这是98年的Winning The Tax Game 版本的keypoints, 希望对报税疑问者有一定的帮助
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Playing by the Rules
Tip 1: Avoid taxes like the plague but don't evade them.
Tax avoidance involves legally structuring your affairs to take advantage of provisions or loopholes in our tax law.
Tax evasion is a no-no. It can bring civil and criminal penalties, and can mean up to five years in prison.
A voluntary disclosure may be your best option to come clean if you've been evading taxes.
Tip 2: Understand this thing called the marginal tax rate.
Your marginal tax rate is likely the most important tax figure for you to know.
Simply put, it's the amount of tax you'll pay on your last dollar of income.
Your marginal tax rate depends on three things: Your province of residence, your level of income, and the type of income earned.
Tip 3: Know the difference between a deduction and a credit.
A deduction reduces your taxable income and offers tax savings equal to your marginal rate.
A credit reduces your basic federal tax bill, dollar for dollar, and results in savings on surtaxes and provincial taxes.
There are two types of credits: non-refundable and refundable.
Tip 4: Always wait to trigger a tax hit.
Educate yourself on what kind of events can lead to a tax bill.
There may be good reasons for involving yourself in some of these taxable events, but wait until a future year to trigger the tax hit if you can.
Tip 5: Pay your taxes on time, but not ahead of time.
Don't hope for a refund when you file your return. Aim for a small balance owing instead.
Request to have source withholdings reduced where you expect a refund due to certain deductions.
You may have to make quarterly installments where your income is not subject to source withholdings.
Consider the installment method that results in the lowest quarterly payments.
Tip 6: Think of taxes when big things happen in life.
Think of taxes any time big events happen in life.
Visit a tax professional before the events take place, if possible.
Tip 7: Dispute your assessment when you think you're right.
If you disagree with your Notice of Assessment, call Revenue Canada to straighten things out.
If a phone call doesn't help, consider filing a Notice of Objection within the required time limits.
Your last line of attack is to take Revenue Canada to court, start with the Tax Court of Canada's informal or general procedure, and potentially ending at the Supreme Court of Canada.
Splitting Family Income
Tip 8: Split income for hefty tax savings.
Splitting income invovles moving income from the hands of one family member, who will be taxed at a higher rate, to the hands of another, who will face tax at a lower rate.
The attribution rules prevent many attempts at passing income to other family members.
Splitting income most commonly entails investing moeny in lower-income hands, making deductible payments to lower-income family members, and claiming deductions and credits ont he most appropriate tax return.
Tip 9: Consider family trusts for income splitting.
Every trust has a settlor, trustee, trust assets, and beneficiaries.
A trust can be used to implement many of the income-splitting ideas presented in Tip 8.
Educating the Family
Tip 10: Use an RESP to save for your child's education.
RESPs are much more flexible than they have been in the past.
The new Canada Education Savings Grant (CESG) means a direct contribution by the government to a child's RESP, making these plans hard to resist.
Tip 11: Set up in-trust accounts properly; otherwise stick to an RESP.
In-trust accounts are a popular method of saving for a child's education, but are often set up improperly. There are three steps to properly setting up an in-trust accounts. (1. Set up true bare trust. 2. Ensure contributor (settlor) of the account is not also the trustee. 3. Sign an agreement providing that i) the property cannot revert back; ii) not require that property be passed to persons to be named by him after setting up the account; iii) not require that his consent or direction be obtained before the assets in the account that his consent or direction before the assets in the account are disposed of.)
Once the money is in the account, forget about getting ti back -- it belongs to the child and he or she has a right to it at age of majority -- for education or otherwise.
I'm a fan of RESPs over in-trust accounts.
Tip 12: Change the ownership of a second property to multiply tax savings.
Every family is entitled, for 1982 and later years, to one principal residence exemption to tax-shelter the profits on the sale of a home.
Ownership of a second property can be transferred to multiply the available exemptions, but professional tax advice is gong to be important here!
Tip 13: Plan the family's move carefully to maximize tax benefits.
You can deduct costs for moving as long as you're moving to a new work location or to school, and your new home is at least 40 kilometres closer than your old home.
Plan your move so that it coincides with a new work or school location and meets the distance test.
If you're moving to a new province, time your move to take advantage of lower tax rates.
Remember that you can pay an adult child to help int he move and then deduct this as an expense.
Tip 14: Maximize the base for your child care expenses.
Claim child care expenses where they were incurred to allow you or your spouse to earn income.
The amount deductible will be based on the age of your child and whether or not he or she has any infirmities.
Tip 15: Challenge the tax collector if a disability credit is isallowed.
You're entitled to a disability tax credit where you have a severe and prolonged disability that markedly restricts a basic activity of daily living.
The tax collector has not been generous in allowing these credits.
Consider filing a Notice of Objection or appealing to the Tax Court of Canada if you disagree with the tax collector's disallowance of your claim.
Tip 16: Choose carefully whether to claim attendant care as a deduction or a credit.
You may be entitled to claim attendant care costs if you're disabled and required the care to learn income.
Attendant care costs can be claimed as a deduction or as a medical credit. You'll have to do a calculation to figure out which is best for you and your family.
Surviving Separation and Divorce
Tip 17: Claim the equivalent-to-married tax credit if applicable.
Claim the equivalent-to-married credit if you are separated, divorced, or otherwise single,and you support a relative who lives with you.
The credit could save you $1450 in tax.
Tip 18: Avoid a tax hit when splitting retirement plan assets.
When dividng up the assets after separation or divorce, avoid taxes on the transfer by splitting RRSP or RRIF assets in accordance with a written separation agreement or a decree, court order, or judgement.
Tip 19: Maximize Child Tax Benefits by applying for one-income status.
Canada Child Tax Benefits are based on the combined incomes of both spouses and, as a result, often quickly disappear.
Make an election within 11 months of marriage breakdown to have the benefits based on one income only. This may increase the benefits significantly.
Tip 20: Consider splitting real estate when dividing up assets.
Each family is entitled to just one principal residence exemption, but each separated or divorced person is entitled to his or her own exemption.
Where the family owns more than one property at the time of a separation or divorce, it makes sense from a tax point of view to give each spouse one property, to multiply the number of exemptions that can be claimed.
Tip 22: Consider preserving pre-May 1997 support agreements.
New rules say that child support agreements made or varied after April 20, 1997, provide for payments that are non-deductible to the payor and non-taxable to the recipient. The tax collector comes out ahead under the new rules.
Consider keeping pre-May 1997 agreements intact to avoid the tax collector's win here.
Optimizing Employment Benefits
Tip 23: Take non-taxable benefits as part of your compensation.
Most Canadian employers lack creativity when structuring employment compensation.
Receiving a non-taxable benefits is the same as receiving salary or wages that will never show up on your tax return.
Next time you change employers or re-negotiate your salary or wages, ask for non-taxable benefits to form part of your compensation package.
Tip 24: Calculate whether a taxable benefit works to your advantage .
A taxable benefit will still leave you better off than if you had purchased the item yourself, and is of most value when you would have purchased the item anyway.
The value of the benefit added to your income is simply your employer's cost of the item -- which could be a lower cost than you could have obtained yourself.
Tip 25: Negotiate a loan from you employer instead of from a bank.
Borrowing from your employer rather than a financial institution will normally save you interest costs.
While you will normally have taxable interest benefit to include in your income, there may be a special relief from this taxable benefit if you are borrowing to buy or re-finance a home, or for a purpose that would normally entitled you to deduct interest.
Tip 26: Opt for stock optons or similar tax-efficent compensation.
Stock opton plans can be a very tax-efficient source of compensation, since the plan may entitle you to a 25-percent deduction to offset the taxable benefits.
These plans are best when you're confident that your employer's shares will increase in value and you'll be able to sell the shares down the road.
Phantom plans and stock appreciation rights (SARs) are hybrids of a stock opton plan, except that they don't require you to buy shares. SARs are especially attractive, since they still offer the potential for the 25-percent deduction.
Claiming Employment Deductions
Tip 27: Claim all the employment deductions you're entitled to.
Employees aren't given a lot of breaks in the form of deductions.
Claim all the deductions you're entitled to, and make sure you obtain a signed form T2200 where necessary.
Remember to claim a GST rebate where possible, using form GST370.
Always keep your receipts on file in case the tax collector wants to see them.
Driving Automobiles on the Job
Tip 28: Say "thanks, but no thanks" when offered a company car.
