Year-End Tax Planning
Tax-planning is simply legally reducing one’s taxable income by taking full advantage of deductions and credits and other techniques.
Tax planning is often an ongoing process. However, as we draw to a close to the present taxation year, special attention should be paid to year-end tax planning. The following are some tax planning considerations. Consultation with a tax advisor may be advisable to properly implement certain suggestions.
Timing Of Income And Expenses
Generally speaking, you want to accelerate expenses and defer income. The opposite will be true only if you anticipate high income in the next taxation year and low income in the present taxation year. Accelerating expenses means making expenditures in the present taxation year, rather than in the next taxation year. For example if you plan to purchase a new computer in the first quarter of the next taxation year, consider making the purchase now so that you can depreciate it this year. Income that has been earned cannot be deferred. However if you have a project that you can delay starting until the new year, do so. That way the income won’t be taxed until the next taxation year and you won’t pay tax on it until the year after that.
RRSP contributions are one of the key tax planning tools available. An RRSP allows you to receive a deduction while having your capital earn income tax free until the funds are withdrawn upon retirement. You should contribute to your RRSP as soon as possible due to the additional year of income compounding you can enjoy by making the contribution at the start of the year rather than at the end. For the present taxation year, you can claim an RRSP contribution of up to 18% of income earned from employment or business in the former taxation year, up to a maximum of $21,000. You are allowed to make an excess contribution of as much as $2,000.00 without it being subject to the 1% per month special tax. If you contributed less than the maximum allowable amount of your RRSP in a previous year, you can use your unused RRSP contribution room for the present taxation year by contributing an additional amount equal to the amount of the unused room. The contribution deadline for the present taxation year is March 1, of the next taxation year. Interest paid on funds borrowed to make an RRSP contribution is not deductible. Generally, if you do borrow, make sure that the earnings in your RRSP are growing at a higher rate than your interest payment on the loan. Setting up an RRSP for your child is an excellent opportunity to not only save tax, but to also create large gains in long term investment growth, and an even larger deduction when your child starts to pay tax.