How Much Tax Should You Pay?

Tax time is here and with the simplicity of tax preparation software, many people are inclined to prepare their own return.  After all, programs are cheaper than accountants.  Even when you can do your own tax return, should you?

The question has meaning if you notice a single point.  You can put what you must on your return and the program makes that convenient and accurate.  You won’t know what you should have or could have put on your return.

Professional accountants are usually able to give you some guidance.  Ask them, “What should I do now to save tax in future years?”

Should you put money into an RRSP as you approach 71?  It depends on your tax rate now and after 71.  There is not a lot of sense to saving money at 30% to pay it later at 40% or even 50%.

Should you have dividend income after age 64?  Maybe, but not for sure.  Beginning around $70,000 of income the government has a special tax to claw back Old Age Security income.  Since dividends are “Grossed up” to integrate the corporate/personal tax system. dividends attract more clawback than other forms of income.  Sometimes reallocating investments between spouses can fix it, but there could be tax issues to do it.  Plan well ahead.

If you have a business, should it become a corporation?  There are many factors to this one, but they are straightforward.  In some cases the savings are substantial.

Other factors are a checklist.

  • Maximize the Tax Free Savings Account.
  • Mortgage interest could be made tax deductible
  • Using corporate class investment funds or segregated funds to minimize tax on investment changes
  • Know what employment perks would be taxable and negotiate for the non-taxable ones.
  • Know the difference between marginal rate (the rate on the next dollar of income) and average rate.  You can manage based on  marginal rate.  Average just happens but it represents the money lost.  There is a big difference.  In Ontario with income of $90,000 average is 24.55% but marginal is 43.4%.

You may find it worth your trouble to pay the extra fees to go to a professional accountant.  As an alternative, go to them after tax time, and ask them to review what you have filed.  You should ask for their observations and suggestions.

For many, there will be nothing of concern.  It is like spending half an hour with a golf pro once in a while just to make sure that no bad habits have crept in unnoticed.  Taxation is a complex field and a review by someone familiar with the rules is a worthy use of time and money.

John Maynard Keynes once said, “The avoidance of taxes is the only intellectual pursuit that still carries any reward.”  Spend some time.


Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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