When Uncle Charlie filed his tax return last April, he was expecting a $300 refund. Turns out he had miscalculated, and Canada Revenue Agency (CRA) caught the error. CRA corrected his mistake and sent him a cheque for an additional $167 just before Christmas. So, Charlie sent a letter to CRA: "Dear Sir/Madam, I am now 70 years of age. At last, I believe in Santa Claus."
If the extent of your tax planning is hoping that CRA will catch a mistake you've made and send you a little more cash, it's time to be more active. Make it your New Year's resolution to implement one profitable tax strategy in 2005. To make this easy, let me suggest a few options to consider:
Start a part-time business.
There's nothing like self-employment to create deductions. Even a part-time business can allow you to claim a deduction for things you're paying for anyway: Mortgage interest, property taxes, computer costs, vehicle costs, landscaping and more. Be sure to have a reasonable expectation of profit in your business, otherwise any losses could be denied.
Negotiate to hire an assistant.
Canadian tax law will allow any employee to claim a deduction for salary or wages paid to an assistant, provided your employer required you to pay for an assistant (negotiate this with your employer). Consider hiring your lower-income spouse as that assistant. You'll be splitting income and saving tax in the process.
Make a loan to your spouse.
Save tax by shifting investment income to your lower-income spouse. Do this by lending money to your spouse to invest, and charging the prescribed rate of interest on the loan (3 per cent until March 31). This interest rate is locked in forever, and the interest is due within 30 days following each year-end. You'll save tax provided your spouse earns more than the prescribed rate on the portfolio.
Consider a leave of absence or sabbatical.
You can defer tax on up to one-third of your salary each year by setting aside some money in a deferred salary leave plan. You can then take a leave of absence or sabbatical and collect your deferred salary at that time. Any employer can set this up, but there are rules to follow, so a tax pro will have to help.
Revise your will to include a trust.
A testamentary trust in your will can save your surviving family members significant tax dollars. Rather than leaving income-producing assets directly to your heirs, consider leaving them to a trust for your heirs. The trust can pay the tax on any income earned annually, saving the family tax through income splitting, while your heirs can still access the inheritance.
Consider a voluntary disclosure.
Santa Claus is not the only one who checks to see who's been naughty and nice. The CRA checks too. If you've been cheating on your taxes, it's possible to come clean and to avoid penalties and criminal charges with a voluntary disclosure (VD).
For small balances owing, a simple adjustment request may be better, but for large dollars, a VD can make sense.
Find a new job.
If you find a new job and move to a lower-taxed province, you could save thousands in taxes annually. Alternatively, look for work with a "prescribed international organization," which includes the United Nations and certain agencies that have a relationship with the UN. Why? You may be entitled to a deduction for the full amount of your income from this type of organization.
Tim Cestnick, FCA, CPA, CFP, TEP, is author of Winning the Tax Game 2004, and The Tax Freedom Zone. He is managing director, tax and estate planning, at AIC Ltd.
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