You may not need to pay as much as you think
“We have no choice but to pay tax,” says Stacey Cooper, JR Shaw School of Business instructor, “so we have no choice but to realize that it affects us.”
Learning a little about how it all works, she adds, can help you save money. Year end is a great time to take stock of your finances and make adjustments that will allow you to do just that.
“Tax impacts you from the point where you start working until the day you die,” says Cooper. “So why not do something about it?” Here’s how.
1. Reap your losses
With the stock market, you win some, you lose some. What you win, or capital gains, are taxable. But if you sell stocks at a loss, those losses are deductible. Should you have a feeling they aren’t about to become hot commodities any time soon, “Why not trigger these losses right now so that you offset the tax that you’ll have to pay on those gains?” says Cooper. Just aim to break even.
“Why not trigger these losses so that you offset the tax that you’ll have to pay?”
That said, beware of creating what’s called a superficial loss, she warns. Basically, if you sell then repurchase the same stock the loss will not be deductible.
2. Delay your gains
Once Dec. 31 is in sight, hold off billing, invoicing or selling stock at a gain until the new year. At this point, you’ll likely have a good sense of your year’s total income and be able to use that number for working out your tax-saving strategies. No need to complicate that now.
Overall, “a good strategy is to trigger gains early in the year and losses late in the year, if possible,” says Cooper.
3. Give it away
Christmas is the time for giving, so get donating. Besides it just being the right thing to do, “This is one of the easiest ways to reduce the tax you’re going to pay,” says Cooper.
In Alberta, tax credits on donations are calculated at 10% for the first $200 donated, with the remainder credited at 21% (total donations cannot exceed 75% of your income). For example, donate $500 and you’ll get $20 back on the first $200 and $63 on the remaining $300, for a total credit of $83.
“This is one of the easiest ways to reduce the tax you’re going to pay.”
There's a federal credit on top of that: 15% on the first $200 and 29% thereafter.
Within families, the payback can get even better. “Maximize your donations by claiming all of them on a single taxpayer,” says Cooper. “You’ll get more of the tax credit and more money back in your pocket.”
4. Keep it in the family
If you’re working but your spouse isn’t, the household income – according to Canada Revenue Agency – is technically yours, even if you’ve got a joint bank account. That means if your spouse were to invest any money, the earnings are taxed according to your (higher) income bracket – unless you set up a spousal loan.
Basically, this is an agreement that includes a reasonable term for repayment and an interest rate. Write it down, sign it and you’re done – your spouse can now claim earnings at his or her own income tax bracket, which is likely much lower, meaning less tax.
Charge your spouse a prescribed interest rate from Canada Revenue Agency, in this case the rate used to calculate taxable benefits for employees and shareholders from interest‑free and low-interest loans, currently 3%.
“At the end of every year there’s always the chance those rates are going to come up, so it’s nice to lock it,” Cooper advises.
5. Roll back your earnings
Knowing your personal (federal) tax bracket is an essential part of your tax-saving strategy. For 2022, this is how they work:
- the first $0 – $50,197 is taxed at 15 percent
- the next $50,197 to $100,392 is taxed at 20.5%
- the next $100,392 to $155,625 is taxed at 26%
- the next $155,625 up to $221,708 is taxed at 29%
- and anything over $221,708 is taxed at 33%
If you know you’ve earned more than $50,197 by the end of the year, a combination of donations, delaying other earnings or planning for a lump sum RRSP contribution before the deadline in 2022 could lessen the tax burden at that 20.5% bracket, if not eliminate it entirely.
Whatever you choose to do before year’s end, an investment adviser or an experienced accountant is a valuable ally in your money-management strategy. Don’t delay: some transactions take a few days to settle.
Either way, a simple rule of thumb goes a long way when it comes to taxes: Invest the time in exploring your options, says Cooper, and above all, “Be smart about it.”