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3 Ds of tax planning - deduct, defer and divide

ANALYSIS: Measuring the success of your portfolio isn't only about the rate of return you achieve. It is a good start, but it doesn't reflect the complete picture. Include the tax element - how much you pay or how little you pay - and you start to define success differently. It is all about how much you get to keep in your pocket.

Being tax smart and investing in a tax efficient manner will help to optimize your investment return and minimize taxes paid. RRSPs and TFSA accounts are two types of tax savings plans and make all kinds of sense for most Canadians, but there are limits and once those limits are hit here are a few other ways to pay less tax. They are commonly referred to as the 3 Ds of tax planning - Deduct, Defer and Divide.

Deduct:

To the extent that you are able to deduct any part of your earnings and lower your total income means you pay less in taxes. Here are a few deductions that often get overlooked:

1) The equivalent to spouse credit: if you are single, divorced or separated. Only one dependent can be claimed and the child must be under 18 in the tax year unless the child is mentally or physically challenged.

2) Charitable donations: federal and provincial credits, spouses can pool their contributions.

3) Childcare expenses: expenses can be deducted where both spouses are working and includes daycare, boarding school, hockey school or summer camp.

4) Medical expenses: non-reimbursed medical expenses can be claimed as a non-refundable tax credit.

5) Carrying charges: such as interest on loans for investment and fees paid to investment advisors or planners

6) Moving expenses: you must be employed, and your new location much be at least 40 kilometres closer to your place of work and starting a business qualifies, as would be moving away from home to start your first job.

Divide:

Financial strategies that contribute to this type of effective tax planning include the use of spousal RRSPs and jointly held property. As well here are a few considerations:

1) Have the higher income earner pay the household bills while the lower income earner invests money. The income generated will be taxed in a lower marginal rate.

2) Consider a spousal loan: Rather than making a gift, you lend funds to your spouse at the prescribed interest rate that is in effect at the time the loan was originated and your spouse pays interest annually by January 30 of the following year. Spousal loans have been used by savvy couples for many years but they are exceptionally attractive now since the prescribed interest rate is currently at a historical low of 1% (which is the lowest rate possible) until at least June 30, 2016.

Defer:

1) You can make your contributions anytime but that doesn't mean you have to take the deduction in the year you made it. You may choose to defer claiming RRSP contributions if you know that your income will increase substantially in the following year and place you into a higher tax bracket.

2) Charitable donations can be pooled and deferred for up to 5 years.

3) Medical expenses can be claimed in any 12-month period ending in the tax year you're filing for.

4) If students don't need to use the tuition tax credit, the education amount or the textbook tax credit because they have no tax to pay, they can transfer those credits they don't need to reduce their tax to zero to their spouse, common law partner or even a parent or grandparent. They can also carry forward any tuition, education or textbook credit they didn't use or didn't transfer to any future year when they will have tax to pay.

When it comes to paying taxes the government is a necessary partner. I wouldn't let taxes drive my investment decisions but they sure get a healthy consideration and who doesn't want to pay as little as possible. Refer to the CRA website to explore even more ways to save.

As the Chief Financial Commentator for CTV News, Pattie Lovett-Reid gives viewers an informed opinion of the Canadian financial climate. Follow her on Twitter @PattieCTV

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