Chapter 3:

Planning Your Tax Strategy

Ted Stephenson, MBA, CFA, CFP

George Brown College

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Chapter 3: Learning Outcomes

Learning Objectives:
LO1 Describe the importance of taxes for
personal financial planning.
LO2 Illustrate how federal income taxes are
computed by completing a federal income
tax return.
LO3 Select appropriate tax strategies for
different financial and personal situations.
LO4 Identify tax assistance sources. 2
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Taxes and Financial Planning
(1)
 Paying taxes is inevitable; you pay tax when
you get a paycheque from a job or when you
make a purchase.

 For most Canadians, about one-third of each

dollar you earn goes to pay taxes.

 An effective tax strategy is vital for

successful financial planning.

 Familiarity with tax rules and regulations

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can help you maximize after-tax cash flows
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Taxes and Financial Planning
(2)
 To help you cope with the many types of
taxes you should:

 Know current tax laws as they affect you.

 Maintain complete tax records.

 Make employment, purchase and

investment decisions that leave you with
the greatest after-tax cash flows and net
worth.
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Taxes and Financial Planning
(3)
Four types of taxes are:

1. Taxes on purchases

2. Taxes on property

3. Taxes on wealth

4. Taxes on earnings

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Filing Your Federal and
Provincial Income Tax Return
(1)
 First, you must determine whether you
are required to file a return

 Next, which form best serves your needs?

 Finally, are you required to submit

additional schedules or supplementary
forms?

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Filing Your Federal and
Provincial Income Tax Return
(2)
Who Must File?
 All residents of Canada must file a

federal income tax return for any year in

which they have a balance of taxes
owing.

 Your province of residency as of

December 31 of the taxation year
determines which provincial income tax
return you are required to file.
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 Filing Your Federal and
Provincial Income Tax Return
(3)

Generally, you should keep tax records for three years from the
date you receive your notice of assessment. However, you may
be required to provide backup documentation for up to six years
from filing (seven years total). Certain records, such as housing 8
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Income Tax Fundamentals (1)
Steps for Computing Taxable Income and Tax
Liability

1. Step 1: Determine Total Income

2. Step 2: Calculate Net Income

3. Step 3: Calculate Taxable Income

4. Step 4: Calculate Federal Taxes Owing

5. Step 5: Calculate Net Federal Tax 9

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Income Tax Fundamentals (2)

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Income Tax Fundamentals (3)
 Step 1: Determining Total Income
 Total Income consists of five main
components:
1. Employment income
2. Net business income
3. Investment income
4. Taxable capital gains
5. Other income – retirement income, Old
Age Security, Canada Pension Plan and
Employment Insurance payments
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Income Tax Fundamentals (4)
 Step 2: Calculating Net Income
 Net Income is the total income reduced
by certain deductions:
 Contributions to RRSP, RRP and IPP’s
 Union and professional dues
 Childcare expenses
 Disability supports deductions
 Moving expenses
 Other deduction – business investment
loss, interest paid on loans, employment
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Income Tax Fundamentals (5)
 Step 3: Calculating Taxable Income
 Taxable Income is the net amount of
income after allowable deductions on
which income tax is computed.
 Additional deductions and losses carried
forward from prior years
 Security options deduction
 Capital gains deduction
 Net capital loss of prior years
 Other deductions
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Income Tax Fundamentals (6)
 The first four federal tax brackets and
corresponding rates in 2022 were:
Taxable Income Tax Rate
0–$50,197 15%
$50,197–$100,392 20.5%
$100,392–$155,625 26%
$155,625-$221,708 29%

 (Income over $221,708 has a federal tax

rate of 33 percent.)
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Income Tax Fundamentals (7)
 Step 4: Calculating Federal Taxes Owing
 Taxable income is basis for computing amount
of your income tax owing
 Tax rates and tax credits are used to compute
taxes payable

 Marginal Tax Rate (MTR)

 Is rate of tax paid on the next dollar of taxable income

 Average Tax Rate (ATR)

 Total tax due divided by total income

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Income Tax Fundamentals (8)
 Marginal Tax Rate (MTR)
 Is rate of tax paid on the next dollar of taxable income
 For example, suppose you earn $53,000 of taxable income.