You may face two different taxable benefits if your company provides you with a car: a stand-by charge and an operating cost benefit.
In most cases, you'll be better off providing your own car to avoid these taxable benefits, and then taking an allowance or reimbursement from your employer for use of you car at work.
Tip 29: Claim automobile expenses that exceed your allowance or reimbursements.
A reimbursement and an allowance are different things. A reimbursement requires that receipts be provided to your employer, while an allowance does not.
Reimbursements and reasonable allowances based on kilometres driven are not taxable. Unreasonable allowances are taxable.
Claim a deduction for automobile expenses if you have not been reimbursed, or if your actual expenses are greater than your allowance received.
Tip 30: Defer tax with an RPP, RRSP, or DPSP.
A registerd pension plan (RPP) can provide a deferral of tax on your employment income, although in many cases I prefer an RRSP to an RPP when given a choice.
An RRSP is the most common tax-deferral vehicle in Canada and, like an RPP, provides a direct deferral of tax on employment income.
A DPSP is a plan to which your employer alone can contribute.
Contributions to RPPs and DPSPs will reduce the amount you can contribute to you RRSP.
Tip 31: Push the tax on your bonuses to a future year.
You're entitled to defer a bonus for up to three years. You won't face tax until the year the bonus is paid.
Deferring the bonus for three years and investing the money you would otherwise pay in taxes will reduce the true const of that tax bill.
Tip 32: Consider a leave of absence or sabbatical plan to defer tax.
A leave of absence or sabbatical plan will allow you to defer tax on up to one-third of your income for a full six years.
Certain other conditions must be met for the plan to qualify, and you'll pay tax on the deferred income no later than six years after the deferral begins, whether or not you actually take the leave or sabbatical.
Calling It Quits
Tip 33: Roll as much as possible of your retiring allowance to your RRSP or RPP.
Your best optoin when receiving a retiring allowance from your employer is to roll as much of it as possible into your RRSP or RPP to defer tax as long as possible.
This rollover must be made within 60 days following the year you receive the payment.
Tip 34: Consider a non-competition payment for potential tax savings when leaving your job.
A non-competition payment made to you may be very tax-efficient. It would appear, based on the Fortinos case, that the payment will either be tax-free, or taxed as a capital gain. In a worst-case scenario, it'll be taxed as regular income.
Before entering into a non-competition agreement and taking payment, be sure to visit a tax professional to talk about the benefits, risks, and any new developments on this issue.
Jumping on the Bandwagon
Tip 35: Count the costs before leaping into self-employment.
Self-employment can offer benefits -- not the least of which are tax breaks -- but it's not for everyone.
Know what resources you have, and what you need, before committing to full-time self-employment.
Tip 36: Structure you work so that you're self-employed, not an employee.
Arrange your work relationships so that you're considered self-employed rather than an employee.
You'll need to pass four tests to convince the tax collector that you're truly self-employed and not simply an employee in disguise.
Tip 37: Make sure you have a reasonable expectation of profit.
Claiming losses from your business will save you tax since those losses are applied against other sources of income.
While claiming losses for a couple of years is not likely to be a problem, recurring for three years or more could be a red flag on your tax return.
Avoid problems with REvenue Canada by preparing forecasts today to support your claim that you have a reasonable expectation of profit, and try to avoid recurring losses.
Choosing Your Business Structure
Tip 38: Consider incorporation once your business has grown, but not before.
The key benefits to setting up your business as a corporation are limited liability and the opportunity for tax deferralon corporate earnings.
Normally, you'll experience these benefits most once the business has grown in size and profitability, and so it's often preferable to wait until that time to incorporate.
Setting up a corporation too soon could result in trapped losses in the corporation.
Tip 39: Choose the right year-end for your business.
It can be a difficult decision to choose between a non-calendar and a calendar year-end.
Generally, if your business income is expected to rise consistently over the next few years, a non-calendar year-end will offer tax-deferral opportunities.
Be sure to visit a tax pro before making a final decision on a year-end.
Claiming Business Deductions
Tip 40: Maximize your deductions for home office expenses.
Claim a portion of all eligible home costs when your home is your principle place of business or is used to meet clients on a regular and ongoing basis.
Maximize the business use of your home by choosing carefully the areas to include in the calculation.
Tip 41: Maximize deductions related to business use of your automobiles.
Maximize business use of your car by stopping for business reasons on the way home from work, or on the way to work, and keep a log book of distances driven for business during the year.
Use your jalopy with the most costly expenses for business purposes.
See Tip 29.
Tip 42: Categorize your meals and entertainment to maximize tax savings.
Meals and entertainment costs are genrally 50-percent deductible when they are incurred to earn business income.
In some situations these costs are fully deductible.
Keep track of the categories separately to ensure maximum deductibility.
Tip 43: Maximize your eligibility to claim capital cost allowance.
It's possible to claim CCA on assets that you might already own and are now using in the business.
Maximize your CCA claim by buying new assets before the end of the fiscal year or by selling old assets after the current fiscal year.
Tip 44: Pay salaries to family members for a number of tax benefits.
Paying salaries or wages to family members with a lower marginal tax rate can result in permanent tax savings, and a perfect splitting of income.
The compensation will provide RRSP contribution room to your family member.
This strategy makes for a great way to cover education costs for children in school.
Adding Up the Tax Hits
Tip 45: Understand the various "taxes" affecting your business.
Income taxes are not the only type of tax that your business will have to deal with.
Take the time to understand your obligations to CPP, EI, provincial payroll taxes, workers' compensation, and the GST/HST.
Reducing Taxable Investment Income
Tip 46: Deduct as much of your interest cost as possible.
Interest is normally deductible when the money borrowed is used for business or investment purposes.
Consider swapping non-deductible for deductible debt where possible.
The tax collector will look to your current use of borrowed money to determine whether your interest costs will remain deductible.
Tip 47: Call your profits capital gains and your losses business losses.
It may not always be clear whether you should treat your investment profits and losses as capital or income.
Where possible, you'll want to argue that your profits are capital gains and your losses are business losses.
Document your reasoning and be consistent from one transaction to the next.
Tip 48: Claim a captial gains reserve to spread your tax bill over time.
It's very difficult to avoid paying tax on accrued capital gains on assets you own.
Your best bet is to push the tax bill as far into the future as possible.
A taxable capital gain can be spread out for up to five years by taking payment of the proceeds over an extended period. This is called a capital gains reserve.
Investing in Private Corporations
Tip 49: Consider an investment holding company in certain situations.
A corporation may be used to reduce clawbacks on OAS, minimize taxes on death, reduce probate fees, and provide a source for earned income.
You'll need enough open money to make this idea worthwile -- generally over $300,000. If you're interested, visit a tax pro to talk this idea over, since it won't be everyone.
Tip 50: Consider buying shares in a CCPC for a capital gains exemption -- and more.
Owning shares in a Canadian-controlled private corporation can offer tax benefits in the form of an enhanced captial gains exemption if the shares increase in value, and an allowable business investment loss if the investment turns sour. (May need to hold for two years - privately?)
Qualified farm property and shares purchased on the Canadian Dealing Network can also enjoy some of these benefits.
Investing in Real Estate
Tip 51: Use real estate properly to generate wealth and minimize taxes.
Build wealth and minimize taxes by leveraging your real estate to invest in the stock market -- but do this prudently!
Make sure you have a reasonable expectation of profit from your rental property; otherwise you could be burdened with unexpected taxes and an investment dud.
Choosing Conventional Securities
Tip 52: Participate in REITs or royalty trusts for tax-efficient cash flow.
REITs and royalty trusts provide tax-efficient cash flow for those who need a steady income from their investments.
Purchasing REITs or royalty trusts through a mutual fund is a great way to go.
Both investments are ideal for those who need to generate capital gains to use up capital losses.
Tip 53: Think twice before you buy into a mutual fund at the end of the year.
Buying mutual funds near the ned of the year could subject you to taxable distributions normally made at the end of December.
Paying taxes on this distribution could mean that you're effectively paying tax on someone else's profits.
Consider buying your fund units at the start of the calendar year, or try some of the other strategies I've noted to minimze the tax hit on the annual distributions.
Tip 54: Avoid index-linked GICs outside your RRSP or RRIF.
Index-linked GICs can offer stock market returns, but these returns are taxed as interest income -- not capital gains.
You'd do better for yourself by investing in an equity mutual fund that generates market returns. In this case, your profits will be taxed, appropriately, as capital gains.
