After reading an article in a recent MoneySense magazine called 11 Steps To Financial Freedom, I thought it would be interesting to go through each of these steps one-by-one and share my results on this blog. Each week I’ll go through one of the 11 steps to financial freedom, with the intention of creating a complete financial plan by the end of the series.
Over the past several weeks I have prioritized my goals, determined my net worth, recorded my cash flow, compared my spending to my goals, set my top three goals, developed a strategy to reach our goals, and reviewed my insurance coverage.
This week we take a look at step 8: slash your taxes.
Slash Your Taxes
According to the MoneySense article; most tax planning is fairly straight-forward and you’re likely taking advantage of the best tax shelters out there if you own your home and are contributing to your RRSP, RESP and TFSA.
There aren’t too many strategies for individuals to save on taxes these days. With my wife staying at home full time we can claim the $10,382 spousal amount and the Universal Child Care Benefit. We also get a small tax deduction for the interest paid on my wife’s student loan.
Lately I’ve been wondering what to do with my RRSP and if it’s worthwhile to contribute to a spousal RRSP. Since I contribute a large percentage of my salary to a defined benefit plan, I don’t have much RRSP contribution room available to work with. And now that I’ve been earning extra income online with this blog and some freelance writing, I need to figure out the best approach to take in order to minimize my taxes.
Action Step #8: Consider Calling a Tax Accountant
For this step I reached out to tax expert Mark Goodfield of The Blunt Bean Counter and asked for his thoughts on our situation.
Mark suggested that unless you are self-employed or rely on commission income, rental income, or significant investment income, an accountant will be somewhat limited in the planning they can do for you.
“However, you can also look at an accountant as insurance. You don’t like paying it, but when you need it, you are glad you have it. There may be years where an accountant cannot provide much in the way of income tax planning, but there will be a year somewhere where they may provide advice that covers their fees for the next ten years,” he said.
Goodfield added, “many people like having a relationship with an accountant, so when they have a question or have a significant issues such as a new job offer, inheritance or they have lost their job, they can call someone they know and who knows them, which reduces the stress of trying to find an accountant at a time they are under time constraints to make a significant financial decision.”
How Complicated is your Tax Situation?
Since our tax situation is becoming more complex due to extra income and expenses from my online business, Mark suggested that I speak with an accountant. “They would ensure you are maximizing all applicable expenses against your online income, from home office to marketing,” said Goodfield. “An accountant could start the process of determining whether you should transfer your online business to a corporation.”
“This is where it gets tricky”, advised Goodfield. “You need an accountant with strong income tax knowledge. I would suggest that if you incorporate, you consider the use of discretionary common shares so you can stream the dividends to your wife who is in a lower income tax bracket.”
Mark also offered some thoughts in regard to my RRSP. “I am still a proponent of RRSP’s for someone who is a higher bracket taxpayer. However, as you already have a defined benefit plan, there is less urgency to contribute. If you have not created a rainy day fund, I would consider building up your TFSA first.”
“With the new pension splitting rules, the benefits of a spousal RRSP have been mitigated,” added Goodfield. “However, some stay at home spouses still like the idea of having a RRSP in their name. A spousal RRSP could also, in an emergency, be used as a rainy day fund and if you plan around the anti-avoidance withdrawal rules (you could not have contributed to the spousal RRSP in the year or two preceding the withdrawal) the withdrawals may not attract significant income tax. However, I would not tax plan around collapsing the spousal plan.”
I’m really thankful that I was able to touch base with a tax expert like Mark for this step. Tax planning is often overlooked by people my age, but as Mark points out, opportunities still exist for individuals to pay less income tax and to consider tax efficiencies for the future. This gives me a lot to think about over the next few months.
Next week we’ll determine which investments are right for us with step 9: create an investing policy.