Three Best Tax Savings To Do In Three Hours

Now that the Holiday Season is over and you may have blown the budget during the merry times with your family and friends, many readers may be experiencing a a temporary cash flow shortage. If so, these three tax savings ideas may seem worth checking out.

Let’s start with the one that takes about fifteen minutes for a call or email to be made to a broker by the High Income Partner (HIP) and who has $5,500 contributed to the Tax free Saving Account of the Low Income Partner (LIP). As this is not taxable there is no income to attribute back to the contributor. Children who will be 18 years or older during the year can also be included in this strategy for splitting income.

There are two considerations to keep in mind about this very useful strategy. The cumulative contribution limit of TFSA’s for 2017 is $ 52,000 and as contributions can be made up to this limit at any time this can be quite useful for young family members in single parent situations. The wage earner’s income can be split with them. Withdrawals from a TFSA can be replaced the next year or later along with the new contributions allowed. The other consideration is to be very careful about holding U.S. stocks in a TFSA. A withholding tax is collected by the Internal Revenue Agency before the dividends are paid to foreign investors and it is not recoverable. TFSA’s are thus likely not a good place to be holding U.S stocks.

If the $ 52,000 TFSA income split with the Low Income Partner and children does not maximize the income splitting savings then this second great, all-purpose splitter is likely the way to go: It consists of the HIP loaning money to the LIP and any children over 18 to invest in interest or dividend paying income. The LIP and/or the children pay 1% of interest each year on the loan to the HIP. The interest is required to be declared on the income tax return each year of the loaner or the technique is null and void. Each family members can deduct the interest paid on their tax return. 1% interest is the prescribed rate in 2016 set by Canada Revenue and you can set It in your loan agreement as the permanent rate for the life of the loan. This move will take about forty-five minutes to set up as a signed agreement between the two people for each loan is needed and I strongly suggest the two people use separate brokers and bank accounts.

The above transactions should maximize family income splitting opportunities over a few years and they work best for couples and families. The third strategy focuses on differentiating among investments and using the tax rates and rules. Everyone can profit here, especially single young people and seniors. While the two hours spent here will give users a solid tax saving start, they will continue to save more money if the investor also uses the tactics to help select their investments using the perhaps unfamiliar tax rules and rates.

The above report of avoiding US withholding taxes on dividends by not including U.S. stocks in a TSFA is a good example of using this strategy to reap wealth creation and preservation rewards.   Readers are often not clear as to how the tax varies on eligible dividends or capital gains or even be aware that from $45,282 to $73,145 of taxable income, the tax in Ontario on capital gains is over twice as much as eligible dividends, and regular income is taxed at over four times the rate. Or that with a taxable income over $ 90,563 capital gains are taxed at 3.7% to 12.6% less than eligible dividends. Many Exchange Traded Funds and regular Mutual Funds are heavily invested in U.S. and global stocks that make it worthwhile for readers to check on their real return [after taxes and fees] to their pocket.   Instead of using fund, shares in Canadian companies that have over half of their income from global sources but with eligible dividends can be an effective, tax-saving way to handle global diversification.

In summary, a lot of MoneySaver readers at all income levels spend little, if any, time monitoring their investment taxes—likely the biggest expense in their lives. Once a year they pop up a computer program and fill it in or just drop their data off with the tax person at the mall to do it for them. It would surprise them to hear that you do not pay tax but earn tax credits on eligible dividends up to $45,282 of taxable income; up to 20% saving on tax rates for choosing among ordinary income, capital gains and eligible dividend investments; the tax avoidance aspect of RRSP’s, TFSA’s, Split Shares of stocks; and the simple income splitting strategies described here. The conclusion here is to do your own income tax and make full use of the tax information and or meet with your tax person and go over the same activities. Early every year go online to collect the new related tax information [and review the old] or buy/read a current tax planning document.   In my own experience of tax avoidance we saved over 50% of our taxes and that paid for a second car and two holidays in the Caribbean and Florida each year. ¹

It would be appropriate to check these three activities out with your investment adviser as Minister Morneau has been exploring tax changes to raise taxes that may affect the 2017 year taxes.

Hedley Dimock, MA, EdD, Guelph, Ontario.

hdimock@teksavvy.com

Dimock, H. Reducing Income Tax by 50%, Canadian Moneysaver, June, 2013, pp.8-10.