The additional tax savings witht equity fund is your reward for giving up the security of guaranteed capital offered by an index-linked GIC.
Tip 55: Invest in labour-sponsored funds for tax efficiency and good growth potential.
LSVCCs (labour-sponsored venture capital corporation) offer generous tax credits to investors, usually worth up to $1050 annually in most provinces, and are RRSP-eligible.
Keep your annual investment down to $3500, since you won't receive credits for amounts over this. (May need to hold units for eight years.)
Use your tax savings from an LSVCC investment to make another RRSP contriibution or to invest in a good-quality equity mutual fund.
Taking a Different Route
Tip 56: Consider an exempt life insurance policy for tax-sheltered growth.
An exempt life insurance policy will allow the tax-free growth of investments inside the policy.
The face value of the policy plus the accumulated investments will be paid out tax-free to your beneficiaries upon your death.
There are ways of accessing the investments in the policy during your lifetime, although there may be tax or interest costs invovled in doing this.
Tip 57: Use offshore trusts for big tax savingsin three scenarios -- legally.
There are three scenarios in which offshore trusts can clearly be used to avoid income tax in Canada. (Inheritance Trust, Emigration Trust, Immigration Trust)
Each scenario involves a non-resident of Canada for tax purposes.
You may be subject to the foreign reporting requirements if you're involved with an offshore trust.
Tip 58: Defer tax with a commodity straddle, but beware of GAAR (general anti-avoidance rule)
A commodity straddle is an aggressive tactic that lets you shift income from one year to the next. It involves buying two opposite future contracts.
Be aware that the tax collector could potentially invoke GAAR.
Understanding RRSP Basics
Tip 59: Contribute to an RRSP for tax deferral and tax-free growth.
An RRSP offers two significant benefits: a deferral of tax and tax-free growth inside the plan.
The earlier in life you start, the greater the benefit to you in retirement.
You'll face tax on your RRSP assets once you make withdrawals from your plan, but these withdrawals will be made slowly over time and won't begin for a number of years, multiplying the benefits of the deferral and the tax-free growth.
Tip 60: Understand whether your RRSP assets are protected from creditors.
RRSPs administered by insurance companies are generally protected from creditors.
It has traditionally been believed that other RRSPs are vulnerable to creditors, but a recent court decision would suggest that your RRSP might be protected.
Tip 61: Pay your RRSP fees from outside your plan up to age 69.
Administration and investment management fees for your RRSP or RRIF are not deductible for tax purposes.
Pay these fees from outside your plan up to age 69 to preserve the growth of your plan assets. From age 69 onward, pay the fees from inside the plan as a way to make tax-free withdrawals from the plan.
Contributing to Your RRSP
Tip 62: Know Your RRSP contribution limit each year, then avoid an accumulation of contribution room.
You're entitled to contribute 18 percent of your earned income from the prior year to an RRSP, to a yearly maximu.
Even though unused contribution room can be carried forward, don't let this happen, since you'll be giving up a valuable tax deferral and tax-free growth of your money.
Tip 63: Make a contribution in-kind to your RRSP if you're low on cash.
If you haven't got the cash, contribute in-kind to maximize your RRSP contributions.
You'll be deemed to have sold any investment that is contributed in-kind, which could mean a taxable capital gain; but you'll also be entitled to a deduction for your contribution in-kind, within your contribution limits.
Set up a self-directed RRSP to make a contribution in-kind.
Tip 64: Maximize your RRSP contributions even if you have to borrow the money.
Borrowing to contribute to your RRSP makes sense when your other choices are to make no contribution or to delay the contribution for even two or three years.
The interest on your RRSP loan will not be tax deductible.
Tip 65: Have your employer contribute directly to your RRSP.
Employer-direct RRSP contributions can significantly increase the amount you're able to contribute to your RRSP without borrowing.
Your employer will simply send a portion of your pay directly to your RRSP carrier, and will avoid income tax withholdings (although CPP and EI will still be payable).
Your employer should keep the payment at or below $10,000 to avoid tax withholdings.
Tip 66: Over-contribute $2000 to your RRSP if you can leave it for 10 years.
Excess contributions to an RRSP attract a monthly of 1 percent of the excess amount.
You're entitled to a $2000 over-contribution and should take advantage of this when you have 10 years or more before you'll be making regular withdrawals from your RRSP.
Tip 67: Over-contribute to your RRSP just before winding up the plan at age 69, if you have earned income.
You'll have to wind up your RRSP by December 31 of the year you turn 69.
You may be able to take advantage of RRSP deductions beyond age 69 through the senior's over-contribution, which involves making one last over-contribution to your RRSP just before winding up the plan at age 60.
The tax savings from the future deduction will outweight any penalties owing from the over-contribution.
Tip 68: Boost the value of your RRSP with tax-free rollovers.
Transfers From One RRSP to the Next.
Retiring Allowance Rollovers.
RPP Assets to an RRSP.
Inherited RRSP Assets.
Transfer Upon Marriage Breakdown.
U.S. IRA to an RRSP.
Tip 69: Ensure that your child files a tax return to maximize RRSP contribution room.
There's no requirement to file a tax return unless income is over $6956 or there are capital gains to report.
Even if it's not required, helping your child file a tax return can be worthwile because it will create valuable RRSP contribution room that will save your child tax down the road and provide a good head start in saving for retirement.
Tip 70: Claim your RRSP deduction in the right year.
Your RRSP contributions will entitle you to a deduction on your tax return but that deduction may be put off and claimed in any future year.
Delaying the deduction may make sense when you expect to face a higher marginal tax rate in the next couple of years.
Tip 71: Contribute to your RRSP instead of paying down your mortgage.
Except in very rare situations, you'll be better off making contributions to your RRSP than paying down the mortgage.
Get the best of both worlds by contributing to your RRSP and then using the tax savings to pay down the mortgage.
Tip 72: Contribute to a spousal RRSP to equalize incomes in retirement.
A spousal RRSP is a plan that you contribute to but your spouse makes withdrawals from.
You're entitled to a deduction and your spouse will be taxed on any withdrawals, which accomplishes a perfect splitting of income.
Watch out for attribution rules, which could tax some of the withdrawals in the hands of the contributor.
A spousal plan can be used to make RRSP contributions beyond age 69, and to reduce taxes upon your death through a contribution by the executor.
Withdrawing From Your RRSP
Tip 73: Make RRSP withdrawals during periods of no or low income.
Withdrawing funds from your RRSP can be done tax-efficiently if your income is low, thanks to the basic personal and supplementary credits totalling $6956.
Withdrawals will be subject to withholding taxes, which are simply installments toward your eventual tax bill.
Tip 74: Consider the impact of using RRSP assets to buy a home.
Under the Home Buyers' Plan (HBP), you may be eligible to make tax-free withdrawals from your RRSP in order to buy a home.
The younger you are, the more it will cost you in RRSP growth to use the HBP.
Money borrwed from your RRSP under the HBP must be paid back over 15 years.
The rules are many and complex, so take the time to learn how the HBP works first.
Tip 75: Consider the impact of using RRSP money for full-time education for you or your spouse.
The 1998 federal budget opened a door to make tax-free withdrawals from an RRSP for full-time training of education.
You can withdraw up to $10,000 each year, over four years, to a maximum of $20,000 in total withdrawals.
The plan is similar to the Home Buyers' Plan in many ways, and the rules can be complex. Take the time to understand the impact on your retirement savings before withdrawing RRSP money.
Tip 76: Take three steps to minimize the tax hit on RRSP withdrawals if you're planning to leave the country.
If you're planning to leave Canada, leave your RRSP intact and make withdrawals once you're gone. The only tax you'll face in Canada will be a maximum withholding tax of 25 percent, which could be reduced to just 15 percent.
Be sure to follow these three steps to minimize the tax hit on your RRSP if you plan to leave the country: (1) Leave your RRSP intact; (2) Step-up the cost base of your plan assets; and (3) Give up residence properly.
Benefitting From RRIFs and Annuities
Tip 77: Roll your RRSP to a RRIF or annuity to defer tax well beyond age 69.
When your RRSP matures in December of the year you turn 69, you've got three choices for those assets: Make a lump-sum withdrawal; buy an annuity; or roll the assets to a RRIF.
The annuity and RRIF options will allow you to defer tax, while the lump-sum option won't.
In most cases, the RRIF option will be best, but speak to a reputable financial advisor about which is best for you before making a decision that you may have to live with for a lifetime.
