I filed my taxes last week and expect to see a $2,500 refund hit my account some time in the next few days. While normally a big tax refund is cause for celebration, I won’t be treating this one as a windfall. That’s because it turned out my wife owed around the same amount when she filed her taxes. One offsets the other and so our total household taxes owing nets out to zero.
Coincidence? No way! This was all part of a well thought out tax planning strategy designed to minimize taxes and smooth out our monthly income and expenses. Since our tax situation is more complicated than most, a little advanced planning goes a long way. We don’t need any big surprises during tax season.
For some background, I earn regular employment income while my wife stays home full-time and looks after our two kids. Any income earned from freelance work or through the blogs goes into our small business, from which we stream dividends to my wife to the tune of about $3,500 per month.
The small business arrangement allows us to split income and save on taxes. Outside of our corporation, the best tax move we make is contributing to our RRSPs.
First 60 Days Assessment
While I do make semi-regular contributions throughout the year, I use the first 60 days of the year to assess our tax situation and identify any opportunities to reduce our taxable income by making additional RRSP contributions.
One quick way to do this is to use an income tax calculator to quickly estimate your tax refund (or taxes owing) by selecting the province in which you reside and then entering your income, taxes paid, plus any RRSP contributions. Toggle this amount until you receive the desired refund. In our case, we want to reduce our taxes owing to zero.
I’ve done this ‘first 60 days’ assessment for the past several years and managed to reduce our household taxes while also increasing our RRSP portfolio balance to nearly $150,000.
As you know, I’m an early tax filer and so after gathering all of our documents and making an assumption that we’ll owe, I figure out how much of an RRSP contribution is needed to reduce those taxes owing to zero. Then I’ll take out a small top-up loan*, either from a low-interest RRSP loan or by borrowing temporarily from our line of credit. Voila – no more taxes owing!
*A note of caution: A top-up loan only makes sense if you can meet the resulting debt obligations. You must be able to pay back the loan, and on time.
RRSPs are horribly underutilized as a tax-planning tool. According to a TurboTax national survey, Canadians aren’t taking advantage of tax credits and deductions as much as they should be, with only 31 percent planning on submitting an RRSP contribution slip. That means more than two-thirds of tax-filers will not!
We use the first 60 days of the year to assess our tax situation while there’s still time to do something about it. RRSPs can drastically impact your tax return, but don’t treat RRSP season like a last minute, panic-induced fire drill. Careful planning can save you time and money come tax season.