a business simply for the tax reasons is a terrible idea. However, investing in business growth and claiming the expense is another story. This year, I expensed business advertising, a little business travel, and spent more on hosting to support online growth.
- Organized all my Business Receipts – This goes hand in hand with investing in business growth, but keeping your receipts organized can help a great deal. Technically, you cannot claim an expense unless you have the physical receipt. In the past, I would misplace a lot of receipts. Over the past couple years, I’ve used a filing cabinet to store tax receipts in an organized manner.
- Family Account Structuring – With my wife on maternity this year, she had a reduced marginal tax rate. With that said, we let her high interest savings account accumulate in her name untouched, while using my savings to pay down the mortgage etc. This does not save a large amount of money, but every bit counts!
How did you organize your affairs in a tax efficient manner this past year?