Thursday, January 2, 2020

A New Year Brings New Tax Changes

Both small and large tax savings lie in waiting for us to grasp. Some are handouts from the federal and provincial governments and others are strategies we have to put into practise.  Unfortunately, taxes are a way of life for Canadians.  Our tax dollars help to pay for government programs and services. On the flip side, we have financial goals and dreams, too, just like the government has theirs.  Every cent we can save for ours is invaluable. 
As always, it’s not a surprise to see the tax brackets modestly increase each year to adjust for inflation. But a much-welcomed surprise and an unusual adjustment is to the Basic Personal Amount (BPA)--what I refer to as our tax-free zone. For 2020, the proposed Basic Personal Amount is $13,229 whereby personal income tax does not apply on these first dollars of income. The bonus is these small tax-free gifts will continue in the forthcoming years. The Federal government’s intention is to increase the BPA over four years until the amount reaches $15,000 in 2023.

This year Canadians with income above this minimum threshold will hardly notice the difference. The tax savings will equate to $174 ($13,229-$12,069)x15%) when you compare the Basic Personal Amount in 2019 of $12,069 to the newly proposed $13,229.  The increased savings will come with time. 

The priceless suggestion is to make time to assess and analyze where your income will land, both on the federal and provincial ladders. This practice is most beneficial as one year ends and another begins.  The tax brackets help to pinpoint your marginal tax rates.  If you are conscious of saving for specific goals, I always encourage looking at the amount of income tax you have paid by year-end. 

Your last pay statement of the tax year or T4 information slip provides valuable information.  Seeing firsthand the amount of income tax deducted from your gross income may shock you into action and cause you to plan different strategies to keep some of your hard-earned dollars in your pockets.

During your working career, a useful and practical strategy is contributing money to an RRSP (Registered Retirement Savings Plan).  This is especially applicable when your income falls in the second tax bracket and higher. In the diagrams below, the ladder draws your attention to the fact that as your income increases so does your marginal tax rate.  All Canadians start at the bottom. 

The tax savings, derived with deposits to an RRSP, generates a tax refund for other financial goals.  This ripple effect creates a dual bonus.  As you save for your retirement, you have additional cash to pay down credit cards.

Here’s a basic example: 

All year, you have diligently saved $100 each week so by the end of the year, you have tucked away $5,200 in a daily savings account.  Now you are contemplating your goals for the year.  You stare at your retirement savings and credit card statements and wonder what to do.

One possible strategy is depositing your savings into an RRSP investment vehicle to reduce your taxable income for the year.  Once your tax return is filed, you receive a tax refund for your top-up contribution.  I choose to think of this as having your cake and eating it too. 

The math tells us.  Your annual income is $55,000 (which falls in the second tax bracket).  A contribution of $5,200 deposited to an RRSP refunds $1,066 ($5,200 x 20.5%). Now the refund can be applied towards your credit card.    The dual purpose is you have saved for your retirement and reduced your debt.  

This quick glance looked only at the federal side of taxable income and tax credits. Our provincial governments also offer different packages of tax rates and credits.  The tax savings exist on two levels.  The tax side to wise financial planning can be complicated.  With an array of tax planning incentives and strategies, you may need some assistance to decipher which apply to your family and you.  A new year always brings new tax changes to help us.  Ensure you make the best of a taxing situation with sound financial advice.    

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