Deduct, defer, divide: How to pay less tax

Effective tax planning is dependent on an individual’s personal finances, so it stands to reason that investment and tax planning should be considered as part of the same discussion.

When reviewing your plans, there are a few basic principles to follow. These principles are often known as the 3Ds: deduct, defer, and divide.

Deduct. A deduction is a claim to reduce your taxable income. You can reduce your taxable income and the taxes you have to pay by using all of the tax deductions you are allowed. Some examples could include pension plan and RSP contributions, union/professional dues, alimony payments, employment expenses, moving expenses, professional fees, interest paid on money borrowed for income-producing investments (except RSPs), medical expenses, charitable donations and child care expenses.

You can also reduce your taxable income by taking advantage of the Canadian dividend tax credit, a nonrefundable tax credit that applies when Canadian dividends are included in income.

Defer. Generally, tax deferral offers two advantages. It is better to pay a dollar of tax tomorrow than it is to pay a dollar of tax today. It is preferable to earn money this year and delay paying the income tax on it until sometime in the future. For example, if you contribute to a RSP and/or a pension plan during your working years, and withdraw the money from the plan in retirement, you could pay less tax if your tax rate is lower than it was during your peak earning years.

Divide. Dividing taxes, or income splitting, is about taking an income and dividing it among more than one taxpayer. For example, it is preferable for two people (say a husband and wife) to pay tax on incomes of $40,000 each than for one person to pay tax on an income of $80,000.

Handling some or all of these issues can be complicated. Most people, quite rightly, depend upon professional advice to help them. A Financial Planner can work in partnership with a tax professional to guide you in the right direction.

For more information please contact me at 403-5042780 or email me at matt.solberg@td.com.

Matt Solberg is the Vice President — Investment Adviser at TD Wealth Investment