With tax season over for the majority of Canadians (self-employed Canadians and their spouses still have until June 15th to file their returns), now is the perfect time to embark on a financial tune-up and do some proactive planning. Here are some key tax planning considerations:
Do you have a plan to improve your tax position?
Tax planning involves taking a strategic look at how the individual elements of your financial situation work together with the goal of minimizing your taxes. For example, are you best utilizing tax-deferred or tax-friendly accounts such as Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESPs) and Tax-free Savings Accounts (TFSAs)?
RRSP contributions are deducted from your taxable income and are one of the key tax planning considerations. Here are a few RRSP tips to improve your tax position:
RRSP deductions can be deferred
If you expect to move into a higher tax bracket, deferring your RRSP deductions can help maximize your tax savings. Many people are unaware that you don’t need to deduct RRSP contributions on your tax return in the same year they are made. Any contributions you chose not to deduct can be carried forward and deducted in a future year as “unused contributions.” Deducting the contributions in a higher tax bracket will result in greater tax savings. (Note: you still need to report the ‘unused contributions’ on your tax return in the year they are made)
Adjust contributions based on salary
Review the amount you’re contributing to your RRSP every year (or when you get a raise in salary or income) to keep on track with your retirement goals.
Don’t overcontribute beyond your retirement needs
Once you turn 71, you have to convert your RRSP to a Registered Retirement Income Fund (RRIF) and will be required to withdraw a minimum percentage from the RRIF every year as income. Make sure you don’t overcontribute beyond your needs in retirement.
Consider a spousal RRSP
With a spousal RRSP, the higher-income spouse gives up some of their available contribution limit to contribute to the RRSP of the lower-income spouse. The higher-income spouse still gets to claim the tax deduction, and the lower-income spouse pays less tax on the money in retirement when the RRSP converts the RRIF, as it would be taxed at the lower income spouse’s tax rate.
Do you have an estate plan and have you reviewed it recently?
It’s important to have a proactive estate plan, regardless of your age or net worth. Without one, you are effectively allowing decisions regarding your wealth, your assets, your dependents, and your medical care to be settled by provincial laws and/or the courts should you become incapacitated, or on your passing.
Here are some key documents and strategies to consider in estate planning:
- Will: Do you have one? When was the last time you updated it? Your will is a key part of your estate plan. Not only does it name the person who will handle the administration of your estate, it also provides direction for the distribution of your assets and the guardianship of any minor children after your death. It is important to periodically review and update your will to ensure it reflects any changes to your family or financial situation.
- Living trust: The main difference between a will and a trust is that a trust allows you to transfer assets to beneficiaries when you’re still alive, while a will transfers assets on your death. Assets placed in a living trust (such as an Alter Ego Trust) will be managed by your named trustee if you become incapacitated, and the trust contains your instructions for what you want to happen to your assets when you die. A trust is also more legally binding than an ordinary will, which can be challenged in court as to whether it fulfills your “moral obligation” to your dependents. A trust also allows you to avoid probate, where the contents of your will are made publicly available.
- Power of Attorney for Property: Do you have one in place? This important document allows you to name who has the authority to make financial decisions on your behalf in the event you are incapacitated and unable to communicate decisions on your own.
- Review your beneficiary designations: When was the last time you reviewed the beneficiaries of your RRSP, TFSA or your life insurance policies? If you’ve recently married, gone through a divorce, or had a child (or if your children are now adults), it may be a good time to review them.
- Review your life insurance options: Do you have enough life insurance to cover your family’s living expenses if something happens to you? It’s important to review your life insurance requirements to ensure you have the appropriate amount and type of coverage.
Do you have a filing system in place for tax-related information?
If you found yourself scrambling to locate important tax documents for your 2022 return, now is the perfect time to get organized. Whether you prefer digital or physical storage, ensure that your files and folders are arranged logically and stored in one place. Make sure you have a backup system in place if you are storing files electronically, and keep a separate folder for each tax year. If you prefer paper copies, consider investing in a proper filing cabinet with documents arranged by tax year for easy retrieval. Also, ensure you have a method to keep track of any unused RRSP contributions and other carry-forward amounts like capital losses, charity receipts and tuition.
Note: you need to keep all tax-related records and receipts for six years, including:
- any correspondence from the CRA, especially notices of assessment or reassessment
- tax returns and supporting documents for previous years (retain all tax-related records and receipts for six years in case you are audited)
- records of tax instalments paid
- T4 slips and other wage statements
- eligible medical and dental cost receipts
- eligible child care receipts
- eligible moving expense receipts
- charitable receipts
- political donation receipts
- RRSP contribution receipts
- records of repayments to Homebuyers’ Plan or Lifelong Learning Plan
- records of RRSP or RRIF withdrawals
- records of investment purchases and sales in non-registered accounts
- investment account monthly statements
- receipts for home office expenses and ‘business use of home’ expenses if you are self-employed
S+C Partners is committed to helping you
Tax time doesn’t need to be stressful. Taking a step back now to review your financial position and goals will save you both time and money in the future. Our dedicated tax and advisory teams are here to support you and include fully qualified and experienced Trust and Estate Practitioners. Please call us at 905-821-9215 or email us at info@scpllp.com if you have any questions or require any assistance with tax planning considerations.
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S+C Partners is a full-service firm of Chartered Professional Accountants, tax specialists, and business advisors with in-house expertise that extends well beyond traditional CPA services. In addition to audit, accounting, and Canadian tax services, we also offer business advisory services, comprehensive IT solutions, Human Resource consulting, and in-house expertise within highly focused areas such as US taxation, business valuations, and estate planning. We provide all the technical expertise of a large CPA firm, but with the personal touch and partner-level attention of a boutique accounting and advisory firm.