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Spring 2006 |
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F
i n a n c i a l
Top 5
tax-saving best practices
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Submitted Photo |
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Minimizing tax is a very
important part of one’s financial plan. The following best practices
include some basic tax-saving strategies that are available to most
individuals.
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By Joan McCarthy |
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Minimizing tax is a very
important part of one’s financial plan. The following best practices
include some basic tax-saving strategies that are available to most
individuals.
Utilize capital losses
Capital losses arising in a particular tax
year are applied first against capital gains arising in that tax year.
If losses remain, then a taxpayer is allowed to carry the capital losses
back three years, or forward indefinitely, to recover taxes paid on
capital gains in those years.
Income-splitting
Income-splitting shifts family income from
one family member in a high tax bracket to another family member in a
lower bracket. An example of income-splitting is to have the partner who
is in the lower tax bracket invest as much of their salary as possible.
This would involve having the partner in the higher tax bracket cover
all the household expenses. Investment income will grow and be taxed in
the hands of the partner with the lower tax rate.
Defer taxes
The most common method of deferring taxes
is by contributing to an RSP. Instead of being taxed in the current year
on this income, once the funds are in an RSP, a deduction for the RSP
amount is allowed against your income on your personal tax return to the
extent that you have contribution room. Neither the funds in the RSP,
nor any investment growth generated on them, will be taxed until
withdrawn from the RSP. Often this withdrawal will not occur until
retirement, when most people are in a lower tax bracket.
Make use of all tax deductions
Keeping track of all possible tax
deductions throughout the year can result in significant tax savings.
The old adage: “When in doubt, keep all receipts”, rings true as an
eligible deduction or tax credit can be disallowed by the Canada Revenue
Agency (CRA) if the supporting receipt or documentation is not
available. Accurate and complete records can also minimize time spent on
future assessments, re-assessments, or audits.
Will planning
Effective estate planning can ensure that
tax savings continue even when you have passed away. Without a will,
your estate can end up paying more taxes than necessary. Typically, upon
death there is a deemed disposition of all assets held at that time. The
amount of the deemed disposition is included in your terminal tax
return. A will can direct that your assets be rolled over to a spouse or
common-law partner. Thus, there is no immediate deemed disposition at
your death and taxes are deferred.
Taking advantage of opportunities to
realize tax savings is an important strategy for physicians. The
potential benefits of these strategies may vary according to your
specific facts and circumstances. Therefore, be sure to consult your tax
advisor before making any tax planning decisions.
Joan McCarthy is a senior financial
consultant with MD Management’s Newfoundland and Labrador regional
office.
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