The concept of Tax Freedom Day was developed by Canada’s Fraser Institute to provide a practical calculation of the taxation levels placed on Canadians. It uses a statistic model and tax calculator to estimate a household’s tax liability based on province of residence, age, income, marital status, and number of dependants.
A significant portion of the taxes you pay are federal and provincial government income tax – and how much you pay can be positively influenced by taking full advantage of tax planning opportunities. You can bump up your personal Tax Freedom Day with strategies like these:
- Use an RRSP to pull the trigger on taxes Depending on your province of residence and with a marginal tax rate of 46 percent, if your family were to make a $10,000 tax-deductible RRSP contribution, you could save as much as $4,600 in taxes and advance your Tax Freedom Day by as many as 18 days.
- Invest your non-registered dollars tax-efficiently For example, if your family earns $10,000 in interest income, taxed at a personal marginal rate of 46 per cent, you will pay $4,600 in taxes. But if that $10,000 of interest income is derived from more advantageously taxed investments – say, $3,000 invested in Canadian equities that pay dividends, $2,000 in realized capital gains investments, and $5,000 in deferred capital gains investments – your tax cost would be reduced by $3,361 – advancing your Tax Freedom by about 13 days.
- The family that tax-plans together, saves together Families can reduce their tax liability by having the spouse with the higher marginal tax rate make a prescribed rate loan to the spouse at a lower marginal tax rate. Often referred to income-splitting, this strategy may also be used with children or other relatives. Here’s an example: Transfer $10,000 from a family member taxed at a 46 per cent marginal rate to another family member taxed at a 25 per cent marginal rate and (based on a prescribed loan interest rate of 1 per cent), the tax savings would be $2,100 – or 9 tax freedom days.