Tax Planning

You can defer paying tax on your income by contributing to a Registered Retirement Savings Plan (RRSP).  By doing this, you are reducing your taxable income in the year the contribution is made, which can lead to lower taxes owing, or even a refund!

However, be aware that you will have to pay tax when you redeem from your RRSP ― or your Registered Retirement Income Fund (RRIF) ― later on.  It is best to wait until after you are retired to redeem this money because you are likely to be in a lower tax bracket, and this will result in tax savings.

The most commonly understood strategy is for you to make deductions from your taxable income.  Examples of tax-deductible items are:

RRSP contributions

Child care expenses

Carrying charges*

Interest on investment loans*

Professional fees*

We can help make sure you are claiming everything you can.

*these only apply in certain scenarios

It can be possible to save a little bit of money on your tax return by doing income splitting with your spouse or common-law partner.

A Spousal Registered Retirement Savings Plan (SP RSP) is a great investment product to consider when the contributing spouse earns more than the recipient during their working years ― especially when this is likely to be the case in retirement as well.  By contributing to a SP RSP, the higher income earner receives a tax deduction.  The recipient then pays tax on their redemptions in retirement.  Hopefully, at this time, they are in a lower tax bracket.

Spousal loans can be useful in balancing the household income (in working or retirement years) when one spouse makes significantly more than the other and they are looking to earn additional investment income.  The goal in this situation is to put the investment income on the lower earning spouse's tax return.  However, these are very complex, require proper documentation, and are best left to a professional.

Pension splitting is useful in balancing household income later in life.  Some eligible sources of income are the Canada Pension Plan (CPP) and your workplace pension income.  You can also pension split your RRSP or RRIF income once the transferring spouse is over the age of 65.

 All income splitting strategies have limits and rules that need to be followed if they are to be used successfully, so it is best to speak with a tax professional or a financial planner. 

Canadians' annual income is subject to a marginal tax rate system, which helps define how much tax you need to pay on your income.  You are taxed by the federal and provincial government through this system, and each government has different dollar values and percentages defining each bracket.

Your annual income will define how much tax you need to pay based on where your income falls within the tax brackets.  The first dollar you make each year, for example, will land in the first tax bracket, and will therefore be taxed at the lowest tax rate, as will any other income you make that does not exceed the first tax bracket’s threshold.  Any income you make above that will land in the second tax bracket and be subject to a greater taxation percentage than your income sitting in the first tax bracket.  To further illustrate, if you make enough income that you exceed the first AND second tax bracket thresholds, you will be taxed at a higher percentage again on the dollars sitting within the third tax bracket, and so on.

In other words, the higher your annual income is, the more you will be taxed at the top end of your income, depending on how much of it is sitting in the first, second, third, fourth, and fifth tax bracket.

Knowing which tax bracket your income falls into can be helpful in figuring out how much of your income you should keep aside to help pay for your taxes.  Also, tax rates can change, so it is best to work with a tax professional or a financial planner.