Some top tax saving strategies
(Special) - Reducing the amount of tax you pay each year doesn't have to be difficult. There are a number of tax-saving strategies that are easy to implement and leave more money in your pocket.
The first is contributing to a Registered Retirement Savings Plan (RRSP) and/or the new Tax Free Savings Account (TFSA).
"Do both and do both the maximum," advises Myron Knodel, Director of Tax and Estate Planning with Investors Group.
Financial experts almost universally agree that the TFSA is one of the most revolutionary financial products to hit the market since the introduction of RRSPs more than 50 years ago.
Anyone over 18 can open a TFSA and put up to $5,000 a year in any sort of investment allowed in an RRSP. You pay no tax on the income earned or any capital gains when the investment is withdrawn.
TFSA contributions also can be carried forward and if you withdraw money in one year from the account, you are allowed to put it back, but only in the year after it is withdrawn.
RRSPs and TFSAs can have different purposes.
An RRSP is a longer-term investment strategy that is probably more attractive to people in a higher income tax bracket who can take greater advantage of the tax refund you get from contributing to an RRSP.
TFSAs, however, are probably more suitable as a short-term investment strategy. They are more flexible than an RRSP because you can take your money in and out. If you withdraw money from an RRSP before its maturity, you pay a heavy tax penalty.
The decision where to put your money will depend on your specific objectives and needs.
If you're anticipating receiving an inheritance, a testamentary trust can provide significant tax benefits because of the preferential treatment that trusts receive under the Income Tax Act.
A testamentary trust is any trust that arises on death through a will. Testamentary trusts report income and pay tax, but usually at a lower rate than if the money was in the hands of the beneficiary.
Also, it can protect money in the event of a marital breakdown.
"Testamentary trusts may seem complicated, but they are really quite simple and routine," says Knodel. "There's no minimum that can be put in and they are becoming more popular."
Income splitting is another easy-to-implement strategy that can have significant tax savings.
Pension income splitting rules, originally introduced in October, 2006, are quickly becoming an important part of the retirement planning process for Canadian retirees and seniors.
The rules took effect in the 2007 tax year and allow retirees to split their retirement income with their partners. It is particularly effective in reducing a household's overall tax bill by shifting income from a higher-income earner to one or more lower-income earners.
The government estimates pension income splitting measures will provide Canadians more than $1 billion in tax relief each year.
Registered Educational Savings Plans (RESPs) help parents pay for the cost of their children's education.
Although there are no deductions like there are with an RRSP, your investment within the plan can grow tax free until it is withdrawn and all of the investment decisions are made by you. The lifetime contribution for each beneficiary is $50,000.
As well, you can take advantage of federal government grants of up to 20 per cent of your annual contribution up to a maximum of $500 for each beneficiary. The lifetime limit for the grant is $7,200.
For families with a more modest income, a learning bond provides an additional grant of up to $2,000 per child.
If the beneficiary of an RESP does not go to education after high school, your plan may allow you to choose another beneficiary, transfer the earnings to your RRSP, or withdraw the earnings, in which case you will pay taxes on them. You have to return any grants to the government unless you have a family RESP with one or more beneficiaries related to the contributor.
There are many more tax savings strategies available. To learn about your options, you may want to consult a tax or investment professional.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. (boggsyourmoneyrogers.com)
Copyright 2009 Talbot Boggs