 Your 2022 federal tax liability is calculated as 15 percent on

the first $50,197, while the remaining $2,803 ($53,000 -
$50,197) is taxed at 20.5 percent.

 In total, your federal taxes equal 15 percent of $50,197 =

$7,529.55 and 20.5 percent of $2,803 = $574.62, for a total
of $8,104.17 before the consideration of any tax credits.

 Your federal marginal tax rate is 20.5 percent, the rate

applied to the next dollar of taxable income.
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Income Tax Fundamentals (9)
 Average Tax Rate (ATR)
 Total tax due divided by total income

 To continue our example, your average

federal tax rate is calculated as your total
tax bill of $8,104.17 divided by your taxable
income of $53,000, resulting in an average
federal tax rate of 15.29 percent.

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Income Tax Fundamentals
(10)
 Step 5: Net Federal Tax
 Tax Credit an amount subtracted directly
from the amount of taxes owing

 Non-refundable tax credits are subtracted

from the amount of taxes owed but can never
reduce federal tax below zero

 Refundable tax credits are refunded to

individuals if they qualify even if their tax
liability is zero
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Income Tax Fundamentals
(11)
Examples of tax credits include:
 Basic personal  Contributions to
amount CPP/EI
 Age Amount (65 or  Caregiver Amounts
older)  Disability amount
 Infirm Dependant  Tuition and
(over 18 years old) education
 Spousal expenses/interest
(equivalent-to on student loans
spouse) amount  Medical expenses
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 Income Tax Fundamentals
(12)
Non Refundable Tax Credit Federal
Basic personal amount $14,398
Spouse or common-law partner/equivalent-to-spouse/eligible
dependent amount maximum; if infirm, see also Canada Caregiver 14,398
below
–eliminated when spousal/dependent income exceeds 14,398
Age amount (65+ years of age) 7,898
–reduced when income exceeds 39,836
–eliminated when income exceeds 92,479
Disability amount 8,870
Disability amount supplement for taxpayers under 18 years of age 5,174
–reduced when total child care and attendant care expenses
3,030
claimed for this taxpayer by anyone exceed
–eliminated when above expenses exceed 8,204
Canada Caregiver Credit—infirm spouse/eligible dependant or
child under 18—line 30500 (infirm child under 18) or added to Line
2,350
30300 or 30400, and Line 30300 or 30400 threshold increased by
this amount 20
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 Income Tax Fundamentals
(13)
Non Refundable Tax Credit Federal
Canada Caregiver Credit—infirm adult dependent
relative, spouse or eligible dependant age
7,525
18+; line 30425 is reduced by line 30300 or
30400 claim
–reduced when relative's income exceeds 17,670

–eliminated when relative's income exceeds 25,195

Pension income amount—lesser of eligible pension
2,000
income or
Medical expense tax credit is for expenses in
2,352
excess of the lesser of 3% of net income or
Tax credit for medical for other dependants is for
expenses in excess of the lesser of 3% 2,479
of dependant net income
Eligible adoption expenses—maximum per child 17,131
Canada Home Buyer’s Amount 10,000
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Canada employment amount 1,287
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Income Tax Fundamentals
(14)
Making Tax Payments
 Source Withholding
 Employees withhold from source to pay
income tax, CPP and Employment Insurance
contributions
 Reported to you on your T4 (Exhibit 3-5)
 Can reduce source withholding
 Installment Payments
 Deadlines and Penalties
 Must file by April 30 of each year
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 Automatic 5% penalty on balance owing ifHill Limited
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Income Tax Fundamentals
(15)
 Genevie Seymour’s 2022 Tax Return
 Identification
 Total Income
 Net Income
 Taxable Income
 Net Federal Tax
 Refund Owing
 Income Tax Return and Benefit Return

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Tax-Planning Strategies (1)
 Tax planning is the use of legitimate
methods to reduce one’s taxes.

