Doing it yourself

Taxes

You do not need to know every detail of our incredibly complicated income tax system. The average person will be well served by taking advantage of these four types of tax planning opportunities.

Do:

• Avoid taxes: Profits from the sale of a principal residence, and up to $500,000 of capital gains from the sale of an active business you own, are tax free.
• Defer taxes: Contribute to pension plans or an RRSP, and an RESP if you have children. Investment gains are not taxed until withdrawal, which allows income to compound tax-free over long periods of time.
• Split income: Our tax system has progressively higher rates as you earn more, so having income taxed in the hands of lower income family members saves money. Consider employing your spouse or children if you have a business. Contribute to a spousal RRSP. Split your CPP entitlements.
• Generate tax-preferred investment income: Dividends from Canadian corporations and capital gains on the sale of investments get preferential tax treatment relative to earned income and interest. Earning $80,000 at a job in 2004 would cost about $23,000 in income tax plus CPP and EI premiums. The same income, half in Canadian dividends and half in capital gains, is liable for only $8,000.

Don't:

• Cheat on your income tax returns by falsifying your income or expenses.
• Buy an investment that is being touted more for its tax benefits than its returns