Benjamin Franklin once said
only two things are certain in life: Death and Taxes.
What are your plans to lower down your taxes?
So in today’s video,
I am going to share some powerful secrets
that you can reduce your tax paying as easily as possible!
Hi Everyone, This is Thomas!
Better Mindset | Better Life!
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I want to share one of my favourite books in my financial journey:
It’s called
15 secrets the taxman doesn’t want you to know
by Dwayne Daku
It focusses on using a non accounting terms
to provide you with suggestions on how to legally reduce
the amount of income you have to pay.
The book was first published back in 2008
but lots of ideas and concepts can still apply to today’s world.
Let’s jump into it
Taxes have been the single biggest expense to Canadian since the 60‘s
According to the Fraser Institute,
a Canadian research company based in Vancouver,
an average family needs to pay more than $50,000 in taxes in 2019
and that’s 45% of the Canadian average household income.
And not to mention all the housing, clothing,
food cost has increase tremendously.
Take gasoline for example:
35% of the cost goes to tax.
First, there is the carbon tax,
which a tax on top of the federal tax.
Then there is a tax that the provinces charge
and finally, there is GST of all the other taxes,
so it’s a tax on tax and more tax on taxes.
Even with the ever-increasing taxes,
Canada is still in a huge deficit.
To put it in visual.
If Quebec taxed 100% at all income generated in the province,
it would take more than 3 years to pay off all the debts
and fund all the obligation they currently have.
And also, with the current challenge,
the government is printing money non stop.
Guess who needs to pay the bill at the end.
the author felt that people need tips and direction
to reduce their tax obligation effectively
Usually around March or April,
many people want to file the tax early
because they are expecting a good tax refund
and looking forward to spend it.
Statistics Canada indicates that
CRA issue about 18 billions in tax refund in 2020,
an average amount per return is $1800 per head.
Technically speaking,
CRA is borrowing a $1800 interest free loan
from each person every year in Canada.
let's take a look at what could happen
if you're simply paid what was due but no more
and have those extra funds to invest each year
if you invest $1,800 each year in a tax shelter plan for 30 years
at a 5% interest rate
it will give you just under $275,000 as interest
it also means the 54,000 that you saved up,
can grow to $325,000 that the government was getting instead of you.
One of the ways to keep more money in the pocket
instead of waiting for a tax refund is to review the withholding tax in the payroll.
If you are working for someone,
usually the employer will automatically deduct
a portion of your pay cheque for taxes.
So you can ask your employer to adjust the amount using the Form TD1.
If there are changes in life’s
such as spouse or number of dependants,
credits, tuition, disability and caregiver amounts.
These amounts give your employer a view into
how much income tax should be deducted at the source
and your employer can adjust your tax withholding accordingly.
If your RRSP, medical, or
charitable contributions are consistent each year,
you could contact CRA and get a wavier
which permits you to reduce your withholding tax
But please keep in mind,
do not simply spend all those additional funding.
You have managed to get along without that extra cash,
so you should be able to maintain the same lifestyle.
The purpose is to use those extra money to speed up the saving
And also, after you might still need to pay tax owning
even the correct of tax deducted by your employer.
Reason can be other source income
such as investment income, or taxable benefits.
Secret no.2 Turing bad Debts into Good Debts.
Dwayne define bad debt where you cannot use
the interest charge as a deduction on your tax return.
Say John owes $5,000 on his credit card.
The interest on the credit card debt is not tax deductible
and its compounding interest
He also has another $5,000 that he set aside for investment
and collecting interest and dividend.
Scenario 1
he can cash out that $5,000 investment to pay off the credit card.
Or For tax efficiency,
He can clear off his credit card with this investment.
Then go to bank to borrow $5,000 to invest back into his original investment.
Through his personal line of credit or from his home line of credit.
Under line 22100,
the interest you pay on borrow investment purposes is tax deductible.
The investment needs to be an income-producing investment,
Which means it needs to yield interest and dividends.
If the only earnings in the investment can only produce capital gains,
you cannot claim the interest you paid
Some people are further extending this idea
and apply to their mortgage payment.
Turning the mortgage interest payment for tax deduction.
When you are paying down the mortgage,
the equity in the property increase
and therefore, you can borrow more in the HELOC.
Then using the money to invest into an income producing investment,
which its can be tax deductible
using the investment return and the extra tax return to pay down mortgage.
And repeat until the mortgage is done
The strategy is called the Smith Manoeuvre,
feel free to google it for more detail explanation
But be warned, this strategy is not for everyone.
There are a lot of risk factors behind it.
Both in tax and investment liabilities.
Please talk to the financial professional before implement
The author pointed out there are lots of ways to reduce the income tax.
Each of them can only reduce a little,
but together they can provide you with significant impact
There are 3 common ways
Deduct consultation fees:
If your tax return is prepared by someone who charges a fee,
that amount can be a tax deduction.
Also, any fee paid for investment or financial advice
can be deducted from the income earn
Deferred reporting:
If you have Investments that matures on specific day
like a term deposit,
try to schedule it to mature early In January,
that way you have almost a whole year
before having to deal the tax on the earning
Charity Donation:
Canada has a generous tax credit system for donors to charities.
For example: Mary in Alberta makes a donation of $700.
The Federal will give her
15% for the first $200 and 29% over $200.
Mary gets $175 in tax credit
Also, the Provincial give 10% on the first 200
and 21% after so she gets another $125.
So when Mary donates 700 in Alberta,
she gets $300 for her tax credit.
the net cost for her is $400
Secret #4 Registered Retirement Saving Plan
Registered Retirement Saving plan known as the RRSP
is one of the common tools to deduct taxes.
Tom makes $100,000 per years
and say his income tax bracket is at 30%,
so he needs to pay $30,000 as income tax per year.
If he contributes $10,000 to rrsp,
the income drops to $90,000,
for math purpose, let’s keep it at 30%,
the tax he needs to pay is $27,000.
If Tom does this for every year
and it grows at a rate of 5% per year,
after 30 years,
tom will have $700,000 in this RRSP account.
In addition, each year Tom have saved $3,000 in taxes,
so technically speaking,
the annual $10,000 really only cost Tom $7,000.
Indeed, compare to TFSA,
RRSP is a tax deferral plan
which there is tax to pay when you begin withdrawal.
But RRSP permits you to reduce your tax now
and allows the money to compounded growth
and tax sheltered over the years
Also, the max you can contribute into TfSA is still $6,000 per year.
Where RRSP can put up to $26,000 per year.
2 things that the author point is that
make sure you name your spouse as beneficiaries for your RRSP plan
because RRSP can roll over tax free to your partner should you pass away.
If not, the whole amount in the RRSP becomes your last year income
and easily 50% of entire plan goes to the CRA pocket.
The other one is spousal RRSP,
it’s design for high income tax bracket family.
Where one person with high income tax bracket
contribute to their spouse which has a lower income.
The main advantage is at the time you withdraw,
the taxable amount of each could be considerably lower than
if only one person was taking the full amount.
This is a way to split income in the future
and save on the amount of tax that will have to paid.
Which ever route that you take,
make plans and do not delay.
Let time dissolve the tax burden.
Can you imagine,
you call the travel agent and just telling them you want to take a trip.
But not telling them when to leave and return or How much money you spend and so on.
Unfortunately, that is the way many people plan their financial lives.
let me know if you want to know more about this book
or what did you learn something today!
I will put all the links down below in the description box
including where you can buy this book
This is Thomas!
If you want to learn how money works
and how you want to work with money,
then I will see you in the next video!