The golden rules of tax planning

It's perfectly natural to try to reduce your income tax bill – within the leeway allowed by law, of course! And you can achieve exactly that… with solid tax planning.

Many factors come into play in efficient tax planning, but the prime objective is always to find a counter to the progressive tax rates that form one of the basic principles of our tax system. To succeed, you have to implement a strategy that applies the three Ds of tax planning: Deduct, Defer and Divide.

Making the three Ds of tax planning work for you

The experts agree that when it comes to tax planning, focusing on the three Ds will allow you to pay less tax and at the same time increase your personal worth.

DEDUCT

When you prepare your annual tax return, you can deduct certain allowable contributions from your taxable income, such as the contribution you make to your registered retirement savings plan (RRSP) for the current year. Depending on the type of job you have, you can also deduct many costs and charges from your income. Last, there are a number of credits, exemptions and abatements that can help you reduce your tax burden.

Types of items that can be deducted from income:

• Charitable donations, medical expenses, child care expenses, the basic personal exemption and the Québec abatement are only a few of the items you can deduct from income in order to pay less tax.

DEFER

RRSPs and registered retirement income funds (RRIF)s are excellent ways to defer the income tax you have to pay for a given year. Once you're in a lower income bracket and withdraw the funds you placed in these types of registered investments, your tax rate should be lower, which means you'll be saving on income taxes.

Types of investments that allow you to defer payment of a portion of your income tax:

• T-Class funds, market-linked guaranteed products and corporate class funds are other investments that allow you to defer payment of a portion of your income tax.

DIVIDE

Dividing – or splitting – your income is another way to reduce your tax load. In fact, because our tax system is progressive and, as a result, the tax rate increases with the level of income, splitting income among different family members has the effect of reducing total income tax payable. For example, the tax payable on an income of $50,000 is considerably higher than the total of the tax payable on two incomes of $25,000. The tax free savings account (TFSA) is an ideal product for splitting income and reaping the benefits of sizeable income tax reductions.

Types of plans that allow you to split your income:

• These are primarily the RRSP, RRIF, registered education savings plan (RESP) and income from employer-sponsored pension funds (pension income), from the Québec Pension Plan and Old Age Security.

Are you ready for your tax plan?

To make sure a larger share of the money you earn stays in your hands, a structured tax plan that takes all your needs into account is a must. For more information on the subject or if you have any questions, contact your Desjardins financial planner, who has the right skills to guide you in preparing your personal tax plan. While you're thinking about it, view our summary table for a look at the different ways you can Deduct, Defer and Divide to minimize the tax you have to pay.

Bonne planification fiscale!

Plan, product or deduction	Deduct	Defer	Divide	Comment/Explanation
RRSP	X	X	X	RRSP income and income from RRIFs may be split
RRIF		X	X
TFSA			X	Assets may be split between a taxable and a non-taxable income
RESP		X	X	Income may be split with the beneficiary engaged in postsecondary studies
Charitable donations	X			In both cases, these can be combined to maximize the deduction
Medical expenses	X
T-Class funds		X		A portion of the income is paid as a return of capital
Market-linked guaranteed products		X		Income is taxable at maturity and, in some cases, income withdrawn prior to maturity is not taxable because it is considered a return of capital
Corporate class funds		X		These funds can also be used to transform highly taxed types of income, such as interest, into more tax-advantaged income such as dividends and capital gains
Capital yield bond funds		X
Employer-sponsored pension funds (pension income)			X	Income splitting conditions and the age at which they apply depend on the source of income
Québec Pension Plan			X
Old Age Security Pension			X