Ralph Moss Limited

Tax Strategies

Timing you income for tax deductions!

Canadians are accustomed to seeing federal and provincial tax rates nudge upwards year after year (not to mention new taxes, surtaxes, and rising consumption taxes).
But believe it or not, tax rates can come down. And when they do, that creates some interesting tax planning opportunities.

A made-in-Ontario tax break Ontario residents are a case in point.Over the next few years Ontarians will have a special opportunity to save tax.
Under the 1996 Ontario provincial budget, personal income tax rates will be reduced over the next few years. This means that if Ontario residents can defer income for tax purposes for a year or two,they will pay a considerably lower rate of tax on it.
Before the last budget, the personal income tax rate in Ontario was 58% of basic federal tax. Beginning in July this rate was cut to 56% for 1996. It is then scheduled to fall to 49% effective Jan. 1,1997, and be further reduced to 40.5% by1999. Because provincial tax is calculated as a percentage of federal tax payable (except in Quebec), the savings increase as income rises.

Deferring income Deferring taxable income can be an attractive strategy in many situations, for residents in all provinces.
If you expect your income to be lower in a particular year - perhaps because you're planning to take a year off work to travel - deferring income to that low-income year can pay big dividends.
Here are some suggestions on how to proceed.

• Make an RRSP contribution.Contributing the maximum to your Registered Retirement Savings Plan(RRSP) is the most obvious way to defer tax. It may be wise to borrow to contribute, especially since interest rates these days are near historic lows.
• Time your capital gains and losses.One of the big advantages to owning a capital asset is that you don't have to account for any change in its value until you actually sell the property (or otherwise dispose of it for tax purposes). This allows you to sell when it suits you best, tax-wise (always bearing in mind that investment decisions should never be based solely on the tax consequences).
  In a year of high income, for example,any capital gain you make will be taxed at your top marginal rate. It may be a good idea to delay selling investments that will realize a capital gain until a year when your income is lower. If you have gains you want to offset, you might want toconsider selling property that will realize a capital loss now.
• Defer withdrawals from tax sheltered plans. Within government imposed limits,it can be to your advantage to delay receiving income from a pension or annuity. Withdrawing only the minimum required from your Registered Retirement Income Fund is another effective way t odefer taxable income.

Because everyone's financial situation is different, it's always a good idea to seek professional advice before proceeding, and to identify other ways to defer taxable income.