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Planning to pay less income tax

There are a number of ways to organize your financial plan to reduce the income tax you have to pay. It is all part of the financial planning process.

Your financial services professional will help you take advantage of all the opportunities available and explore with you the options that will result in an effective strategy.

Here are a few ways to reduce your tax bill.

1. Contribute the maximum to your Registered Retirement Savings Plan (RRSP)

Your taxable income is reduced by the amount you contribute to your RRSP. The more you contribute, the less tax you pay. Your contributions can also make you eligible to various government tax credits and benefits.

Your RRSP can also come in handy if you buy a house, become a full-time student or leave your job.

By contributing to your spouse’s RRSP, you benefit from income splitting before and during retirement.

2. Open a Tax-Free Savings Account (TFSA)

The Tax-Free Savings Account (TFSA) is a savings account in which earnings are sheltered from taxes.

While the contributions are not tax-deductible, you pay no income tax on the money you deposit or withdraw, or on the income your investment has earned. This is what makes a TFSA a tax-free account.

3. Split your income

Income splitting happens when two spouses divide their income in order to reduce their total tax bill. The spouse who earns more transfers a portion of his or her income to the one who earns less. The larger income is thereby reduced and taxed at a lower rate. Even retired couples can save thousands of dollars by splitting their income.

Income splitting is governed by very strict federal regulations.

4. Use universal life insurance as a tax shelter

Universal life insurance allows you to invest in a tax-sheltered plan. You can also obtain additional cash, tax free, by borrowing against the policy using the surrender value as collateral. This can be a very interesting financial and fiscal strategy for some people.

Universal life insurance is for people with significant non-registered assets. Those assets can be invested as savings in a universal life policy, and earnings will accumulate tax-free until the policyholder’s death.