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What can I do year-round to save taxes?

Plan Ahead

While most Canadians think of tax-saving strategies in the final hour -- during RRSP season or the April 30th tax deadline -- proactive investors realize that tax planning is an ongoing process, not a last-minute headache.

Taking just a few practical steps now can save both time and money and take the bite out of your taxes. Here are some common tax-saving strategies that often get overlooked during the income-tax rush.

A Family Affair

While investment income often ends up in the hands of the highest income earner, making more investment room in the hands of a lower-income earner can create tax savings for a family. Splitting day-to-day living costs between a two-income family is one way to decrease taxes and boost the investment portfolio of a lower-income spouse. For example, the highest-income earner could consider paying all non-deductible tax expenses, leaving more cash in the hands of the lower earner for investment purposes.

TIP: If you are part of a two-income family and are considering splitting expenses for tax savings, setting up separate bank accounts instead of a joint account, keeps funds separate for easy reference if the accounts are ever audited for tax purposes.

Don't Overlook RRSP Contribution Room

Yes, you may have joined the annual lineup of investors who made a last-minute contribution to a registered retirement savings plan (RRSP), but you may be overlooking extra contribution room. If you have contribution room left, you are not alone. According to Statistics Canada, over $300 billion worth of RRSP contribution room has yet to be filled by Canadian investors. Check your tax Notice of Assessment for your RRSP contribution room. Once calculated, allowable RRSP contributions can be "topped up" within 60 days of the current tax year-end, or in the current tax year.

The most overlooked Tax Benefit: Capital Losses

Combine your winners with your losers. You can offset capital gains taxes with current or prior-year capital losses. This can be done by minimizing your capital losses by selling them in a year you sell capital gains winners. But only if this makes sense for your financial goals! Say for example, you were going to make $2,000 on the sale of one share and you've got a loser that you want to get rid of. If you sell both together, you'll end up offsetting some of the taxes or paying no taxes on the capital gain investment.

Save Taxes with Labour-sponsored Tax Credits

Although any investment is risk-oriented, the federal government benefits Canadians who purchase approved shares of labour-sponsored venture capital corporations at any time of the year. Investors in approved labour-sponsored investments receive a federal tax credit of 15%. Some provinces provide an additional percentage. Purchase a labour-sponsored investment for an RRSP and you'll also reap additional tax-saving RRSP benefits.

While these investments are gaining in popularity, there is an eight-year holding period. If you cash in before the holding period has ended, you'll incur taxes and lose the tax benefits.

Biggest Mistake You Can Make re: Tax Savings

Missing the RRSP deadline. You've heard it before, but taking the challenge out of looking for RRSP funds at the last minute can be accomplished ahead of time.

Start today: A monthly, disciplined savings plan, however small, "dollar-cost averaging," not only takes advantage of market downturns and cheaper prices, but also reduces market volatility. By sheltering as much money as you can into an RRSP, you continue to benefit from tax-deferred growth in investments until the time you turn 69 when you must convert your RRSP to a retirement income fund or annuity. The income that is withdrawn at that point is often taxed in a lower tax bracket.

Unused Carry-over Benefits

There is a long list of tax benefits that you may have overlooked in previous years that can still be claimed in the future. Everything from home-office expenses, to unused charitable donations, to moving expenses, to educational credits, may mean tax savings to you. These are just a small sampling of often-overlooked, tax saving strategies. Your best tax-planning strategy is year-round planning and sitting down with a trusted advisor and/or tax accountant long before the busy income-tax season.

Bookmarks

  • 201 Easy Ways to Reduce Your Taxes year-round, by Evelyn Jacks, published by McGraw-Hill Ryerson Limited. A plain-language book chock full of practical tax advice.
  • Winning the Tax Game 2002, by Tim Cestnick, published by Prentice Hall Canada, 2001
  • Tax accountants are an excellent source of tax-savings booklets and information.