Tax planning versus tax preparation

The place to start is to understand the difference between tax preparation and tax planning. As you are preparing to file your 2006 tax return, it is often too late to do any sort of strategic planning.

Tax preparation is really the act of summarizing the historical events for the past year. Tax planning, on the other hand, is looking into the future and trying to develop both long-term and short-term strategies to minimize the tax bill. Anyone who understands taxation and the rules will also know that many tax-planning strategies will require years of planning before you can reap the rewards.

A hands-on approach

A hands-on approach to tax preparation can also mean many rewards for effective tax planning. Unfortunately, more and more people are taking the hands-off approach because it is much more convenient and manageable. Today, companies are profiting from Canadians by trying to make tax preparation as easy as possible through software programs, online services and by putting kiosks everywhere during tax season.

The problem with making tax preparation easier is it goes against one of the basic principles of good tax planning — know the rules.

Just do it

Getting someone to prepare and file your taxes may be convenient, but if you want to learn more about tax planning, it may be worthwhile to invest the time to do your own tax return.

The process in itself is very educational and you will learn not only aspects of tax preparation but, more importantly, you will learn about how to prepare more effectively for the future.

Even if you prefer to get someone like an accountant to file your tax return, try to complete the return yourself before you bring it in. What you are likely to find as you prepare your own tax return is that you will start asking different, more specific questions, which in itself will improve your learning.

Remember, tax avoidance is the strategy of using tax measures in the Income Tax Act to minimize your tax bill. This is smart tax planning that requires at least a basic level of knowledge. Don’t confuse this with tax evasion, which is knowingly falsifying statements or failing to disclose income sources. Pleading ignorance is not well received by the government. The Canada Revenue Agency takes the approach that you are guilty until you prove yourself innocent.

My two cents

You can learn about taxes by going to courses, reading books or talking to others. One of the best strategies to learn is by doing. In the case of tax planning, doing your own tax return could be one of the best strategies for learning.