 Tax Evasion is the use of illegal actions

to reduce one’s taxes.

 To maximize after tax cash flow some

simple strategies can be investigated.

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Tax-Planning Strategies (2)
 To maximize after-tax cash flows, some simple
strategies can be investigated:

1. Are you choosing the form of remuneration

that is most advantageous to you?

2. Are you taking full advantage of all deductions

and credits that are available to you?

3. Are you taking advantage of all possibilities to

defer the payment of taxes to a later date?
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Tax-Planning Strategies (3)
4. Should you adopt “income-splitting”
techniques that permit a lower-income
member of your family to declare
investment income and pay less tax on
it?

5. Have you organized your investment

portfolio so that it attracts the lightest
tax liability?

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Tax-Planning Strategies (4)
How should you receive income?
1. If paid commission may deduct expenses
from your employment
2. Some employee benefits receive more
favorable tax benefits
3. Take bonus after end of tax year
 Tax concerns for small business owners
 Is it better for a small business owner to
pay them-self a salary or receive
remuneration in the form of dividends?
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Tax-Planning Strategies (5)
Tax Free Savings Account (TFSA)
 2023 can contribute up to $6,500 annually
 Regardless of amount contributed to RRSP/RSP
 Unused room can carry forward
 Contributions grow tax free
 Withdrawals are tax free as well
 Withdrawals create contribution room for future
years
 Gains/withdrawals not considered when
determining eligibility for federal income tax
benefits (OAS) or credits
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 TFSA is subject to same investment
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Tax-Planning Strategies (6)
First Time Home Savings Account
(FHSA)
 Designed to help Canadians save for a
principal residence.
 Can contribute up to $8,000 annually with
a $40,000 lifetime limit and must be used
within 15 years of starting.

 For more information visit Department of

Finance Canada:
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Tax-Planning Strategies (7)

Maximizing the benefits of deductions

and tax credits
 Be aware of current tax laws and
regulations
 Use contributions to retirement plans to
defer taxes on income
 Maximize your contribution each year
 Child support, alimony and spousal
maintenance payments are no longer
deductible
 Interest on funds used to earn taxable
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Tax-Planning Strategies (8)
Maximizing the benefits of deductions
and tax credits
 Be aware of the tax treatment of stock
options, capital losses and gains and
lifetime capital gains exemptions
 All people qualify for basic personal
deduction amount and income tax credit
 Also, can claim for eligible dependents
 Interest paid on student loans
 Tuition fees and education amounts
 Medical expenses
 Charitable contributions 31
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Tax-Planning Strategies (9)
Tax Deferral Techniques:
 Defer taxation of income until a later date
when combined average tax rate will be
lower
 During deferral period investment income
earned can be reinvested tax free
 Registered Retirement Savings Plans
 Registered Pension Plans
 Individual Pension Plan
 Deferred Profit-Sharing Plan
 Investing in capital assets
 Registered Education Savings Plan 32
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Tax-Planning Strategies (10)
Income Splitting Techniques:
 Unlawful to invest in name of lower income
earning spouse or minor child to have
income taxed at lower rate
 Legal means of income splitting include:
 Contributions to spousal RRSP
 Splitting CPP/QPP benefits with spouse
 High income spouse pays living expenses
and lower income spouse invests
 Transfer assets used to generate business
income 33
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Tax-Planning Strategies (11)
 Income Splitting Techniques include:
 Legal means of income splitting include:
 Open Registered Education Savings Plans
(RESP)
 Opening a Registered Disability Savings
Plan (RDSP)
 Set up in-trust investment account for
minor child(ren)
 Invest in federal Child Tax benefit
 Transfer asset to adult child
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Tax-Planning Strategies (12)
Ensuring that your portfolio is tax
efficient
 Interest income fully taxed at marginal tax
rate
 Hold such investments in RRSP
 Dividends and capital gains are taxed less
heavily
 Interest for loans made for investment
purposes are tax deductible (subject to
certain conditions)