Tip 78: Defer tax on your RRIF withdrawals as long as possible.
Defer tax as long as possible by minimizing how much you take out of your RRIF and by delaying those withdrawals until absolutely necessary.
You can minimize your withdrawals by basing them on the age of the younger spouse, and you can delay your withdrawals until the end of the year following the year you set up the plan.
Understanding Registered Pension Plans
Tip 79: Consider opting out of your company pension plan if you have the choice.
When you leave a company pension plan you could very likely be short-changed on the benefits you take with you, particularly when you haven't been a member of the pension plan for long.
When you leave a pension plan and don't join another, you could lose the ability to use a tax-deferred retirement savings plan for a full year.
An RRSP is much more portable than a pension plan, but each situation should be evaluated separately.
Tip 80: Look into an individual pension plan (IPP) to avoid a big tax hit when leaving your company pension plan.
You might have two or three options available when you leave a pension plan. It's quite common to take the commuted value of the plan when this is an option.
Consider setting up an IPP if you will be running a business. This may allow a tax-free transfer of your commuted value to the new plan.
Speak to a tax pro experienced in IPPs to set this plan in motion.
Reporting Your U.S. Income
Tip 81: Claim a foreign tax credit when you've paid withholding taxes to Uncle Sam.
Certain types of income from the U.S. will be subject to withholding taxes down south.
As a Canadian resident you'll be entitled to a foreign tax credit in Canada for U.S. or other foreign taxes you pay.
Be sure to claim the tax credit to ensure you're not double-taxed on the same income in different countries. The calculation is don on Schedule 1 of your tax return.
Profiting From U.S. Real Estate
Tip 82: Use the net rental income method on your U.S. rental property in most cases.
When you own a rental property in the U.S., there are two ways of paying tax on the rents you earn: a withholding tax, or the net rental income method of reporting.
The net rental income method will generally provide the greatest tax savings.
Tip 83: Take two steps to minimize the tax hit on the sale of your U.S. real estate.
When you sell your U.S. real estate, you'll be subject to a 10-percent withholding tax that the buyer will have to remit to the IRS.
Minimize this tax by selling to someone planning to use the property as a principal residence, or by applying to the U.S. for a withholding certificate.
Minimize your taxable gain on the sale by making appropriate adjustments to your sale proceeds and your cost base.
Cutting Your Gambling Losses
Tip 84: Register at a casino or hotel to track gambling losses for tax savings.
Canadian residents can now claim U.S. gambling losses to offset winnings.
Register ata casino or hotel and establish an account to substantiate your gambling losses.
File a tax return, Form 1040NR, to claim your losses and recover any withholding tax.
Staying Canadian
Tip 85: Understand the implications of becoing a resident of the U.S.
Avoid becoming a U.S. resident for tax purposes if you hope to keep your tax affairs from becoming a complex quagmire.
If you spend, on average, more than 122 days each year in the U.S., you might meet the substantial presence test, which will deem you to be a resident of the U.S.
If you meet the substantial presence test and are deemed to be a resident of the U.S., filing Form 8840 could solve your problem.
Considering U.S. Estate Taxes
Tip 86: Determine whether you're a candidate for U.S. estate taxes.
You could be liable to pay U.S. estate tax if you own U.S. assets or are considered domiciled in the U.S.
If you think you're a candidate for U.S. estate taxes, refer to Tip 101.
Walking to a Different Drummer
Tip 87: Understand the significant changes resulting from the 1997 Quebec budget.
The 1997 Quebec budget brought big changes to the province's tax system, including changes to tax rate brackets and the introduction of a new simplified tax filing system.
The simplified system will replace number of deductions with a single lump-sum tax credit.
Tip 88: Understand the differences between federal and Quebec taxes, and plan accordingly.
The federal and Quebec tax systems are different in many areas.
Be sure to understand these differences so that your income tax planning works both federally and in Quebec.
Investing in Quebec
Tip 89: Take advantage of special investment incentives offered only to residents of Quebec.
Consider investing in one of a number investments that offer attractive tax incentives to residents of Quebec.
These include: QSSPs, QBICs, CIPs, QIFs, and flow-through shares.
Giving It Away Today
Tip 91: Give assets away during your lifetime for tax and probate savings upon your death.
The tax collector can't tax you on credits you don't own at the time of your death.
Consider giving assets away today to minimize taxes and probate fees upon death, but beware of the deemed disposition at fair market value that could lead to a tax bill when you make the gift.
Tip 92: Consdier an estate freeze to minimize your tax bill on death.
By completing an estate freeze you'll manage to pass the future growth of the frozen assets to your heirs or others of your choice.
This will, among other things, freeze your tax bill upon death, enabling you to estimate and plan for those taxes ahead of time.
A corporation or trust are most commonly used to freeze an estate.
Giving It Away at Death
Tip 93: Leave it to your spouse to defer the tax hit longer.
Leaving assets to your spouse or a spousal trust upon death will allow you to avoid the effect of a deemed "sale" at a fair market value of those assets when you die.
If you're going to leave assets to the kids upon your death, leave them with those assets that will be subject to little tax, if any: cash, life insurance benefits, a principal residence, or assets that have not appreciated much in value.
Tip 94: Minimize the tax on your RRSP or RRIF assets upon death by naming the right beneficiaries.
You'll always manage to avoid tax on your RRSP or RRIF assets upon death by naming your spouse as the beneficiary of your plan.
You may also manage to defer tax on your plan assets by transferring your RRSP or RRIF to a person financially dependent on you at the time of your death.
Tip 95: Instruct your executro to make a final contribution to your RRSP after your death.
The executor of your estate may be able to make final RRSP contributions on your behalf after you're gone.
The contributions must be made to a spousal RRSP, within your contributions limits.
A deductions may be claimed on your final tax return for these contributions.
Tip 96: Save your heirs tax by setting up a testamentary trust in your will.
A testamentary trust provides an opportunity for your heirs to split income with the trust, maximizing the number of dollars that will be taxed in the lowest tax bracket.
Setting up a testamentary trust must be done in your will.
The tax savings can be up to about $11,000 (maximum) annually, depending on your income level and your province of residence.
Tip 97: Give to charity and save a bundle. But do it properly.
Giving to charity during your lifetime or upon death can provide significant tax savings. Making doncations during your lifetime will also save probate fees.
Consider donating securties instead of cash.
Consider a charitable remainder trust or life insurance as tax-efficient ways to help your favourite charity.
Tip 98: Suggest an offshore inheritance trust to non-resident family members.
If you're expecting a non-resident relative to leave you an inheritance, arrange for the inheritance to be place in an offshore trust with you as beneficiary.
Arrangements must be made before your relative dies.
Tax-free distributions of capital can be made from the trust, making it more attractive than an RRSP.
Providing Tax-Free Death Benefits
Tip 99: Negotiate a $10,000 death benefit with your employer.
Your employer can pay a $10,000 death benefit to your spouse or other beneficiaries on a tax-free basis.
At your next salary review or new position, negotiate to have such a payment made. It's like life insurance without any premiums.
Tip 100: Use life insurance to soften the blow of a tax bill at the time of your death.
Sometimes it's impossible to avoid a tax bill on death. If you want to minimize the impact of this, life insurance may be your best bet.
Life insurance will be particularly important when you expect a tax bill on death with little cash available to pay those taxes.
Consider asking your heirs to pick up the tab for the insurance; after all, they're the ones who will ultimately benefit.
Planning for U.S. Estate Taxes
Tip 101: Forecast your U.S. estate tax and apply eight strategies to minimize the tax bill.
U.S. estate taxes will aply to any U.S. situs property you own on the date of your death.
Recent changes in the Canada-U.S. tax treaty make this estate tax blow easier to take, but you still need to plan.
Apply one or more of the ight most common strategies to minimize U.S. estate tax.
Keep your US assets below $1.2M to avoid estate tax on all but your US real estate and a couple of other uncommon US assets.
Consdier holding your US assets inside a Canadian corporation.
Giver property to your spouse and children over time, since each person is entitled to his or her own unified credit.
Buy life ensurance to cover any US estate tax liability.
Restructure your debt so that non-recourse loans are secured by your US assets, since this debt will reduce hte value of you taxable estate.
Move your US assets back to Canada.
Leave your US property to a qualified domestic trust (QDOT). This type of trust does not eliminate US estate tax but can defer it until the death of the second spouse.
Rent instead of own. You're not going to pay estate tax on assets you don't own so consider renting a place in your favourite location down south rather than buying.
