January is the best time to get started!
Minimizing taxes is one of the best ways to help you save money. The highest marginal tax bracket in Ontario is currently 53.5% on income over $220,000. Even at a more modest income of $93,000, the marginal tax bracket rises to 43.4%. Not very good. Below, is a 2017 checklist on some ways to reduce your tax bill and maximize your after-tax income.
(1) For 2017, the maximum annual contribution limit is $26,010 (The maximum of $26,010 for 2017 would be reached at an earned income of $144,500 in 2016). The maximum RRSP contribution amount that can be deducted is called the "RRSP deduction limit". Your deduction limit is found on your Notice of Assessment from CRA. Your 2017 limit would be on your 2016 Notice. Prior year unused contribution room, unused RRSP deductions, and annual private pension plan contributions affect the calculation of your overall "RRSP deduction limit" for 2017. Make sure not to make RRSP overcontributions. A penalty will be assessed by CRA of 1% per month on your excess contributions. You have until March 1, 2018 to contribute to your 2017 RRSP. The sooner you contribute, the sooner your money starts to grow tax-free until you start to withdraw.
Make the Most of Registered Savings Plans (RRSP)
(2) What is a spousal RRSP? The primary benefit of a spousal RRSP is that funds withdrawn can generally be taxed in the hands of the lower-income spouse or partner. The higher-income contributor typically gets a larger tax deduction because of the higher tax bracket. Here's how it works. If both you and your spouse withdraw $30,000 each in one year, then each person is in a lower tax bracket than if only one of you would withdraw $60,000. It is important to withdraw the money from the separate plans in order for both spouses to benefit from lower tax rates. An added incentive is that if you each have an RRSP, you will both benefit from the nonrefundable pension tax credit and you may be able to reduce or eliminate the Old Age Security (OAS) clawback.
Benefits of a Tax-Free Savings Account (TFSA)
(3) Investment income in a TFSA—whether you’re earning interest, dividends or capital gains—are not taxed, even when withdrawn. This tax-free compound growth means that your money grows more quickly inside a TFSA than in a taxable account. The annual TFSA contribution limit for 2017 is $5,500. The maximum TFSA cummulative total is currently $52,000. If you are setting up a TFSA account for the first time in 2017, you can contribute the maximum cummulative total of $52,000. Warning: Similar to an RRSP, a penalty will be assessed by Canada Revenue Agency (CRA) of 1% per month on your excess contribution. Also make sure to follow the rules about withdrawing and redepositing funds in and out of a TFSA account.
Registered Disability Savings Plan (RDSP)
(4) A Registered Disability Savings Plan (RDSP) is a special program that helps Canadians with disabilities and their families save for long-term financial needs such as future medical and living costs. Like an RESP, investment income is tax-deferred and you may be eligible for government assistance. While contributions to the RDSP are not eligible for a tax deduction, income earned grows on a tax-deferred basis until the funds are withdrawn. When withdrawn, the amount is taxed as income. Contributions can be up to a lifetime limit of $200,000. Plus, anyone can contribute with the written permission of the plan holder. Contributions can be made up until the end of the year the beneficiary turns 59.
Split taxable income
(5) Another way of paying less tax is by using the income splitting tax plan. How it works is that you transfer income to a lower income spouse or a common law partner or your child. Your taxable earnings will decline. The catch is that the lower income individual must actually perform job-related duties. You must keep employment records. You must pay a wage or salary that commensurate with what you would pay another person to do the same job. Another benefit to this strategy is that a hired spouse will be contributing to the Canada Pension Plan (CPP) and also may contribute to an RRSP.
(6) What is split pension income? If you received "eligible" pension income last year. It might be worthwhile to split as much as half of your pension with your spouse or common law partner in order to lower your taxes. Canada Pension is paid out to canadian citizens that are at least 65 years old.
"eligible" money includes:
1. Income from a Registered Pension Plan (RPP);
2. Annuities from a Registered Retirement Savings Plan (RRSP);
3. Payments from a Registered Retirement Income Fund (RRIF), and
4. The taxable portion of annuities from a superannuation or pension fund or plan.
For individuals under the age of 65, qualifying income comprises money from pension plans and superannuation plans, including foreign pensions.
Lend money to your spouse
(7) A higher-income spouse or partner can lend money to a lower-earning spouse or partner in order to invest. There must be a promissory note that includes the federal prescribed interest rate. Your spouse would report the investment income. The annual interest is claimed as a tax deduction. The higher earning spouse would pay tax on the interest income that you receive in that calendar year.
Talk to John McCormack CPA CGA, who may be able to find other ways for you to minimize your tax burden.
© copyright 2016 John McCormack CPA CGA All rights reserved
Tel: (905) 257-1550 Fax: 1-888-455-8628