Most of us don’t like to think about how much tax we pay until April 30, tax D-Day. Problem is, “tax minimization,” or finding clever ways to pay the least amount of tax legally possible, isn’t an end-of-year thing. It’s something you’ve got to think about right out of the blocks. So, for a well-planned 2003, here are some tax strategies to keep in mind:
Deduct your losses
OK, so 2002 wasn’t exactly a stellar year for the stock market. But there is a way to use any hits you took in the market to your advantage. If in the last three years you made money on investments and paid tax on the earnings, now may be the time to get back what you paid. Any losses you took this year can be applied against what you made in the previous three taxation years. Or you can carry forward what you lost this past year and deduct it against any future capital gains.
Make your debt tax-friendly
You can actually claim the interest you’ve paid on a loan, provided that you took the loan for investment purposes. (Interest on any other kind of loan isn’t tax-deductible.) So, it makes sense to pay off any debt where the interest isn’t tax-deductible and replace it with tax-friendly debt. Let’s say, for example, you owe money on your personal line of credit or (God forbid) on your credit cards. Let’s also say you’ve got the same amount in an unregistered investment (your RRSP doesn’t count for this strategy). If you sell your investment, you can use the money to pay off your debt. Then, take a loan to repurchase your investment (after you’ve waited the required 30 days) and voila, you’ve just made your loan tax-deductible.
Maximize your RRSP contribution
This is the year you get investment-savvy. You’re going to maximize your RRSP contribution. But instead of scrambling to come up with a whack of cash at RRSP-deadline time, you’re going to figure out how much you’re allowed to contribute (that would be 18 per cent of 2002’s earned income to a maximum of $13,500), divide that by 12 and start making monthly contributions. You’re far more likely to come up with your full contribution this way. And since an RRSP is the single best savings/tax-deferral vehicle in Canada, you’d be crazy not to pitch in as much as you’re allowed.
Claim your biggest expenses
The fatter the expense, the fatter the tax deduction. And, depending on when you shelled out the most, you can claim medical expenses for any consecutive 12-month period to get the biggest deduction, as long as the period ends some time in 2002. So, if you started your costly dental work in August 2001, for example, and forgot to claim those expenses, you’re still in luck. Just bundle together 12 months’ worth of expenses (from August 2001 to July 2002) and claim it all.
Help your family and increase your deduction
Daughter in a financial fix? If you earn more than she, give her (or a spouse or family trust) a low-interest loan and get a nice tax break in the process. To be eligible for the deduction, you have to have a written loan agreement and charge interest, which must be paid yearly, by Jan. 30. Luckily, interest rates are really, really low right now–the “prescribed rate,” or the least interest you can charge to qualify for the tax break, is a measly two per cent. Now, your daughter can invest the money and the income will be taxed in her hands. What’s more, if you make the loan for the long term, you can protect the current rock-bottom rate for the future. So, you’ll be sitting pretty with an income-splitting strategy that will pay off big time. Since there’s no way around our rigorous Canadian tax system, you’ve gotta take the breaks where you can find them. So, stop putting it off, get planning and save your money.
Gail Vaz-Oxlade’s latest book is Dead Cat Bounce: The Skinny on e-Vesting (Prentice Hall). She can be reached at www.gvomoney.com.