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Playing by the Rules
Tip 1: Avoid taxes like the plague but don't evade them.
Tax avoidance involves legally structuring your affairs to take advantage of provisions or loopholes in our tax law.
Tax evasion is a no-no. It can bring civil and criminal penalties, and can mean up to five years in prison.
A voluntary disclosure may be your best option to come clean if you've been evading taxes.
Tip 2: Understand this thing called the marginal tax rate.
Your marginal tax rate is likely the most important tax figure for you to know.
Simply put, it's the amount of tax you'll pay on your last dollar of income.
Your marginal tax rate depends on three things: Your province of residence, your level of income, and the type of income earned.
Tip 3: Know the difference between a deduction and a credit.
A deduction reduces your taxable income and offers tax savings equal to your marginal rate.
A credit reduces your basic federal tax bill, dollar for dollar, and results in savings on surtaxes and provincial taxes.
There are two types of credits: non-refundable and refundable.
Tip 4: Always wait to trigger a tax hit.
Educate yourself on what kind of events can lead to a tax bill.
There may be good reasons for involving yourself in some of these taxable events, but wait until a future year to trigger the tax hit if you can.
Tip 5: Pay your taxes on time, but not ahead of time.
Don't hope for a refund when you file your return. Aim for a small balance owing instead.
Request to have source withholdings reduced where you expect a refund due to certain deductions.
You may have to make quarterly installments where your income is not subject to source withholdings.
Consider the installment method that results in the lowest quarterly payments.
Tip 6: Think of taxes when big things happen in life.
Think of taxes any time big events happen in life.
Visit a tax professional before the events take place, if possible.
Tip 7: Dispute your assessment when you think you're right.
If you disagree with your Notice of Assessment, call Revenue Canada to straighten things out.
If a phone call doesn't help, consider filing a Notice of Objection within the required time limits.
Your last line of attack is to take Revenue Canada to court, start with the Tax Court of Canada's informal or general procedure, and potentially ending at the Supreme Court of Canada.
Splitting Family Income
Tip 8: Split income for hefty tax savings.
Splitting income invovles moving income from the hands of one family member, who will be taxed at a higher rate, to the hands of another, who will face tax at a lower rate.
The attribution rules prevent many attempts at passing income to other family members.
Splitting income most commonly entails investing moeny in lower-income hands, making deductible payments to lower-income family members, and claiming deductions and credits ont he most appropriate tax return.
Tip 9: Consider family trusts for income splitting.
Every trust has a settlor, trustee, trust assets, and beneficiaries.
A trust can be used to implement many of the income-splitting ideas presented in Tip 8.
Educating the Family
Tip 10: Use an RESP to save for your child's education.
RESPs are much more flexible than they have been in the past.
The new Canada Education Savings Grant (CESG) means a direct contribution by the government to a child's RESP, making these plans hard to resist.
Tip 11: Set up in-trust accounts properly; otherwise stick to an RESP.
In-trust accounts are a popular method of saving for a child's education, but are often set up improperly. There are three steps to properly setting up an in-trust accounts. (1. Set up true bare trust. 2. Ensure contributor (settlor) of the account is not also the trustee. 3. Sign an agreement providing that i) the property cannot revert back; ii) not require that property be passed to persons to be named by him after setting up the account; iii) not require that his consent or direction be obtained before the assets in the account that his consent or direction before the assets in the account are disposed of.)
Once the money is in the account, forget about getting ti back -- it belongs to the child and he or she has a right to it at age of majority -- for education or otherwise.
I'm a fan of RESPs over in-trust accounts.
Tip 12: Change the ownership of a second property to multiply tax savings.
Every family is entitled, for 1982 and later years, to one principal residence exemption to tax-shelter the profits on the sale of a home.
Ownership of a second property can be transferred to multiply the available exemptions, but professional tax advice is gong to be important here!
Tip 13: Plan the family's move carefully to maximize tax benefits.
You can deduct costs for moving as long as you're moving to a new work location or to school, and your new home is at least 40 kilometres closer than your old home.
Plan your move so that it coincides with a new work or school location and meets the distance test.
If you're moving to a new province, time your move to take advantage of lower tax rates.
Remember that you can pay an adult child to help int he move and then deduct this as an expense.
Tip 14: Maximize the base for your child care expenses.
Claim child care expenses where they were incurred to allow you or your spouse to earn income.
The amount deductible will be based on the age of your child and whether or not he or she has any infirmities.
Tip 15: Challenge the tax collector if a disability credit is isallowed.
You're entitled to a disability tax credit where you have a severe and prolonged disability that markedly restricts a basic activity of daily living.
The tax collector has not been generous in allowing these credits.
Consider filing a Notice of Objection or appealing to the Tax Court of Canada if you disagree with the tax collector's disallowance of your claim.
Tip 16: Choose carefully whether to claim attendant care as a deduction or a credit.
You may be entitled to claim attendant care costs if you're disabled and required the care to learn income.
Attendant care costs can be claimed as a deduction or as a medical credit. You'll have to do a calculation to figure out which is best for you and your family.
Surviving Separation and Divorce
Tip 17: Claim the equivalent-to-married tax credit if applicable.
Claim the equivalent-to-married credit if you are separated, divorced, or otherwise single,and you support a relative who lives with you.
The credit could save you $1450 in tax.
Tip 18: Avoid a tax hit when splitting retirement plan assets.
When dividng up the assets after separation or divorce, avoid taxes on the transfer by splitting RRSP or RRIF assets in accordance with a written separation agreement or a decree, court order, or judgement.
Tip 19: Maximize Child Tax Benefits by applying for one-income status.
Canada Child Tax Benefits are based on the combined incomes of both spouses and, as a result, often quickly disappear.
Make an election within 11 months of marriage breakdown to have the benefits based on one income only. This may increase the benefits significantly.
Tip 20: Consider splitting real estate when dividing up assets.
Each family is entitled to just one principal residence exemption, but each separated or divorced person is entitled to his or her own exemption.
Where the family owns more than one property at the time of a separation or divorce, it makes sense from a tax point of view to give each spouse one property, to multiply the number of exemptions that can be claimed.
Tip 22: Consider preserving pre-May 1997 support agreements.
New rules say that child support agreements made or varied after April 20, 1997, provide for payments that are non-deductible to the payor and non-taxable to the recipient. The tax collector comes out ahead under the new rules.
Consider keeping pre-May 1997 agreements intact to avoid the tax collector's win here.
Optimizing Employment Benefits
Tip 23: Take non-taxable benefits as part of your compensation.
Most Canadian employers lack creativity when structuring employment compensation.
Receiving a non-taxable benefits is the same as receiving salary or wages that will never show up on your tax return.
Next time you change employers or re-negotiate your salary or wages, ask for non-taxable benefits to form part of your compensation package.
Tip 24: Calculate whether a taxable benefit works to your advantage .
A taxable benefit will still leave you better off than if you had purchased the item yourself, and is of most value when you would have purchased the item anyway.
The value of the benefit added to your income is simply your employer's cost of the item -- which could be a lower cost than you could have obtained yourself.
Tip 25: Negotiate a loan from you employer instead of from a bank.
Borrowing from your employer rather than a financial institution will normally save you interest costs.
While you will normally have taxable interest benefit to include in your income, there may be a special relief from this taxable benefit if you are borrowing to buy or re-finance a home, or for a purpose that would normally entitled you to deduct interest.
Tip 26: Opt for stock optons or similar tax-efficent compensation.
Stock opton plans can be a very tax-efficient source of compensation, since the plan may entitle you to a 25-percent deduction to offset the taxable benefits.
These plans are best when you're confident that your employer's shares will increase in value and you'll be able to sell the shares down the road.
Phantom plans and stock appreciation rights (SARs) are hybrids of a stock opton plan, except that they don't require you to buy shares. SARs are especially attractive, since they still offer the potential for the 25-percent deduction.
Claiming Employment Deductions
Tip 27: Claim all the employment deductions you're entitled to.
Employees aren't given a lot of breaks in the form of deductions.
Claim all the deductions you're entitled to, and make sure you obtain a signed form T2200 where necessary.
Remember to claim a GST rebate where possible, using form GST370.
Always keep your receipts on file in case the tax collector wants to see them.
Driving Automobiles on the Job
Tip 28: Say "thanks, but no thanks" when offered a company car.
You may face two different taxable benefits if your company provides you with a car: a stand-by charge and an operating cost benefit.
