Tips to Reduce 2002 Taxes

How do you feel now that you have filed your taxes for 2001?

Most individuals I talk to are disgusted with the incredible amount of taxes we pay each year. However, they meekly accept the fact that taxes are high in Canada, and that they must pay their "fair share." I agree with them to a certain extent, but then proceed to discuss, what is fair? The Canada Customs and Revenue Agency (CCRA) has provided us with some simple ways to allow us to pay only our "fair share."

The problem is that, as tax-paying citizens, we must investigate alternative investments to rid ourselves of the unnecessary amount of tax we have recently remitted. This task is a lot easier than it sounds. First, look at your most recent tax return and analyze the income you made in 2001, and see if there are any income investments that can be repositioned to reduce your tax for 2002. Do not procrastinate- you must act today for 2002!

A good way to take initiative is to have your financial planner optimize your portfolio's tax efficiency. In Canada, there are three ways to invest:

Registered Retirement Savings Plans (RRSPs). All income is tax-deferred until you withdraw funds in retirement.
Open accounts. These could consist of stocks, bonds, mutual funds and real estate assets held outside your RRSP.
Personal Tax Strategy (PTS)™. This is a Universal Life program where the open assets are held inside the UL policy.

So how do these three investments help you for 2002?

We all know how RRSPS work, and a large percentage of taxpayers contribute each year. But what about the other investment holdings?

Tax problem #1: Interest income. Did you know that interest income is taxed at your marginal tax rate? Do you know what your marginal tax rate is? It is the highest rate you pay on your last dollar of income for the year. Yes, that's right, you do not get the benefit of the blended rate on your income.

Solution: Hold your interest bearing investments inside your RRSP or your Universal Life program. This can eliminate the annual tax that must be reported and paid.

Tax Problem #2: You received a T-3 or T-5 and have distributions to report on a mutual fund you own. Some mutual funds that are relevant for your portfolio have historically reported large distributions.

Solution: Hold these mutual funds inside your RRSP or your Universal Life program. This will not eliminate the distributions, but inside the RRSP they will be taxed as income only on withdrawal in retirement. If the distributions are received within your Universal Life Personal Tax Strategy, there are several ways to eliminate the tax and even pass the asset to the next generation "tax free."
These two simple ideas are quite attractive and should be investigated. You can save as much as $1,000 of tax on a $50,000 portfolio immediately by taking the investments that are causing annual taxation and repositioning them in a Personal Tax Strategy (PTS)™.

Remember that the CCRA only wants your "fair share," and it is up to you to call your IPC associate to see how tax optimization in your portfolio will reduce the tax you pay.