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Deferring tax payment puts money in your pocket

There's a lot to be said for procrastination. Certainly, life for Grandpa Jim would have been a little easier if he hadn't been such a "do-it-now" person.

You see, Grandpa Jim (my brother-in-law's grandfather) had made a decision to move to a remote location overseas as a missionary many years ago. At that time, his dentist advised him to have all his teeth removed to make room for dentures. After all, dental care overseas left something to be desired.

So, Grandpa Jim proceeded to have every one of his teeth pulled. It's too bad that, in the end, he gave the overseas thing a second thought and decided not to go.

If Grandpa Jim had been a procrastinator, he might have delayed having his teeth pulled. Who knows, he might have lived his last 40 years with real teeth.

Procrastination can work in the realm of taxation, too. You see, delaying the requirement to pay tax can actually save you tax. This is true now more than ever.

The indexing

Ralph Goodale, federal Minister of Finance, has announced that all personal tax amounts indexed to inflation annually will be adjusted upward by 3.3 per cent for 2004. An indexation factor is applied every year to tax bracket thresholds, non-refundable tax credit amounts, and benefit amounts.

Some amounts will be adjusted in your favour by more than 3.3 per cent for 2004 based on promises made in the 2000 federal budget. It was that budget that restored full indexation to the personal tax system. The 2004 federal tax bracket thresholds have been raised to $35,000 ($32,183 in 2003), $70,000 ($64,368 in 2003), and $113,804 ($104,648 in 2003), respectively.

This is no small improvement. It represents a rise of 8.75 per cent in these amounts for 2004. This could very well be the single-largest year-over-year improvement in tax brackets that we'll ever see.

What does it mean for the average Canadian? Ignoring provincial indexation, a person earning $50,000 will save $210 in taxes in 2004, compared with 2003. The savings will be $435 if your income is $70,000. And if you're earning over $113,804 in 2004, your savings will be $710 compared with 2003.

While these amounts may not seem like much, don't forget, these are tax savings you'll gain by just waking up Jan. 1, 2004, and the numbers don't factor in savings to be gained for any provincial indexation.

The plan

Let me suggest a New Year's resolution. Make it a priority in 2004 (and each year going forward) to take at least one step to defer taxable income to a future year. As long as the Department of Finance doesn't increase tax rates, and your income remains relatively consistent from one year to the next, you'll come out ahead by paying tax in a future year. Indexation of our tax system makes it so.

So, the average Canadian can save tax by deferring the tax bill to a future year. But the savings don't end there. The time value of money is also worth mentioning.

Consider a $100 tax bill that can be deferred to a future year. If you can earn, say, 6 per cent on that money before you have to hand it over to the taxman, that $100 tax bill won't truly cost you $100. For example, a $100 tax bill paid five years into the future will cost you just $75 in today's dollars at a 6-per-cent rate. Defer that tax bill for 10 years, and the true cost is just $56. Defer it for 20 years, and the cost is just $31 in today's dollars. Now that's a smart way to cut a tax bill.

How exactly can you defer tax to a future year? Consider a few ideas: (1) contribute to a registered retirement savings plan or similar deferred plan; (2) defer taxable dispositions of assets until a future year; (3) base your registered retirement income fund withdrawals on the age of the younger spouse (this must be done when setting up the RRIF); (4) delay receipt of a bonus from your employer for up to three years; (5) invest in mutual funds with a buy-and-hold approach; and (6) make only the required tax instalments throughout the year (avoid getting refunds).

There are plenty of other ideas as well -- but those are for another time.

Tim Cestnick, FCA, CFP, TE,P is author of Winning the Tax Game 2004, and The Tax Freedom Zone. He is managing director, national tax services, at AIC Ltd.

tcestnick@aic.com



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