Resolution: Reduce Average Tax Refund of $1780

Last year, Canadians both prepaid and overpaid their tax and the amount was significant: $148 a month or $1780 for the year, according to taxation statistics to January 4, 2016. That’s money given to the government on an interest-free basis all year long, and bad financial planning. Over a 40-year worklife, your tax overpayment would be worth $71,200 in capital that would not have been invested in the marketplace.

How could you have made that money grow if you had paid only the correct amount of tax? Consider the following:

In a TFSA: Earnings on investments in a TFSA are never taxed. Each family member age 18 or over should maximize their investment in their TFSA. For taxpayers in the highest tax bracket, RRSPs may be more efficient.

In an RRSP: RRSPs offer two advantages. They shelter income until the funds are withdrawn and they offer a tax deduction when the contribution is made. Because the income will be taxed as ordinary income on withdrawal, contributions should be made when taxable income is higher than the anticipated income level at withdrawal. Likewise, interest income is most efficient in an RRSP, whereas the benefits of reduced taxation of capital gains and dividends are not available if the investments are held in an RRSP.

In a non-registered account: In some provinces, for lower-income earners, dividend income earned in a non-registered account can actually reduce taxes on other income. However, for most taxpayers, non-registered accounts are best used only after TFSA and RRSP contributions have been maximized. If investments are made in RRSPs, TFSAs, and non-registered accounts, be sure to keep investments that earn dividends or capital gains in your non-registered accounts as these will be taxed at lower rates.

Here’s what to do to put a stop to overpaying your taxes and reclaiming your retirement freedom:

1. Maximize your TFSA contribution for all eligible family members. This could result in a tax-free retirement!
2. Maximize RRSP contributions if your federal tax rate is 29% or more.
3. In non-registered accounts, consider the income tax effect on investment return. Taxes on capital gains and dividends are lower than taxes on interest or rental income.
4. Ensure that your income tax withholding from your employer is no higher than required. Complete your TD1 and T1213 forms annually to claim every deduction you’re entitled to and thereby reduce your withholding tax

Additional Educational Resources – Tax Strategies for Financial Advisors Course, Family Tax Essentials book.

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