Kick Start 2015 Financial Plans

First the bad news. The rules behind the very least you could possibly pay as a household are very complicated. Despite all hype around the $5Billion the new Family Tax Cuts and additional provisions promise to eligible households, it’s going to be up to the taxpayer to navigate the new tax return, file accurately and to the family’s optimal benefit.

Now the good news, in case you missed it: there’s $5 Billion of tax goodies up for grabs and there is lots of help available for Canadian families to tap into it. What’s needed is a focus on three key tax strategies:

1. Plan to keep more of the first dollars you earn before year end. In the context of the Family Tax Provisions, the new Tax Cuts begin in 2014, which means you probably have overpaid taxes through income tax withholdings at source with your employer, or through overpaid quarterly instalments. It’s time to do a reality check to see if you can reduce those withholdings or instalments in December. That’s really important because you may be able to create new money for TFSA, RESP, RRSP or other investment purposes. Or, you might be able to pre-pay your credit cards before Christmas to be sure you are on a sound financial footing before 2015 comes around. For help, check out Knowledge Bureau’s recently released Income Tax Estimator or visit with a DFA-Tax Services Specialist for year end tax planning help.

2. Hold onto to your new found money the longest. With the new tax breaks come opportunities to make great investment decisions. What should be done first: contribute to a TFSA or the RESP? Max out the RRSP or get extra tax breaks through tax-efficient charitable giving before year end? The correct answer is “it depends.” That’s why you need to review criteria for investing in each to determine whether family members are age-eligible, have required investment room and most important, what the best deployment of scarce funds will be in the short term and the long term. This is where sound advice from a qualified financial advisor with a strong tax background can really pay off. Look for an MFA (Master Financial Advisor) designate in your area.

3. Make sure your money has purchasing power in the future. One way to do this is to pay down your expensive, non-deductible debt as soon as possible. Another way is to identify the new dollars to be received and then make plans for their purposeful use, before the electronic deposits co-mingle with other priorities. For example, plan to save the new enhanced Universal Child Care Benefits, arriving in a lump sum next July, in separate accounts for each child so that resulting investment earnings are taxed in their hands, not the hands of parents. This is a great way to preserve purchase power of the gift. In another example, recall that the $1000 increases to maximum dollar amounts available for child care expenses must usually be claimed by the lower income earner. This will form part of the 2015 tax refund, so making sure that money is invested in the lower earners’ hands gets great results: purchasing power is enhanced in the future, because the tax bite on earnings resulting from investments will be lower. Bear in mind, however, that there is no tax bite at all when those bigger tax refunds are invested in the lower earner’s TFSA.

The Family Tax Cuts, Universal Child Care Benefits and increased child care expenses, when taken together, can amount to significant sums of money for some families. What’s required, however, is a revisit of “old” tax knowledge and a renewed focus on tax efficient investing before year end.

It’s Your Money, Your Life. The more you know about the latest new tax filing provisions, the bigger the potential for taxes riches. Advisors and clients who take the time to plan now position the family for new wealth building opportunities.

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