In most cases, you'll be better off providing your own car to avoid these taxable benefits, and then taking an allowance or reimbursement from your employer for use of you car at work.
Tip 29: Claim automobile expenses that exceed your allowance or reimbursements.
A reimbursement and an allowance are different things. A reimbursement requires that receipts be provided to your employer, while an allowance does not.
Reimbursements and reasonable allowances based on kilometres driven are not taxable. Unreasonable allowances are taxable.
Claim a deduction for automobile expenses if you have not been reimbursed, or if your actual expenses are greater than your allowance received.
Tip 30: Defer tax with an RPP, RRSP, or DPSP.
A registerd pension plan (RPP) can provide a deferral of tax on your employment income, although in many cases I prefer an RRSP to an RPP when given a choice.
An RRSP is the most common tax-deferral vehicle in Canada and, like an RPP, provides a direct deferral of tax on employment income.
A DPSP is a plan to which your employer alone can contribute.
Contributions to RPPs and DPSPs will reduce the amount you can contribute to you RRSP.
Tip 31: Push the tax on your bonuses to a future year.
You're entitled to defer a bonus for up to three years. You won't face tax until the year the bonus is paid.
Deferring the bonus for three years and investing the money you would otherwise pay in taxes will reduce the true const of that tax bill.
Tip 32: Consider a leave of absence or sabbatical plan to defer tax.
A leave of absence or sabbatical plan will allow you to defer tax on up to one-third of your income for a full six years.
Certain other conditions must be met for the plan to qualify, and you'll pay tax on the deferred income no later than six years after the deferral begins, whether or not you actually take the leave or sabbatical.
Calling It Quits
Tip 33: Roll as much as possible of your retiring allowance to your RRSP or RPP.
Your best optoin when receiving a retiring allowance from your employer is to roll as much of it as possible into your RRSP or RPP to defer tax as long as possible.
This rollover must be made within 60 days following the year you receive the payment.
Tip 34: Consider a non-competition payment for potential tax savings when leaving your job.
A non-competition payment made to you may be very tax-efficient. It would appear, based on the Fortinos case, that the payment will either be tax-free, or taxed as a capital gain. In a worst-case scenario, it'll be taxed as regular income.
Before entering into a non-competition agreement and taking payment, be sure to visit a tax professional to talk about the benefits, risks, and any new developments on this issue.
Jumping on the Bandwagon
Tip 35: Count the costs before leaping into self-employment.
Self-employment can offer benefits -- not the least of which are tax breaks -- but it's not for everyone.
Know what resources you have, and what you need, before committing to full-time self-employment.
Tip 36: Structure you work so that you're self-employed, not an employee.
Arrange your work relationships so that you're considered self-employed rather than an employee.
You'll need to pass four tests to convince the tax collector that you're truly self-employed and not simply an employee in disguise.
Tip 37: Make sure you have a reasonable expectation of profit.
Claiming losses from your business will save you tax since those losses are applied against other sources of income.
While claiming losses for a couple of years is not likely to be a problem, recurring for three years or more could be a red flag on your tax return.
Avoid problems with REvenue Canada by preparing forecasts today to support your claim that you have a reasonable expectation of profit, and try to avoid recurring losses.
Choosing Your Business Structure
Tip 38: Consider incorporation once your business has grown, but not before.
The key benefits to setting up your business as a corporation are limited liability and the opportunity for tax deferralon corporate earnings.
Normally, you'll experience these benefits most once the business has grown in size and profitability, and so it's often preferable to wait until that time to incorporate.
Setting up a corporation too soon could result in trapped losses in the corporation.
Tip 39: Choose the right year-end for your business.
It can be a difficult decision to choose between a non-calendar and a calendar year-end.
Generally, if your business income is expected to rise consistently over the next few years, a non-calendar year-end will offer tax-deferral opportunities.
Be sure to visit a tax pro before making a final decision on a year-end.
Claiming Business Deductions
Tip 40: Maximize your deductions for home office expenses.
Claim a portion of all eligible home costs when your home is your principle place of business or is used to meet clients on a regular and ongoing basis.
Maximize the business use of your home by choosing carefully the areas to include in the calculation.
Tip 41: Maximize deductions related to business use of your automobiles.
Maximize business use of your car by stopping for business reasons on the way home from work, or on the way to work, and keep a log book of distances driven for business during the year.
Use your jalopy with the most costly expenses for business purposes.
See Tip 29.
Tip 42: Categorize your meals and entertainment to maximize tax savings.
Meals and entertainment costs are genrally 50-percent deductible when they are incurred to earn business income.
In some situations these costs are fully deductible.
Keep track of the categories separately to ensure maximum deductibility.
Tip 43: Maximize your eligibility to claim capital cost allowance.
It's possible to claim CCA on assets that you might already own and are now using in the business.
Maximize your CCA claim by buying new assets before the end of the fiscal year or by selling old assets after the current fiscal year.
Tip 44: Pay salaries to family members for a number of tax benefits.
Paying salaries or wages to family members with a lower marginal tax rate can result in permanent tax savings, and a perfect splitting of income.
The compensation will provide RRSP contribution room to your family member.
This strategy makes for a great way to cover education costs for children in school.
Adding Up the Tax Hits
Tip 45: Understand the various "taxes" affecting your business.
Income taxes are not the only type of tax that your business will have to deal with.
Take the time to understand your obligations to CPP, EI, provincial payroll taxes, workers' compensation, and the GST/HST.
Reducing Taxable Investment Income
Tip 46: Deduct as much of your interest cost as possible.
Interest is normally deductible when the money borrowed is used for business or investment purposes.
Consider swapping non-deductible for deductible debt where possible.
The tax collector will look to your current use of borrowed money to determine whether your interest costs will remain deductible.
Tip 47: Call your profits capital gains and your losses business losses.
It may not always be clear whether you should treat your investment profits and losses as capital or income.
Where possible, you'll want to argue that your profits are capital gains and your losses are business losses.
Document your reasoning and be consistent from one transaction to the next.
Tip 48: Claim a captial gains reserve to spread your tax bill over time.
It's very difficult to avoid paying tax on accrued capital gains on assets you own.
Your best bet is to push the tax bill as far into the future as possible.
A taxable capital gain can be spread out for up to five years by taking payment of the proceeds over an extended period. This is called a capital gains reserve.
Investing in Private Corporations
Tip 49: Consider an investment holding company in certain situations.
A corporation may be used to reduce clawbacks on OAS, minimize taxes on death, reduce probate fees, and provide a source for earned income.
You'll need enough open money to make this idea worthwile -- generally over $300,000. If you're interested, visit a tax pro to talk this idea over, since it won't be everyone.
Tip 50: Consider buying shares in a CCPC for a capital gains exemption -- and more.
Owning shares in a Canadian-controlled private corporation can offer tax benefits in the form of an enhanced captial gains exemption if the shares increase in value, and an allowable business investment loss if the investment turns sour. (May need to hold for two years - privately?)
Qualified farm property and shares purchased on the Canadian Dealing Network can also enjoy some of these benefits.
Investing in Real Estate
Tip 51: Use real estate properly to generate wealth and minimize taxes.
Build wealth and minimize taxes by leveraging your real estate to invest in the stock market -- but do this prudently!
Make sure you have a reasonable expectation of profit from your rental property; otherwise you could be burdened with unexpected taxes and an investment dud.
Choosing Conventional Securities
Tip 52: Participate in REITs or royalty trusts for tax-efficient cash flow.
REITs and royalty trusts provide tax-efficient cash flow for those who need a steady income from their investments.
Purchasing REITs or royalty trusts through a mutual fund is a great way to go.
Both investments are ideal for those who need to generate capital gains to use up capital losses.
Tip 53: Think twice before you buy into a mutual fund at the end of the year.
Buying mutual funds near the ned of the year could subject you to taxable distributions normally made at the end of December.
Paying taxes on this distribution could mean that you're effectively paying tax on someone else's profits.
Consider buying your fund units at the start of the calendar year, or try some of the other strategies I've noted to minimze the tax hit on the annual distributions.
Tip 54: Avoid index-linked GICs outside your RRSP or RRIF.
Index-linked GICs can offer stock market returns, but these returns are taxed as interest income -- not capital gains.
You'd do better for yourself by investing in an equity mutual fund that generates market returns. In this case, your profits will be taxed, appropriately, as capital gains.
