Resolve to pay less tax in the New Year

Of all the resolutions you make for 2010, saving tax may be among the easiest to keep and possibly the most rewarding. Every tax dollar saved is a dollar you can spend on the real priorities in your life. Here are some of our favourite strategies:

  1. Open a TFSA for each adult in your family. Why pay tax on your savings when you don't have to? According to Canada Revenue Agency, someone contributing $200 a month to a tax-free savings account for 20 years would enjoy $11,045 in additional savings versus an unregistered account, based on a 5.5% rate of return (see www.tfsa.gc.ca/tfsapamphlet-eng.html).
  2. Top up your RRSP contributions, if possible. As of Jan. 1, 2010, you can make contributions for both the 2009 and 2010 tax years (plus any unused room from previous years). Remember, you have the option to contribute now to maximize tax-deferred growth but claim the tax deduction in a future year when you may be in a higher tax bracket, making it more valuable to you.
  3. Use your $2,000 RRSP overcontribution allowance. Though you won't get an immediate tax deduction, the money grows tax deferred and you can always claim it as part of your RRSP deduction room later. The longer you have until retirement, the bigger the potential bang for your $2,000.
  4. Overcontribute to an RRSP for an adult child. Beginning the year your children turn 19, a one-time $2,000 overcontribution can be made to an RRSP in their name, even if they haven't created their own contribution room through earned income. Here's what your gift could be worth:

    One-time investment

    Rate of return (compounded quarterly)

    Value after 46 years (age 19 to 65)

    $2,000

    6%

    $30,958

    $2,000

    7%

    $48,682

    $2,000

    8%

    $76,464
    Figures in the table: used http://www.dinkytown.com/ calculators.

  5. Get your tax refund working sooner. Think a tax refund is a good thing? From a financial perspective, the answer is no. What it really means is that you lent your money interest-free to the government throughout the year. A better approach is to set up a monthly investment plan for your RRSP and apply to have your payroll taxes reduced. You'll not only pay less tax but also get your RRSP savings compounding faster.

We would be happy to discuss these and other tax-saving opportunities to help you make the most of your money in 2010.

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