November 22nd, 2021
There are basic year-end tax planning techniques that can be utilized to successfully manage income taxes.
Year-end tax planning techniques include:
- Accelerating or deferring income
- Accelerating or deferring expenses that can be used for tax deduction or tax credits
- Taking advantage of any tax provisions that are scheduled to expire at the end of 2021
All of these strategies have one factor in common: the timing of income and expenses. Accelerating means earning additional income or incurring additional tax-deductible expenses in 2021 rather than in 2022.
Deferring means pushing additional income or additional deductions to 2022 rather than 2021.
To the extent that income and expenses can be moved from one year to the next, these tactics can be utilized to optimize a person's tax liabilities between the years 2021 and 2022.
Year-end planning is about finding the right year in which to earn additional income or to spend money on more tax deductions.
For the most part, income earned in 2021 is taxed in 2021, and deductions incurred in 2021 are deductible in 2021.
Normally, people would prefer to defer income and accelerate deductions. A year-end bonus or selling off investments can often be pushed out to the following year. If tax rates are the same in both years, the person has gained the advantage of time. If a person's overall tax rate will be lower in the following year, deferring income has the additional benefit of pushing the additional income into a year with a lower overall rate, thereby reducing tax. The same holds true for deductions, but in reverse. If a person's overall tax rate is the same in both years, accelerating deductions achieves tax savings this year rather than waiting for those tax savings to materialize next year. If a person's overall tax rate is higher in 2021 than it will be in 2022, accelerating deductions produces the additional benefit of yielding potentially larger tax savings this year rather than next year.
- Contribute as much as you can to an RRSP
- Contribute up to $2,500 annually to an RESP and earn a 20% government grant
- Structure your investments to make interest deductible
- If you have a spouse, combine your charitable donations and claim them on the higher-income spouse’s return
- If you own a business, consider the potential benefits of incorporating it
- Contribute up to $5,000 annually to your TFSA for tax-sheltered growth
- If you have a corporation, calculate your optimum salary/dividend mix
- Considering splitting pension income with your spouse
- Take advantage of family income-splitting opportunities such as spousal loans