“I’ve saved the money to pay my income tax.
Now all I have to do is borrow some to live on.”
Lou Costello
How did you survive the tax season? You probably feel you paid more than your fair share of the $145 billion of personal income taxes the federal government collects each year.
Did you have to dip into your personal line of credit again?
To help cheer you up from the seasonal tax blues, here are some of our favourite tax reduction strategies to consider, so that you can turn a tax liability into a tax refund next year.
- Split practice income
Boost your tax savings by maximizing available income splitting opportunities which are not captured by the Tax On Split Income (TOSI) rules. Has your spouse worked at least 20 hours per week in your practice in any of the past five years? Qualifying spouses are entitled to receive any discretionary number of dividends. You can still pay your spouse a reasonable remuneration for actual work performed. If you are 65 years of age, you can split income with your spouse without restriction.
- Pay out Investment Income to Family
Many doctors invest sizable amounts of their retirement savings in stock portfolios or in real estate in their practice or a holding company and don’t realize the earnings on those investments can be paid to family members without TOSI applying. With certain structures, it may even be possible to payout the investment capital.
- Convert dividends into capital gains.
The personal tax savings of converting a regular dividend from your professional corporation into a capital gain are huge. The personal tax on a $400,000 dividend for example is about $130,000, compared to only $65,000 on a capital gain of the same amount. A 50 per cent tax saving!
- Deduct your home mortgage interest.
There are numerous strategies available to make your mortgage interest tax deductible. And doing so can lower a 4 per cent mortgage rate to an effective rate of 2.5 per cent.
- Prescribed Rate Loans
If you have considerable personal assets consider loaning these funds to a spouse or family trust at prescribed rate interest (currently 2%). The investment income earned can now be split with the family members. The key is to ensure the interest is actually paid annually by January 31 of each year.
- Choose an individual pension plan (IPP) instead of a RRSP.
If you are over 50 years of age, you may want to consider dropping the RRSP in favour of an IPP. Doing so allows you to drastically increase your tax deductible pension contribution. One 58-year-old client recently contributed over $300,000 as a deductible past service contribution to his IPP. This contribution was an allowable deduction for the Corporation, as well as the interest on the loan to finance the contribution.
- Maximize tax deduction of medical expenses
Set up your own corporate health plan so you can claim your medical or dental expenses as a fully deductible practice expense. By creating a private health plan you in effect receive a 45 per cent discount on eligible medical expenses.
- Maximize practice expenses with a ‘personal’ element
Look for ways to maximize the amount you claim for automobile expenses, or deduct a portion of your house expenses by setting up a home office. Perhaps you can get the tax department to subsidize a portion of your holidays by signing up for professional development seminars, which promise both legitimate continuing education opportunities and some fun in the sun.
Make tax minimization your priority this year. We will help you to implement effective tax planning strategies relevant to your particular situation and help put more money in your pocket.
