It’s time to do some tax planning
There’s no shortage of tax information. If you have completed your taxes, then tax season has come and gone. Tax filers across the country have gone through the annual ritual for assembling tax receipts to figure out how much we earned and how much tax we will have to pay as a result.
Tax preparation, therefore, is really the act of summarizing the historical events of the past year. Typically tax season is a time to review the past but it is a difficult time to do any strategic planning because the past is the past. Real tax planning is about looking into the future and try to develop both long-term and short-term strategies to minimize the tax bill. Now is the time to look ahead to 2010 to develop good planning strategies and habits for the future.
Tax planning vs tax preparation
There’s a big difference between tax preparation and tax planning. Imagine this scenario: You come to a fork in the road. Let’s say One path sign says Tax Preparation and the other sign says Tax Planning. Which path do you think would get you to financial freedom faster?
Planning will get you there faster because it gives you the ability to implement strategies in the future to reduce the amount of tax you pay and increase your net income. Unfortunately, this is the path least traveled. Instead, most people travel in life on the path of tax preparation by filing our returns each and every year and getting to our destination whenever we get there. Tax preparation is simply the act of filing a return, and the strategies needed to reduce your taxes are those that needed to be done far in advance. I can’t tell you the number of times, I have sat down with people who had no clue of the the tax strategies available to them. Tax preparation is something we all do because we have to. Tax planning, however, is something we should do to help us get to our destination of financial freedom faster.
Getting planning advice
Many Canadians, in recognition of their limited understanding of the tax system, will utilize the services of professionals. I am a strong advocate of getting help and advice. Never assume, however, that tax planning will be given without asking.
For example, don’t assume your tax preparer will automatically provide tax advice. Sometimes tax preparers aren’t qualified to give planning advice. Even Chartered Accountants, who really understand tax planning, may not have time during the tax season to do effective planning with their clients because they may be so busy preparing returns and meeting the filing deadlines. Also, don’t assume that the fee paid for tax preparation includes tax planning. Remember, the fee was probably for the time used to prepare the return. If you have someone who prepares your taxes for you, I would ask them if they do any tax planning and whether you can set up a separate meeting to plan for the future. You might have to pay for their time but it may be worth paying for.
Your financial advisor may or may not provide tax planning advice. Unfortunately, many financial advisors focus primarily on the investment portfolio and products because of the compensation arrangements in the financial services industry. That being said, there are also financial advisors in your community who will help with planning, but you have to ask for assistance in that area. If the relationship with your advisor has been primarily focused on investment, it may be worthwhile to ask if your advisor does tax or financial planning. If this is not his/her area of interest or expertise, then request referral to a qualified professional.
Know you tax rates
One of the basic fundamental things you need to know about taxes is your marginal tax rate. For the past three years, I’ve compiled a one page summary of all of the tax brackets for all provinces in Canada.2011 Tax Rate Card 2010 Tax Rate Card 2009 Tax Rate Card
Three tax strategies – deduct, defer and divide
The three ‘D’s’ to investing are deduct, defer and divide. You must be able to understand all of these important functions in order to do effective tax planning.
Click here to read more about the Three D’s of Tax Planning
Other relevant information
Article on MapleMoney – 10 Things To Know About Tax Planning
TaxResource.ca is a great resource with lots of tax planning strategies for Canadians
TaxTips.ca has some great calculators on tax
Tim Cestnick is one of the most respected tax experts in Canada
Jamie Golumbek is an avid writer and has written extensively on tax planning in Canada
The contents of this post come from Jim’s latest book 10 Things I Wish Someone Told me about Retirement. To learn more about this book and other products by Jim, click here.