A crash course in being tax smart

July 28, 2015

Every year, Canadians who don't understand taxation end up paying more than their fair share. But you don't have to, here's how:

A crash course in being tax smart

Know your entitlements

  • GST/HST credit: Available to individuals with low or moderate incomes, this credit helps offset some or all of the GST/HST paid out over the year.
  • Canada Child Tax Benefit (CCTB): This monthly payment is made to families with children under the age of 18 and is tax-free. Your family receives the full amount if it's below a specified level.
  • Age tax credit: If you turned 65 before the end of the year, you may be able to claim the age tax credit, which is calculated on the basis of income.
  • Pension tax credit:If you're 65 or older, your pension is eligible for a federal tax credit and a variable provincial credit.

Tax-favoured investing

Some forms of income are taxed differently from province to province. That's why it's a good idea to hold GICs and other interest-bearing investments in your RRSPs or RRIFs, where they're sheltered from tax.

Pay less capital gains tax

A capital gain is realized when an asset is sold and the proceeds of the sale (less any selling expenses) are greater than the asset's adjusted cost base. Such a gain will trigger taxes.

  • Within your RRSP, you can buy and sell stocks as much as you like without triggering any tax.
  • Consider selling investments that haven't fared so well to offset the gains.
  • Mutual funds generally pay out all of their income and the profits on stocks traded within the portfolio every year.
  • You have to declare any gains distributed by your mutual funds to the Canada Revenue Agency, even if you simply reinvest them.
  • Long-standing mutual funds with a buy-and-hold strategy may be sitting on a hefty load of profits (unrealized capital gains). But the tax liability for selling off stocks or funds getting caught in a downturn will be yours, even if you've just bought in and haven't actually earned all those gains.
  • Portfolio turnover is the frequency at which you or your mutual fund manager buy and sell investments in your portfolio. Whenever an investment is sold, it triggers capital gains taxes.
  • If the average turnover rate exceeds 20 percent a year, consider selling or moving the investment into an RRSP or RRIF.
  • Although permanent life insurance policies aren't usually a good deal, they do cover capital gains taxes on your vacation property and other estate debts. The death benefits are usually tax-free, and can be used to cover your estate's tax bill.

A good-to-know tax break

The federal government's Canada Child Tax Benefit provides an excellent opportunity for income-splitting.

  • Open a separate account in your child's name and deposit the CCTB cheque. No other money goes into it.
  • The money in your child's account can be used for investing and will not be taxed because it is the child's.
  • When filing the annual tax return, be sure to declare the investment income. There will be no tax payable as long as the child does not have substantial income from other sources.

Many Canadians aren't fully aware of how the Canadian tax system works, and that can result in less money for you. But with these simple tricks, you can figure out how much tax you should be paying and may even save some of your money for yourself.

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