The additional tax savings witht equity fund is your reward for giving up the security of guaranteed capital offered by an index-linked GIC.
Tip 55: Invest in labour-sponsored funds for tax efficiency and good growth potential.
LSVCCs (labour-sponsored venture capital corporation) offer generous tax credits to investors, usually worth up to $1050 annually in most provinces, and are RRSP-eligible.
Keep your annual investment down to $3500, since you won't receive credits for amounts over this. (May need to hold units for eight years.)
Use your tax savings from an LSVCC investment to make another RRSP contriibution or to invest in a good-quality equity mutual fund.
Taking a Different Route
Tip 56: Consider an exempt life insurance policy for tax-sheltered growth.
An exempt life insurance policy will allow the tax-free growth of investments inside the policy.
The face value of the policy plus the accumulated investments will be paid out tax-free to your beneficiaries upon your death.
There are ways of accessing the investments in the policy during your lifetime, although there may be tax or interest costs invovled in doing this.
Tip 57: Use offshore trusts for big tax savingsin three scenarios -- legally.
There are three scenarios in which offshore trusts can clearly be used to avoid income tax in Canada. (Inheritance Trust, Emigration Trust, Immigration Trust)
Each scenario involves a non-resident of Canada for tax purposes.
You may be subject to the foreign reporting requirements if you're involved with an offshore trust.
Tip 58: Defer tax with a commodity straddle, but beware of GAAR (general anti-avoidance rule)
A commodity straddle is an aggressive tactic that lets you shift income from one year to the next. It involves buying two opposite future contracts.
Be aware that the tax collector could potentially invoke GAAR.
Understanding RRSP Basics
Tip 59: Contribute to an RRSP for tax deferral and tax-free growth.
An RRSP offers two significant benefits: a deferral of tax and tax-free growth inside the plan.
The earlier in life you start, the greater the benefit to you in retirement.
You'll face tax on your RRSP assets once you make withdrawals from your plan, but these withdrawals will be made slowly over time and won't begin for a number of years, multiplying the benefits of the deferral and the tax-free growth.
Tip 60: Understand whether your RRSP assets are protected from creditors.
RRSPs administered by insurance companies are generally protected from creditors.
It has traditionally been believed that other RRSPs are vulnerable to creditors, but a recent court decision would suggest that your RRSP might be protected.
Tip 61: Pay your RRSP fees from outside your plan up to age 69.
Administration and investment management fees for your RRSP or RRIF are not deductible for tax purposes.
Pay these fees from outside your plan up to age 69 to preserve the growth of your plan assets. From age 69 onward, pay the fees from inside the plan as a way to make tax-free withdrawals from the plan.
Contributing to Your RRSP
Tip 62: Know Your RRSP contribution limit each year, then avoid an accumulation of contribution room.
You're entitled to contribute 18 percent of your earned income from the prior year to an RRSP, to a yearly maximu.
Even though unused contribution room can be carried forward, don't let this happen, since you'll be giving up a valuable tax deferral and tax-free growth of your money.
Tip 63: Make a contribution in-kind to your RRSP if you're low on cash.
If you haven't got the cash, contribute in-kind to maximize your RRSP contributions.
You'll be deemed to have sold any investment that is contributed in-kind, which could mean a taxable capital gain; but you'll also be entitled to a deduction for your contribution in-kind, within your contribution limits.
Set up a self-directed RRSP to make a contribution in-kind.
Tip 64: Maximize your RRSP contributions even if you have to borrow the money.
Borrowing to contribute to your RRSP makes sense when your other choices are to make no contribution or to delay the contribution for even two or three years.
The interest on your RRSP loan will not be tax deductible.
Tip 65: Have your employer contribute directly to your RRSP.
Employer-direct RRSP contributions can significantly increase the amount you're able to contribute to your RRSP without borrowing.
Your employer will simply send a portion of your pay directly to your RRSP carrier, and will avoid income tax withholdings (although CPP and EI will still be payable).
Your employer should keep the payment at or below $10,000 to avoid tax withholdings.
Tip 66: Over-contribute $2000 to your RRSP if you can leave it for 10 years.
Excess contributions to an RRSP attract a monthly of 1 percent of the excess amount.
You're entitled to a $2000 over-contribution and should take advantage of this when you have 10 years or more before you'll be making regular withdrawals from your RRSP.
Tip 67: Over-contribute to your RRSP just before winding up the plan at age 69, if you have earned income.
You'll have to wind up your RRSP by December 31 of the year you turn 69.
You may be able to take advantage of RRSP deductions beyond age 69 through the senior's over-contribution, which involves making one last over-contribution to your RRSP just before winding up the plan at age 60.
The tax savings from the future deduction will outweight any penalties owing from the over-contribution.
Tip 68: Boost the value of your RRSP with tax-free rollovers.
Transfers From One RRSP to the Next.
Retiring Allowance Rollovers.
RPP Assets to an RRSP.
Inherited RRSP Assets.
Transfer Upon Marriage Breakdown.
U.S. IRA to an RRSP.
Tip 69: Ensure that your child files a tax return to maximize RRSP contribution room.
There's no requirement to file a tax return unless income is over $6956 or there are capital gains to report.
Even if it's not required, helping your child file a tax return can be worthwile because it will create valuable RRSP contribution room that will save your child tax down the road and provide a good head start in saving for retirement.
Tip 70: Claim your RRSP deduction in the right year.
Your RRSP contributions will entitle you to a deduction on your tax return but that deduction may be put off and claimed in any future year.
Delaying the deduction may make sense when you expect to face a higher marginal tax rate in the next couple of years.
Tip 71: Contribute to your RRSP instead of paying down your mortgage.
Except in very rare situations, you'll be better off making contributions to your RRSP than paying down the mortgage.
Get the best of both worlds by contributing to your RRSP and then using the tax savings to pay down the mortgage.
Tip 72: Contribute to a spousal RRSP to equalize incomes in retirement.
A spousal RRSP is a plan that you contribute to but your spouse makes withdrawals from.
You're entitled to a deduction and your spouse will be taxed on any withdrawals, which accomplishes a perfect splitting of income.
Watch out for attribution rules, which could tax some of the withdrawals in the hands of the contributor.
A spousal plan can be used to make RRSP contributions beyond age 69, and to reduce taxes upon your death through a contribution by the executor.
Withdrawing From Your RRSP
Tip 73: Make RRSP withdrawals during periods of no or low income.
Withdrawing funds from your RRSP can be done tax-efficiently if your income is low, thanks to the basic personal and supplementary credits totalling $6956.
Withdrawals will be subject to withholding taxes, which are simply installments toward your eventual tax bill.
Tip 74: Consider the impact of using RRSP assets to buy a home.
Under the Home Buyers' Plan (HBP), you may be eligible to make tax-free withdrawals from your RRSP in order to buy a home.
The younger you are, the more it will cost you in RRSP growth to use the HBP.
Money borrwed from your RRSP under the HBP must be paid back over 15 years.
The rules are many and complex, so take the time to learn how the HBP works first.
Tip 75: Consider the impact of using RRSP money for full-time education for you or your spouse.
The 1998 federal budget opened a door to make tax-free withdrawals from an RRSP for full-time training of education.
You can withdraw up to $10,000 each year, over four years, to a maximum of $20,000 in total withdrawals.
The plan is similar to the Home Buyers' Plan in many ways, and the rules can be complex. Take the time to understand the impact on your retirement savings before withdrawing RRSP money.
Tip 76: Take three steps to minimize the tax hit on RRSP withdrawals if you're planning to leave the country.
If you're planning to leave Canada, leave your RRSP intact and make withdrawals once you're gone. The only tax you'll face in Canada will be a maximum withholding tax of 25 percent, which could be reduced to just 15 percent.
Be sure to follow these three steps to minimize the tax hit on your RRSP if you plan to leave the country: (1) Leave your RRSP intact; (2) Step-up the cost base of your plan assets; and (3) Give up residence properly.
Benefitting From RRIFs and Annuities
Tip 77: Roll your RRSP to a RRIF or annuity to defer tax well beyond age 69.
When your RRSP matures in December of the year you turn 69, you've got three choices for those assets: Make a lump-sum withdrawal; buy an annuity; or roll the assets to a RRIF.
The annuity and RRIF options will allow you to defer tax, while the lump-sum option won't.
In most cases, the RRIF option will be best, but speak to a reputable financial advisor about which is best for you before making a decision that you may have to live with for a lifetime.
Tip 78: Defer tax on your RRIF withdrawals as long as possible.