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Tax-Planning Strategies (13)
Tax issue important to students
1. Learn how to report income from
scholarships, bursaries, fellowships,
grants and RESPs
2. Get common deductions such as
moving expenses, childcare expenses
and interest paid on student loans
3. Non-refundable tax credits such as
tuition and education amounts
4. Other tax credits such as GST/HST
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credit and Canada Child Tax Benefit
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Tax-Planning Strategies (14)
 Every year the CRA modifies tax return
and filing procedures
 Legislation is frequently passed that
changes the Income Tax Act
 Review changing tax laws when personal
financial planning
 Consider changes in personal situation
and income levels

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Tax Assistance and the Audit
Process (1)
Tax Information Sources
 Tax information sources and assistance can
be found at:
 Canada Revenue Agency
 Libraries and Bookstores
 Internet sites
 Tax publications
 Tax preparation software and electronic
filing
 Tax preparation services
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Tax Assistance and the Audit
Process (2)

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Tax Assistance and the Audit
Process (3)
Tax Preparation Software and Electronic Filing
 Most Canadians file tax returns electronically either
directly with the CRA or through a tax service.

 Advantages include benefits to the environment;

receiving a refund within a few weeks; and being able to
keep all original records, reducing the risk of lost
documents.

 The CRA has two systems to enable electronic filing of tax

returns: EFILE and NETFILE. EFILE is a service that lets
authorized service providers and send individual income
tax return information to the CRA directly from the
software used to prepare the tax return. 40
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Tax Assistance and the Audit
Process (4)
What if Your Return Is Audited?
 A tax audit is a detailed examination of
your return for Canada Customs and
Revenue Agency
 More information is requested
 Keep detailed records; receipts, cancelled
cheques, evidence to prove amounts
claimed
 Avoid common filing errors

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 Tax Assistance and the Audit
Process (5)
1. Mathematical errors, such as transposition, adding or subtracting
amounts incorrectly.
2. Forgetting to reduce income by identifying workers’
compensation, social assistance payments, and net federal
supplements.
3. Calculating and claiming provincial tax credits incorrectly.
4. Not including pension adjustments, which affect RRSP contribution
room for the coming year.
5. Claiming GST/HST credits incorrectly by using incorrect spousal
income amounts.
6. Entering the wrong amounts on lines referring to Canada Pension
Plan, Quebec Pension Plan, and Employment Insurance contribution
and overpayments.
7. Claiming incorrect amounts as RRSP contributions.
8. Forgetting to claim the basic personal amount. 42
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Tax Assistance and the Audit
Process (6)
Types of audits include:

 Desk Audit
 Inquiry mailed asking you to clarify or document

 Field Audit
 Agents visit to have access to records
 May request only specific information
 You should seek assistance from a professional
advisor
 Generally, not cause for alarm 43
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Tax Assistance and the Audit
Process (7)
Your audit rights can be listed as following:
 Auditor may only request specific
information
 You can seek assistance from a
professional advisor
 Reassessment cannot go back more than
three years except in cases of fraud or
misrepresentation

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Summary (1)
LO1 Describe the importance of taxes for
personal financial planning
 Tax planning can influence spending, saving,
borrowing and investing decisions
 Knowledge of tax laws and maintenance of
accurate tax records allows you to take
advantage of tax benefits
 Awareness of income tax, sales tax, excise tax,
property tax, estate tax, and other taxes is
important for successful financial planning

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Summary (2)
LO2 Illustrate how federal income taxes are
computed by completing a federal income
tax return
 Major sections require you to calculate
1. Your filing status
2. Income
3. Deductions
4. Other deductions
5. Tax credits
6. Your refund or the additional amount you
owe

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Summary (3)
LO3 Select appropriate tax strategies for
different financial and personal situations
 May reduce your tax burden through
careful planning and making financial
decisions related to
 Consumer purchasing
 Use of debt
 Investments
 Retirement planning

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Summary (4)
LO4 Identify tax assistance sources
 CRA services and publications
 Other publications
 The Internet
 Computer software
 Professional tax preparers
 Commercial tax services, accountants,
and attorneys

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