Tax Tips and Planning

Fred Ketchen: Welcome to the Scotiabank "Find the Money" podcasts. I'm Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. These monthly podcasts call on some of Scotiabank's most knowledgeable experts to help you make the most of your money. Here we'll discuss strategies designed to put you in the financial driver's seat.

In this month's podcast we'll be providing you with tax tips and advice; how to potentially reduce the amount of taxes you pay, what type of investment options receive preferential tax treatment, and how you may be able to plan better for 2007. Joining us is Howard Kabot, he's the National Director Financial Planning at Scotiabank.

Howard, let me start out by asking you how can Canadians reduce the amount of taxes that they pay?

Howard Kabot: That's a very good question. I think the very first thing that Canadians used to think about is making the RSP contribution. It achieves two things; you get a tax refund and, of course, it allows the money to go for retirement. But certainly in terms of reducing your taxes making your RSP contribution should be the very first thing to think about.

There are other things to think about, of course, there are tax credits that you can claim on your tax return, there are deductions you can take around home office expenses, around businesses and so on. And one thing, of course, that claimants sometimes don't think about is filing a tax return for their children… that will help, if not now, then certainly in the future for their children.

Fred: Let's talk about things like medical expenses and so on, and charitable donations. Because that's an important part of any taxpayer's financial life.

Howard: Yeah, that's a very good point and it really can make a difference throughout the year, not immediately but when the tax return is filed in the following April. So things like medical expenses for making that claim as a credit for any medical expenses that are incurred, credits for automobile expenses, charitable donations are a big one as well.

One of the newer credits for 2007 will be the "mass transit" credit that is those that are taking the GO Transit or subway system etc., can get a credit for doing that. The pension income credit is very large that applies to anyone who's 65 years of age or older, they can get a credit if they have a pension income or RIF income.

The age credit is another big one. If you're 65 years of age or older then the government allows you to get a credit just right… as a matter of fact, when you're hitting that special age. So there are certainly lots of credits that need to be accounted for.

Fred: And it's important that we all keep those in mind. Because, obviously taking advantage of those kinds of credits is a very, very important way of reducing your tax burden. Should the amount of taxes that people pay on their investments be a consideration when choosing a particular type of investment?

Howard: Yes, that's another very good question. Typically, there are three types of investment income; there's interest income, dividend income, and capital gains income. And each of them is taxed differently. In general interest income is taxed at the highest rate in Canada. And then dividend income and then capital gains is usually the most tax efficient.

There are some changes coming through with regards to how dividends are taxed. And the federal government has made some announcements in the past few months and if the provinces come through, then we'll get to a point where dividend income will be as tax effective as capital gains.

Fred: One of the things that I've always been afraid of is to try and go over my own income tax preparation forms. And so I really have had to farm that out to someone else, but sometimes these things do get complicated. Some people's tax returns are far from complicated so that brings up the question should people file their own tax returns?

Howard: Yeah, that's obviously something we're seeing more and more of. Especially now because you can buy the tax software pretty much at any corner store and load it on your computer and there are certainly benefits to doing that. Whether you should file your own tax return is really a matter of how complicated you think it is. If you're looking at the return, as some of us do every year, and you're not really sure where certain items go and you're struggling with how to fill it out, then you probably should seek out the advice of an expert.

Having said that, the software that you can buy now is very, very user friendly and a lot of people have a lot of ease with it and could really do a good job with their own tax return as a result. One of the things I always recommend is you pull out your notice of assessment from the previous year because that gives you a very good understanding of where you were last year.

Chances are things haven't changed a lot since that year and you can sort of follow that along as you go. And pulling out last year's tax returns as well to make sure that it matches up with the notice of assessment is also a very good idea. So, yeah, if you think you can do it on your own and you don't have any fears of the computer, then it's usually a good thing to think about.

Fred: I suppose history is an example here that if you file your own tax return last year and when you got your notice of assessment and everything was okay, you probably should have some confidence that perhaps you can do it again.

Howard: Probably, exactly.

Fred: That's probably good news. Howard, how can people plan better for this year, the 2007 taxation year?

Howard: Again, another very good question, typically people are coming to us and thinking about tax plan too late in the year and we like it when they start to think about that earlier now. Income splitting is one of the best things to think about and we say income splitting what we're talking about is diverting income into a spouse's or child's hands. Presumably the spouse or the child is in a lower tax bracket and this obviously for the family means a lower tax bill when they file their tax return at year end.

Of course, we talked about contributing to an RSP, we also like RESPs. While they don't give immediate tax refund, they do result in a lower income to the family because the money in the RESP is growing tax-deferred. And, of course, when the child pulls the money out of the RESP it's coming out sometimes at low tax or no tax so RESPs are really good as well. We talked about deferring income, that is if you can pushing the income off into a future tax year. This is difficult to do for employees in general but anyone who owns a business or self-employed sometimes has that option to defer income to another year.

Fred: Does that mean that if you think you are going to earn less money next year than you did this year, that you would have that option to defer this year's income into the income of 2008 let's say.

Howard: Exactly, if you have that ability what you just said is exactly how it should work. And again employees is tough to do but self- employed individuals sometimes have that ability and have that option so that's exactly right. Lastly, I would emphasize individuals need to seek out a tax professional. As our situations becomes more complicated if they are becoming more complicated then you should talk to a tax professional they would give you the best advice.

Fred: One of the things that I found very interesting over the past couple of years when you get involved in the charity business and raising money for charitable organizations, is that, one of the better ways to contribute to charity is by using some securities in which you've got a substantial capital gain. Would you like to explain that for me?

Howard: Yeah, this is something that is really fantastic, it didn't always used to be that way. And what this essentially means now is if you want to make a charitable donation and you want to contribute stock, that it could be a tax-free donation. It used to be that you had to pay tax on this because giving the stock was deemed to be a disposition for tax purposes and it would be a capital gain and you'd have to pay tax on it. Now that is not the case and you can give this stock tax-free. At the same time, you will get a charitable receipt for the full fair market value of the stock which could equal up to 40% of the contribution being made. So not only now are you avoiding tax but you are getting a tax credit as well so it's almost having your cake and eating it too.

Fred: This has been one great advantage from what I can understand. Charitable organizations who have really benefited from this change in tax policy.

Howard: Absolutely, it's really made a huge difference in which we saw it right away and we continue to see it.

Fred: Howard, thank you very much for this, it certainly has been very interesting.

Howard: My pleasure.

Fred: I'm Fred Ketchen join us for our next podcast, and for more information please visit your local Scotiabank branch. We'd love to have the opportunity to talk with you.