That is definitely not a good trend – but there are ways you can give yourself up to an extra 30 days of tax freedom next year simply by making more effective investment choices this year.

Of all the taxes Canadians pay, income taxes are the easiest to lower through tax-planning strategies.  Here are three that can work for you.

1) Take full advantage of RSP deductions.  A Registered Savings Plan (RSP) is the best tax-saving, nest-egg-building opportunity available to most Canadians. Here’s an example:  According to calculations by The Fraser Institute, an Ontario family consisting of a 50 year old husband, a wife and two dependents, and earning an annual gross income of $100,000 will pay approximately $48,824 in tax.  Accordingly, it takes this family 179 days within the year to pay that bill – placing their personal Tax Freedom Day on June 29^th. But, if that family were to make a $10,000 tax-deductible RSP contribution (assuming a marginal rate of 40 percent) they would realize a tax saving of $4,000 – moving up their personal Tax Freedom date by over 14 days!

Of course, coming up with $10,000 all at once can be almost impossible – but there are more manageable ways to achieve the same result.  You could have your financial institution regularly withdraw an amount of your choice from your bank account and have it placed in an RSP account. Or, if you belong to an RSP program at work, you can have your contribution deducted directly from your paycheque, which has the added benefit of allowing you to reduce the amount of income tax deducted at source.

2) Make tax-smart non-RSP investments.  Many common non-RSP investments generate interest, which is always taxed at your marginal rate. Take our typical Ontario family, for example: If the family earns $10,000 in non-RSP interest income this year (at a marginal tax rate of 40 per cent) the tax cost would be $4,000.  But, by realigning their non-RSP portfolio to generate $3,000 in income from dividends, $2,000 from realized capital gains, and $5,000 from unrealized capital gains, their tax cost is reduced by $2,850 – and their Tax Freedom Day advances by another 10 days! Note that, for this family, reducing taxable income also will reduce the amount of Ontario Health Premium that the family will pay.

3) Use income-splitting to save on taxes.  When a spouse with a higher marginal tax rate makes a loan to another family member with a lower marginal tax rate that is equal to or higher than a prescribed interest rate (set each quarter by the federal government), the overall tax liability is reduced – so long as the interest charged is actually paid within 30 days of year-end.  If our Ontario family split income by transferring $10,000 from a family member taxed at the 40 per cent marginal rate to another family member taxed at a 25 per cent marginal rate, the tax savings are $1,500 – or an additional 5.5 days of tax freedom.[IG2] 

For our Ontario family, the results of using these three tax-saving opportunities are dramatic: A total tax saving of $8,350 and 30.5 additional days of tax freedom! 

Strategies like these can help you save on taxes, too.  Ask your financial advisor how you can celebrate your personal Tax Freedom Day earlier next year … and every year.

* The Fraser Institute -- News Release, June 27, 2003

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.

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