Managing taxes can be tricky for most people to handle on their own. Understanding all the tax rules and sorting out what you owe in taxes to stay on the good side of the Canada Revenue Agency (CRA) can feel overwhelming. You might have heard that there are ways to pay less in taxes and not raise any red flags with the CRA – that’s what tax planning is all about. Most folks actually end up paying more taxes than they really need to, either because they don’t want to get help from a tax expert or because they don’t know about smart ways to plan their taxes.
Paying more taxes than necessary in Vancouver means you might need to save an extra few years towards the down payment for your home or will have to sacrifice living in the suburbs rather than being in the city. Tax planning can be difficult for those who lack financial education. This article will explain the importance of tax planning as well as some tax planning strategies that you can implement.
What is Tax Planning?
Tax planning is the process of organizing your financial and business affairs in such a way that you will pay the least amount of tax legally in Canada. An well designed tax plan will reduce the amount of taxes you pay and is an important part of your financial plan. Tax planning entails optimizing marginal tax rates through various strategies such as tax deductions, tax credits, charitable giving, incorporations, trust arrangements, deductible expenses, income splitting, profit-shifting arrangements, and more. One thing to keep in mind about tax planning is that it may involve multiple professionals to come up with a well designed plan. These professionals can include a financial planner, a tax accountant, and a tax lawyer.
Some factors to consider when developing a tax strategy include the timing of your income, the size of your income, the timing of your purchases and disposition, and your plans for other expenditures. Furthermore, in order to create an efficient tax plan, the types of investment strategies and portfolios you choose will matter as well.
Tax Planning For Individuals in Vancouver
Learning some basic tips on tax planning will give you the confidence of managing your taxes properly by yourself, and hiring an expert will make it even easier for you. Here are some of the tips you can consider for your tax plan:
1. Non Registered Investments
There are tax benefits when using non registered investment accounts. You can choose to invest in diversified assets, and you can even claim capital losses to reduce your tax liabilities during market downturns. Some investments, such as stock are tax more favourably due to tax breaks on dividends and capital gains. For non registered investments, you want to avoid investments such as GICs or Bonds as the income are fully taxable.
2. Registered Investments
Registered investment accounts such as Tax Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), and First Home Savings Account (FHSA) give you many tax benefits when investing your money. Generally speaking, you can enjoy tax deductible contributions from investing in your RRSP and FHSA; you can enjoy tax deferred growth from your RRSP and tax free growth from your TFSA and FHSA. There are certain limits to each of these investment accounts. For RRSP, the contribution limit is based on 18% of your annual earned income, and unused portion will be carried forward and added to new contribution rooms. The allowable room is available on your myCRA account online. For TFSA, if you are someone who is over 18 years of age in the year 2009, you have a total maximum contribution room of $88,000 in 2023 if you have never contributed before. For FHSA, it is a new account available in 2023 and will be very beneficial for first time home buyers in Vancouver. The year you open the account, you are allowed to contribute up to $8,000 into the account. And you will get $8,000 a year for the following 4 years for a total contribution room of $40,000.
3. Borrow to invest
Almost everyone has one debt or the other hanging over their heads. If you are going to have one, you might as well make most of it. Taking out a loan for investment purposes has its tax advantage. The interest on loans taken out for the purpose of investing can be tax-deductible, depending on the type of investments you hold. However, ensure that it is a low interest loan and the rate of return will exceed the loan interest in the long run for this to work. Many people are already doing this by taking out a mortgage to purchase a property. This strategy required careful planning and execution and is best done with a financial planner.
4. Aim for capital gains
Investment is an important aspect of a financial plan because it is what determines how well and fast your wealth will grow for a financially secured future. Investment portfolios such as mutual funds, stocks, bonds, and real estate have their tax advantages if you shoot for capital gains. Capital gains have much more favourable tax treatments compared to dividends, rental and interest income. Earning capital gains will allow you to build your nest egg much more rapidly as the gains are usually not realized until you sell the asset. Which means, the tax on gains are deferred and you can enjoy a more impactful compounding growth effect.
5. Receive dividend income
Dividend income are taxed favourably in Canada, especially for eligible dividend income. Eligible dividend income, in general, are dividends received from Canadian public corporation. You can receive up to $55,000 in eligible dividend income tax-free assuming you do not have any other income! If you have a spouse, it means that you and your partner can received a combined income of $110,000 tax free in eligible dividends if that’s all the income your receive!
6. Assess your deduction strategy
There are expenses you can enjoy as tax deductions or credits such as medical expenses, home office expenses and child care expenses. Itemizing them gives you clarity on the benefits that are available to you and helps you divert the deductions for other useful purposes. Furthermore, your Registered Retirement Savings Plan (RRSP) allows you to enjoy tax deduction and tax-free growth on your earnings until retirement. Even things like riding the skytrain or taking the translink busses and other forms of public transportation has associated tax credits.
7. Start a business
Asides from being your boss and building something for yourself, starting a business also has its tax benefits. One advantage is that you can deduct many of your expenses from the income from your business which will reduce your tax obligations. Some of the tax deductions you can enjoy as a business owner include health insurance premiums, office related expenses, and accounting fees. Aside from deduction benefits, if your business is incorporated, you may also enjoy a lower tax rate on your active business income. In BC, the first $500,000 of net income earned in a Canadian Controlled Private Corporation (CCPC) is only 11%.
8. Philanthropic activities
Donating to charity means you get to help those in need, but you can also enjoy some tax benefits that come along with it. Charitable donations in Vancouver come with generous tax credits or deductions, which will be a good addition to your tax plans. You will get up to 50 cents back in the form of tax refunds for tax reductions on every dollar you donate. There are many ways to donate that can assist you in your tax planning, be sure to chat with a financial planner if you plan on giving money away to charities to ensure a proper charitable plan is set up to your benefit.
Importance Of Tax Planning in Vancouver
Having a well designed tax plan is important for so many reasons in Vancouver. For one, it ensures that you keep more money for yourself, which is a big plus to live comfortably in Vancouver. There are many ways to ensure you pay less in taxes without attracting CRAs attention. With a well-prepared tax plan, you can enjoy paying taxes while building and enjoying optimized wealth benefits for your financial plan.
With a tax plan, you can save some extra cash and divert it into your savings or investments. It is an opportunity to grow your wealth with a smart tax plan. This extra money can help save towards your next big purchase in Vancouver or simply use it to create a memorable experience with your loved ones.
