The end of the year is a common time for businesses, investors, and individuals to contemplate their goals and reevaluate their finances. As an investor, it is also important to conduct tax planning to plan the moves you make throughout the year. It is common to review what went well and areas to improve at the year-end to position yourself better financially. Due to this, many investors take part in tax planning at the year-end to prepare for the next fiscal year. And, with year-end tax planning for investors, comes a few actionable strategies you should make to align your finances to meet your financial goals.
What is Tax Planning?
Tax planning is the process of analyzing your current financial situation and creating plans to become more tax-efficient at the end of the year. Each investment, depending on the financial institution and account types, may be subject to its own tax rules, having knowledge of the different ways your investments can affect your tax is crucial to staying on top of your finances.
1. Use the maximum TFSA contribution limit
A TFSA is a Tax-Free Savings Account. This account type lets you contribute a large sum of money to a saving account without being charged taxes on your contributions. This is a great way to save money, especially in high-income earning households. If you have family, you can gift funds to help reach the maximum contribution amounts.
2. Take advantage of tax-deferred growth opportunities
Tax-deferred growth opportunities such as RRSPs or RESP are exempt from CRA taxes when you make the deposit and allow you to save money without being taxed until you withdraw the money. Adding money to your RRSP/RESP on a yearly basis allows you to defer a percentage of your income and, in the case of an RRSP, the money you contribute is tax-deductible.
Registered Retirement Savings Plan (RRSP)
An RRSP, or Registered Retirement Saving Plan, allows you to shelter your earnings and defer tax until your withdrawal, presumably several years later. There is an annual deadline to make contributions to your RRSP account, typically 60 days after the end of the calendar year. Keep in mind, it is best not to touch the RRSP unless you are retiring or absolutely need to as you can be taxed for taking money out early. You can also lose the contribution room you contributed to when you initially put the money into your account. If you must borrow money from your RRSP, try to pay it back as soon as possible to avoid consequences.
RRSP owners have until the end of the year they turn 71 years old to convert their RRSP accounts into an RRIF (Registered Retirement Income Fund). It may be beneficial to start converting a portion of your savings into an RRIF to utilize the pension income credit. Many advisers suggest starting at 65.
Registered Education Savings Plan (RESP)
On the other hand, an RESP is an account that pays for the post-secondary cost of a beneficiary (child, grandchild, etc). Individuals who hold an RESP account may qualify for certain incentives such as the Canada Education Savings Grant where the government helps fund your beneficiary’s education. RESP is one way to hold investments and contributions are tax-free until withdrawn.
3. Review your investment portfolio
The saying, “Don’t put all your eggs in one basket” is especially true in investing. Although the point of investing is to increase your income, proper tax planning will help maximize your savings and reduce your tax. As the year goes on and the market changes, it is important to assess your current investment portfolio. A well-balanced portfolio ensures that the target allocation is not exceeded. Using strategies such as tox-loss harvesting can help offset your income. Review your portfolio and try to include more tax-advantaged investments such as Canadian dividend-paying investments that allocate capital gain. During your planning, ensure your current portfolio aligns with your goals.
Need help with tax planning?
If you’d like help to plan out your taxes at the end of the year, it is important that you use a professional tax accountant. Regularly keeping up with your income, expenses, and other financial needs is important to ensure your investments are kept safe..
At Soleimani Accounting, we specialize in providing professional accounting services for small businesses and corporations. From bookkeeping and accounting to tax, we are here to help your business thrive through sound financial advice and assistance. Get in touch to book a free 30-minute consultation.