Cleve DeSouza
April showers bring both Mayflowers and the taxman. If you didn’t like how much of your hard-earned money ended up in the government’s pockets this year, then you need to check out these five tips. Start following these tips today and you’ll see your tax bill shrink.
Stormy debt blossoms into productive debt
If you have a credit card or a line of credit balance and you are paying interest that does not qualify for tax deduction, you may be able to convert this debt into a productive debt.
Here’s an example. Let’s say you have a credit card balance of $5,000 and a savings account with $5,000. Every month, you pay 19% interest on the credit card, while the savings account only pays 0.05%. Your marginal tax rate is 45%. In that scenario, you pay 45 cents in taxes on every dollar you make. At that rate, your tax bill adds up a lot faster than the 19% you’re paying on your credit card or the 0.05% you’re earning on your savings.
To fix that, I suggest you use your savings to pay off the credit card. Then, borrow $5,000 and invest it. An easy and safe investment is a Tax-Free Savings Account, which earns 9% in interest. You’ll earn more interest on that investment than you would have from a regular savings account. Even better, you can write off the interest you’re paying on the loan, which earns you a higher tax return. If you’ve been following me, you know what I’m going to say next. Use your tax return to pay down the loan.
Wash, rinse and repeat year after year to accelerate your wealth.
Self-employed? Lower your pay and bask in the sunshine of lower personal taxes.
The average Canadian pays about 45% on personal taxes, while corporations pay about 20%. If you are self-employed, you can make that work for you.
Here’s how it plays out. Let’s say you’ve been paying yourself $100,000 a year, but your personal expenses run about $60,000 a year. Reduce your pay to $60,000 a year. You won’t have to change your lifestyle while you watch your personal tax bill drop. Your business only pays 20% on the $40,000 that you left in the business coffers.
In the end, this leaves more money in your pocket instead of wasting it on taxes.
The early CRA T1213 Form gets the lower tax bill
The CRA T1213 Form, Reduction in Tax Deducted at Source, can be used to apply for a lower tax deduction on your pay cheque. There are specific qualifications you will need to meet, such as higher child care and health care costs, high contribution to a Registered Retirement Savings Plan (RRSP), or if you normally get the foreign tax credit.
Consult a professional to get more definitive details on these requirements, but I am sure this is not a tip you’ll get from Canada Revenue Agency (CRA) or your employer. Why would they tell you this option is available when it’s in their best interest to deduct as much as possible and as early as possible? When you complete your tax return, ask your accountant or tax preparer if you meet the T1213 requirements to lower your at source deduction.
If your family sprouted, it’s time to review your at-source deductions.
The first $13,000 you make in Canada is tax free. If your spouse has no income, you could get another $13,000 tax free. And, by the way, if you have a business and pay your child to work for you, you can get another $13,000 tax free.
The name of the game when it comes to taxes is to lower your taxable income and, ultimately, your marginal tax rate. Income distribution helps you achieve this goal, but you must seek careful professional advice to ensure these moves are suitable for your specific situation. Don’t do it just because it sounds good. Make sure you can objectively substantiate your claim.
Every now and then check with your company’s Human Resources or Payroll department to ensure your TD1 reflects your situation. If you’ve worked for the same company for a few years, your circumstances may have changed. Did you update your employer, for example, when you got married or had your first child? If you didn’t, then the company is deducting more taxes than necessary.
Never give your hard-earned money to the government to hold when you could be investing it and putting it to work for you.
Transform your mortgage interest and watch a new tax deduction be born.
This last tip is definitely one the taxman doesn’t want you to know, so keep it a family secret.
So what’s the big secret? It’s known as the Smith-Maneuver and here is how it works. Mortgage expenses are one the largest expenses Canadians face, but unfortunately we don’t get any tax benefits from this expenditure. You know the wealthy aren’t taking that kind of hit. Instead, they use the Smith-Maneuver.
In simple terms, this calls for converting the equity into your home into a line of credit. Talk to an expert and use the money to make wise investments and start earning interest. Finally, the interest you pay on that line of credit is tax deductible, reducing your tax burden. Wash, rinse, and repeat this process whenever your equity increases.
Before you execute this maneuver, though, talk to an expert. There are inherent risks that you must understand before you try this one.
If you want to talk more about any of these tips, then contact us today. At CleveDoesMore, the best part of our job is helping people make informed choices to strategize their risk and build wealth.
