Monday, May 23, 2011

Tax Freedom Now! Or at least earlier.

Tax Freedom Day is the day of the year when most Canadians finally start working for themselves after paying their total tax bill to all levels of government. It occurs either in late May or early June, depending on where you live. Maybe you feel like you’ve missed the party this year but with some smart tax and financial planning, you won’t miss the celebration next year – and if you really buckle down, you could end up celebrating your personal Tax Freedom Day a month or more earlier than everybody else.

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.
Put all three of these tax-saving strategies to work and your family could save over $10,000 in taxes and speed your personal Tax Freedom Day by 38 days. When wise tax planning and the right investment choices work together, you stand to achieve the best possible returns on your savings. Your professional planner can help make that happen for you.

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