In this article, we’re going to discuss some simple and smart tax-planning (and other planning) tasks that will help you pay less tax and secure your, your family’s, and your business’s financial futures!
Review Your Tax Installments
Hopefully, if you owed tax installments as a result of your last tax return, you’ve been keeping up to date on the payments. If not, it will be determined whether or not installments should have been paid when you file your taxes.
If you should have paid installments and didn’t, you’ll end up paying installment interest – in other words, extra tax.
Tax installments are based on the taxes owing when you file your tax return. So if you’ve had a better or worse year than last, now is the time to get your books in order and either reduce or not pay your final installment, or make a larger installment payment than originally calculated. It’s important to minimize any potential installment interest levied by CRA.
Remember, if your installment payments are higher than your taxes owing, the difference can be refunded (or carried over to the next year or transferred to a different tax program account for a corporation).
Budget for Next Year
Now that you’ve updated your books and prepaid most of your taxes, it’s the perfect time to budget for next year. Remember, it’s important to make plans before you need them.
It’s pointless to budget for January three weeks into the year.
A budget will help you understand many financial matters that should be very important to you, your business, and your family. Budgeting early will allow you to pivot now and set the next year up for success. You’ll determine some of the following:
- Are there leaks in your boat? Some common examples include:
- A large latte factor (AKA, getting drive-thru and takeout too often)
- Over-spending on entertainment such as restaurants, sporting events or concerts
- Wasting money on superfluous spending that doesn’t provide much value such as magazines, unused software or streaming subscriptions, or other items that generally end up being wasted or thrown in the garbage
- If you have a habit, such as smoking or gambling, quantifying the immediate dollar-cost can really help you adjust your routine for next year.
- Do you have necessities that have gone up in price? Some examples are:
- Your rent or mortgage payment
- Your property taxes will certainly be going up, and most likely your utilities will too
- Payments from loans that have a variable interest rate, such as some car loans
- Your grocery bill
- Do you have opportunities to use your money for the benefit of you, your business, and family? Some examples may include:
- Taking a vacation
- Buying a second property
- Investing in needed technology or equipment
- Contributing to your family’s future
Consider Your Investments
Now is also a good time to review the performance of your investments, and your future needs for which you are investing.
Are you contributing enough? Are your investments performing as you need them to?
Remember that time horizon is everything when it comes to your investments, so the earlier you start, the better off you’ll be.
Consider Government Programs
The most common questions we get at this time of year surround RRSPs. Contributing to your retirement is a good idea, but RRSPs aren’t the only vehicle – and depending on your age and situation, there could be much, much better possibilities.
Think about your goals and your budget, and what you want to accomplish by when. Then, educate yourself about the various programs available such as:
- RRSPs (Registered Retirement Savings Plans – Some employers offer RRSP matching!) These come right off your income and result in immediate tax savings. When you retire and begin withdrawing them, you’ll pay tax then. You’re deferring your taxes.
- RESPs (Registered Education Savings Plans – this comes with some government matching!) Note that you can’t deduct these off your income like an RRSP, but in the end, between the matching and the growth of the amounts invested, your child will be better off than if you didn’t invest in their future.
- RDSPs (Registered Disability Savings Plans – this also comes with even better government matching!) Similar to an RESP, this can’t be deducted from your income immediately like an RRSP. However, due to the aggressive potential government matching, this can really set-up your disabled beneficiary for a future if you aren’t there to help out.
- TFSA (Tax-Free Savings Account) contributions are made from after-tax dollars, but you will NEVER pay tax on the income these investments earn. This is by far the most flexible program and when used appropriately, can really, really help you in the long run.
- FHSA (First-time Home Savings Account) contributions are deductible just like an RRSP. You can use this account to make your first home purchase. And if you end up not needing to buy a home, you can transfer these to your RRSP without affecting your RRSP limit.
Note that with any of these programs, you’ll still need to invest the funds. If you just make the contributions and leave them in a savings account, the interest you earn will likely be less than the rate of inflation, eroding your buying power.
For young people who think they’ll never be able to buy a home, you can use RRSP and FHSA programs to come up with over $200,000 per couple if you really go for it.
Your Money is Your Responsibility
If you don’t take care of your money, someone else will…
Help is Out There!
If this is something that intimidates you, and it intimidates many people, help is available. Most people would rather binge-watch Netflix than create their household budget.
Budgeting is your first step to understanding how your money is utilized, and this knowledge can give you the power to take control of your financial future.