I was talking to one of my neighbours this week, and he's pretty fed up with failing to keep his New Year's resolutions year after year. So, this year, he's stacking the odds in his favour.
"Tim, in 2007, I plan to gain weight, read less, spend more time at the office, stay up late every night, and take up smoking."
I told him that he should add one more to the list: Save tax dollars. It will provide a little more cash to buy those cigarettes. If you implement just one or two ideas every year, the tax savings will add up in the long run. Consider some of the following strategies for 2007.
Investors
Adjust your asset location. Asset location refers to where you hold your investments, particularly inside versus outside a registered plan. To the extent you hold assets both inside and outside these plans, consider holding your equities outside, to take advantage of lower taxes on capital gains, and the new reduced tax on eligible Canadian dividends.
Make your interest deductible. If you have cash or liquid investments on one hand, and non-deductible interest costs on the other, consider liquidating some investments (count the tax cost first) or using the cash to pay down the debt. Then, borrow that same amount to replace the investments. The result? The amount of debt will remain unchanged, but the interest costs on the new debt will be deductible if the newly borrowed money is invested properly.
Self-employed
Re-evaluate your compensation. Starting in 2007, Canadian-controlled private corporations can enjoy the small business deduction, and a low rate of tax, on the first $400,000 of income federally. Also, income over this threshold may be eligible for the new higher dividend tax credit for eligible Canadian dividends when paid out to you, the business owner. All of this means that 2007 is a critical year to sit down with your accountant and re-examine your salary and dividend mix.
Redo self-employment contracts. In light of the Royal Winnipeg Ballet court decision this year, take the opportunity to redo your self-employment contract to clarify the intention of the parties to create a self-employment arrangement, which could avoid problems with the Canada Revenue Agency. See my articles dated April 8 and 15 of this year, at timcestnick.com.
Families
Enroll your kids in fitness activities. Starting in January, you'll be entitled to a Children's Fitness Tax Credit for up to $500 in eligible fees paid for enrolling your kids under age 16 in eligible fitness programs.
If you buy transit passes in 2007, be sure to buy monthly or longer passes to be entitled to the public transit pass tax credit. The credit applies to passes purchased after June, 2006.
Retirees
Create pension income for the credit. The base for the pension tax credit was increased this year from $1,000 to $2,000. If you're 65 or older, consider converting part of your registered retirement savings plan to a registered retirement income fund, to create $2,000 of RRIF income annually. You'll pay little or no tax on those RRIF withdrawals thanks to the pension credit.
Optimize the split of pension income. Those age 65 or older with RRSPs or RRIFs, or those with income from registered pension plans, will be able to report up to one-half of eligible income on a spouse's tax return starting in 2007. Take the time to understand the level of income splitting in your family that will minimize income tax, and the clawback of Old Age Security benefits. A trusted financial planner or accountant can help with the math.
Tim Cestnick is a principal with WaterStreet Group Inc. and author of Winning the Tax Game, among other titles.
