Tuesday 22 May 2012

Income splitting with adult children

With the 2012 instalment safely behind us, it's nice to relax knowing that it will be 10-12 months before we must again delve into bills, receipts and tax documents. For people who take an organized, proactive approach to maintaining their own personal taxes, April is a much less stressful month. Make a commitment to improving your tax season experience by making a small change or two relative to your current routine.

For some, this simply means saving more receipts or sticking to a practical system for filing papers. For others, this might mean devoting some time to learning more about the tax system in order to take advantage of savings that may have been missed out on.

In May, we mentioned income splitting as a tax-saving technique.
Let's examine a situation where you have a 19 year-old son who is working and still living at home.

Federal Income Tax
Earned Income   -   Tax Bracket
$0 - $42,707                   15%      plus
$42,707 - $46,992          22%      plus
$46,992 - $132,406        26%      plus
$132,406 +                     29%

By splitting your income, you can transfer a portion of your income to a lower-earning family member, for tax purposes, in order to pay a lesser amount of tax on that portion of income.

Example #1
Say you earn $100,000 and do no income splitting.
You are taxed 29% on $100,000.
You pay $29,000 in federal taxes.

Example #2
Say you earn $100,000 and your son earns $20,000. Through a family trust, you pay your son a dividend of $20000
You are taxed 29% on $80,000 and 15% on $20,000.
You pay $26,200 in federal taxes. Savings: $2,800

It is important to remember that you can only pay dividends to adult household members (spouse and children over 18 living at home). In this example, there is still more tax money to be saved by further splitting with the 19 year-old son.

Would an income split help save you money on your taxes?

Tuesday 15 May 2012

IPP - Your Ultimate Retirement Savings Tool


Individual Pension Plan (IPP), Registered Retirement Savings Plan (RRSP)

Many Canadians have seen their RRSPs take a significant toll in the markets during this Global Recession. Most can do little more than hope for a quick recovery. But there is another option. It’s called Individual Pension Plan (IPP).

What’s IPP?

IPP stands for Individual Pension Plan. It is perhaps the least known, yet most effective tax reduction strategy available in Canada. IPP is a tax-driven registered pension plan catered to individuals who would like to accomplish more retirement savings than what an RRSP can offer.
For example: In 2004, a 50 year old who commences an IPP could have a maximum contribution of $113,300 compared to a maximum RRSP contribution of $15,500. Therefore the IPP has a tax deductible advantage of $97,800.
Start your own IPP, magnify your retirement income and save thousands of dollars in tax—what else could be better?

Tuesday 1 May 2012

Tax Saving Tips for Business, Professional Corporation


Income taxes are the biggest expense for most Canadian. If you have your own business or professional corporation, your company can help generate tax savings to accelerate your mortgage repayment or boost your retirement savings.

Use Capital Gains Instead of Dividends

If you are planning large cash withdrawals from your company, consider taking the cash as capital gains rather than dividends. Only one half of the capital gains is subject to tax.

Set Up Corporate Health Plan

You can get 45% discount on your medical expenses by setting up your own Private Health Services Plan. It allows your corporation to deduct dental and medical expenses for yourself and family members without any corresponding taxable benefit to you.

Split Income With Family Members

The corporate tax rate is around 10% (depending on your province), compared to the highest personal tax bracket of around 40%. Tax saving can be enormous by channelling corporate income to family members in a lower tax bracket, instead of paying all the income to you alone.

Maximize Deductible Pension Contributions

Consider swithing your retirement savings to an Individual Pension Plan (IPP), instead of the RRSP. You can make larger contributions to an IPP than to the RRSP, especially if you are over 50 and you are also entitled to a large tax deduction for past service contribution.

Deduct Mortgage Interest

If you have a sizable house mortgage, you should look for creative ways to write off the mortgage interest