Madan Chartered Accountant, an accounting firm in Mississauga, shares free tax tips for individuals and corporations. After all, it’s our responsibility to save you money.
1. Over Contribute to Your RRSP by $2,000
Contributing to a RRSP is a smart idea, because you receive a tax deduction for the RRSP contribution, and any income or capital gains earned inside a RRSP are not subject to income tax. Income inside the RRSP grows tax-free!
Unfortunately, there is a limit to the amount you can contribute to a RRSP. The maximum amount that can be contributed to a RRSP in the current year is 18% of your previous year’s earned income, plus any unused RRSP room carried forward from prior years.However, there are no penalties for over-contributing to a RRSP by up to $2,000 in excess of your RRSP limit. For example, if your RRSP Limit is $12,000 for the 2010 year, you can technically contribute $14,000. While the additional $2,000 is not tax deductible, any income or capital gains earned on the excess contributions remain tax-free.Note that the $2,000 over contribution limit is a life-time maximum. This means that your total excess RRSP contributions cannot exceed $2,000 at any point in time.
Before taking advantage of this tax savings strategy, you should first consult with an accounting firm in Mississauga.
2. Loan money to your spouse
With interest rates at an all time low, it’s never been a more opportune time to take advantage of income splitting with your spouse through spousal loans.
A spousal loan is money lent to your spouse at the CRA’s prescribed rate of interest, which is currently 1%.
If your spouse invests the loan proceeds in income generating investments, then any income earned on those investments will be included in your spouse’s taxable income and not yours. This is very beneficial if your spouse is in a lower tax bracket than you.
Therefore, if you regularly make investments in stocks, bonds, mutual funds, etc., and are in a higher tax bracket than your spouse, you should consider making a spousal loan to your spouse for investment purposes.
As an accounting firm in Mississauga, we have advised many of our clients to take advantage of this tax saving strategy.
For more information on spousal loans, please see Accountant Toronto – Tax tip – Income splitting with spouse
3. File your personal tax return on time
It’s important that you file your personal tax return on time. Personal tax returns are due on April 30 for individuals and on June 15 for the self-employed. Filing past the deadline will result in significant interest and penalties.
“We always encourage individuals to file their tax returns on time, to avoid incurring large penalties”, says Madan CA, an accounting firm in Mississauga.
In fact, the penalty for filing your personal tax returns late is 5% of the balance owing as of April 30 (or June 15 for the self employed), plus 1% for each month that the return is past-due. On top of the penalties, interest is charged on your balance owing at the CRA’s prescribed interest rate + 4%.
For additional information on penalties and interest charges, please see Penalties and interest charges
4. Declare bonus to defer corporate tax
Declaring bonuses on a corporation’s year-end is an effective tax deferral strategy. Bonuses declared, but not paid, are tax deductible as long as they are paid within 6 months of a corporation’s year end.
For example, assume your corporation in Ontario, Canada has a December 31, 2012 year-end and a pre-tax profit, before management bonuses, of $100,000. In the absence of any tax planning, your corporation will have to pay taxes of $16,500. However, if a bonus is declared for $100,000, your corporation’s profit will be $nil, and no corporate taxes will be payable. What’s even better is that the $100,000 bonus does not have to be paid to you until June 30 of 2013, effectively proving a 6 month deferral of taxes.
You should consult with accounting firm in Mississauga before deciding to declare bonuses.
5. Pay your spouse a director’s fee
Consider paying your spouse a director’s fee to save taxes. The director’s fee paid is taxable to your spouse and is tax deductible to your corporation. If your spouse is in a low tax bracket, he/she won’t pay much in tax on the director’s fee received.
“Review your articles of incorporation and corporate minute books to verify if your spouse is a director of your corporation”, says Madan CA, an accounting firm in Mississauga
A director’s fee is an amount paid to a director of a corporation for services performed such as attending directors meetings, overseeing the management of the corporation, approval of financial statements, declaring dividends, hiring officers for the corporation, and approving modifications to the share capital of the corporation.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.