Defer tax as long as possible by minimizing how much you take out of your RRIF and by delaying those withdrawals until absolutely necessary.
You can minimize your withdrawals by basing them on the age of the younger spouse, and you can delay your withdrawals until the end of the year following the year you set up the plan.
Understanding Registered Pension Plans
Tip 79: Consider opting out of your company pension plan if you have the choice.
When you leave a company pension plan you could very likely be short-changed on the benefits you take with you, particularly when you haven't been a member of the pension plan for long.
When you leave a pension plan and don't join another, you could lose the ability to use a tax-deferred retirement savings plan for a full year.
An RRSP is much more portable than a pension plan, but each situation should be evaluated separately.
Tip 80: Look into an individual pension plan (IPP) to avoid a big tax hit when leaving your company pension plan.
You might have two or three options available when you leave a pension plan. It's quite common to take the commuted value of the plan when this is an option.
Consider setting up an IPP if you will be running a business. This may allow a tax-free transfer of your commuted value to the new plan.
Speak to a tax pro experienced in IPPs to set this plan in motion.
Reporting Your U.S. Income
Tip 81: Claim a foreign tax credit when you've paid withholding taxes to Uncle Sam.
Certain types of income from the U.S. will be subject to withholding taxes down south.
As a Canadian resident you'll be entitled to a foreign tax credit in Canada for U.S. or other foreign taxes you pay.
Be sure to claim the tax credit to ensure you're not double-taxed on the same income in different countries. The calculation is don on Schedule 1 of your tax return.
Profiting From U.S. Real Estate
Tip 82: Use the net rental income method on your U.S. rental property in most cases.
When you own a rental property in the U.S., there are two ways of paying tax on the rents you earn: a withholding tax, or the net rental income method of reporting.
The net rental income method will generally provide the greatest tax savings.
Tip 83: Take two steps to minimize the tax hit on the sale of your U.S. real estate.
When you sell your U.S. real estate, you'll be subject to a 10-percent withholding tax that the buyer will have to remit to the IRS.
Minimize this tax by selling to someone planning to use the property as a principal residence, or by applying to the U.S. for a withholding certificate.
Minimize your taxable gain on the sale by making appropriate adjustments to your sale proceeds and your cost base.
Cutting Your Gambling Losses
Tip 84: Register at a casino or hotel to track gambling losses for tax savings.
Canadian residents can now claim U.S. gambling losses to offset winnings.
Register ata casino or hotel and establish an account to substantiate your gambling losses.
File a tax return, Form 1040NR, to claim your losses and recover any withholding tax.
Staying Canadian
Tip 85: Understand the implications of becoing a resident of the U.S.
Avoid becoming a U.S. resident for tax purposes if you hope to keep your tax affairs from becoming a complex quagmire.
If you spend, on average, more than 122 days each year in the U.S., you might meet the substantial presence test, which will deem you to be a resident of the U.S.
If you meet the substantial presence test and are deemed to be a resident of the U.S., filing Form 8840 could solve your problem.
Considering U.S. Estate Taxes
Tip 86: Determine whether you're a candidate for U.S. estate taxes.
You could be liable to pay U.S. estate tax if you own U.S. assets or are considered domiciled in the U.S.
If you think you're a candidate for U.S. estate taxes, refer to Tip 101.
Walking to a Different Drummer
Tip 87: Understand the significant changes resulting from the 1997 Quebec budget.
The 1997 Quebec budget brought big changes to the province's tax system, including changes to tax rate brackets and the introduction of a new simplified tax filing system.
The simplified system will replace number of deductions with a single lump-sum tax credit.
Tip 88: Understand the differences between federal and Quebec taxes, and plan accordingly.
The federal and Quebec tax systems are different in many areas.
Be sure to understand these differences so that your income tax planning works both federally and in Quebec.
Investing in Quebec
Tip 89: Take advantage of special investment incentives offered only to residents of Quebec.
Consider investing in one of a number investments that offer attractive tax incentives to residents of Quebec.
These include: QSSPs, QBICs, CIPs, QIFs, and flow-through shares.
Giving It Away Today
Tip 91: Give assets away during your lifetime for tax and probate savings upon your death.
The tax collector can't tax you on credits you don't own at the time of your death.
Consider giving assets away today to minimize taxes and probate fees upon death, but beware of the deemed disposition at fair market value that could lead to a tax bill when you make the gift.
Tip 92: Consdier an estate freeze to minimize your tax bill on death.
By completing an estate freeze you'll manage to pass the future growth of the frozen assets to your heirs or others of your choice.
This will, among other things, freeze your tax bill upon death, enabling you to estimate and plan for those taxes ahead of time.
A corporation or trust are most commonly used to freeze an estate.
Giving It Away at Death
Tip 93: Leave it to your spouse to defer the tax hit longer.
Leaving assets to your spouse or a spousal trust upon death will allow you to avoid the effect of a deemed "sale" at a fair market value of those assets when you die.
If you're going to leave assets to the kids upon your death, leave them with those assets that will be subject to little tax, if any: cash, life insurance benefits, a principal residence, or assets that have not appreciated much in value.
Tip 94: Minimize the tax on your RRSP or RRIF assets upon death by naming the right beneficiaries.
You'll always manage to avoid tax on your RRSP or RRIF assets upon death by naming your spouse as the beneficiary of your plan.
You may also manage to defer tax on your plan assets by transferring your RRSP or RRIF to a person financially dependent on you at the time of your death.
Tip 95: Instruct your executro to make a final contribution to your RRSP after your death.
The executor of your estate may be able to make final RRSP contributions on your behalf after you're gone.
The contributions must be made to a spousal RRSP, within your contributions limits.
A deductions may be claimed on your final tax return for these contributions.
Tip 96: Save your heirs tax by setting up a testamentary trust in your will.
A testamentary trust provides an opportunity for your heirs to split income with the trust, maximizing the number of dollars that will be taxed in the lowest tax bracket.
Setting up a testamentary trust must be done in your will.
The tax savings can be up to about $11,000 (maximum) annually, depending on your income level and your province of residence.
Tip 97: Give to charity and save a bundle. But do it properly.
Giving to charity during your lifetime or upon death can provide significant tax savings. Making doncations during your lifetime will also save probate fees.
Consider donating securties instead of cash.
Consider a charitable remainder trust or life insurance as tax-efficient ways to help your favourite charity.
Tip 98: Suggest an offshore inheritance trust to non-resident family members.
If you're expecting a non-resident relative to leave you an inheritance, arrange for the inheritance to be place in an offshore trust with you as beneficiary.
Arrangements must be made before your relative dies.
Tax-free distributions of capital can be made from the trust, making it more attractive than an RRSP.
Providing Tax-Free Death Benefits
Tip 99: Negotiate a $10,000 death benefit with your employer.
Your employer can pay a $10,000 death benefit to your spouse or other beneficiaries on a tax-free basis.
At your next salary review or new position, negotiate to have such a payment made. It's like life insurance without any premiums.
Tip 100: Use life insurance to soften the blow of a tax bill at the time of your death.
Sometimes it's impossible to avoid a tax bill on death. If you want to minimize the impact of this, life insurance may be your best bet.
Life insurance will be particularly important when you expect a tax bill on death with little cash available to pay those taxes.
Consider asking your heirs to pick up the tab for the insurance; after all, they're the ones who will ultimately benefit.
Planning for U.S. Estate Taxes
Tip 101: Forecast your U.S. estate tax and apply eight strategies to minimize the tax bill.
U.S. estate taxes will aply to any U.S. situs property you own on the date of your death.
Recent changes in the Canada-U.S. tax treaty make this estate tax blow easier to take, but you still need to plan.
Apply one or more of the ight most common strategies to minimize U.S. estate tax.
Keep your US assets below $1.2M to avoid estate tax on all but your US real estate and a couple of other uncommon US assets.
Consdier holding your US assets inside a Canadian corporation.
Giver property to your spouse and children over time, since each person is entitled to his or her own unified credit.
Buy life ensurance to cover any US estate tax liability.
Restructure your debt so that non-recourse loans are secured by your US assets, since this debt will reduce hte value of you taxable estate.
Move your US assets back to Canada.
Leave your US property to a qualified domestic trust (QDOT). This type of trust does not eliminate US estate tax but can defer it until the death of the second spouse.
Rent instead of own. You're not going to pay estate tax on assets you don't own so consider renting a place in your favourite location down south rather than buying.
