Financial: Act Now, Pay Less Tax Later

Right now, you're probably thinking more about Christmas than next April's income tax filing deadline. But even though that deadline is months away, now is not only the best time to start thinking about tax preparation, it's the perfect time to take action! Why? Because there is absolutely no doubt that early tax prep can reduce taxes. (To say nothing of the relief you'll feel when that dreaded deadline rolls around and you've got everything under control!)

So let's get started on the road to reduced taxes right now with these seven tax-saving tips:

Make regular tax payments on time. If you're self-employed, you are likely required to pay quarterly instalment payments. (The last one for 2005 is due December 15.) Make them on time to avoid interest penalties and be sure to set aside enough funds to pay any outstanding taxes due at the tax deadline date or you'll pay extra interest on that amount, too.

Make all payments that qualify for tax breaks before the end of the year. December 31 is the deadline for making most payments that deliver tax credits and deductions. That includes certain medical expenses, child-care costs, child support and alimony, charitable and political donations, as well as deductible legal and/or accounting fees and professional and union dues.

Turn losses into gains and gains into bigger gains. Offset capital gains by triggering capital losses so that any transactions are settled by December 31. (Watch out for the "Superficial Loss Rules" that can eliminate capital losses as a deduction. A financial planner can explain them to you.)

Trigger capital gains before the end of the year if the gain won't increase your tax bill -- say, if the gain is offset by capital losses carried forward from previous years. Alternatively, you can choose to defer capital gains by waiting until next year to take a profit on an asset, if it will provide a future tax advantage.

Know your RRSP options. If you're turning age 69 this year, you're required to wind up your RRSP before December 31. You might be able to make one more plan contribution, but you must close your RRSP before the end of the year. If you do nothing, the cash value of your RRSP will likely be taxed at the highest marginal rate. But, you can avoid this huge tax hit by rolling your RRSP into an annuity or (the most popular option) a Registered Retirement Income Fund (RRIF).

Know when to make your move. You pay provincial tax based on where you reside on December 31. Move before year-end if you're heading to a province with a lower tax rate; try to delay your move until the new year if your destination is a province with higher income taxes.

Get the most out of self-employment. If you're self-employed you can claim a capital cost allowance (CCA) on depreciable assets. Usually, only half of the CCA is permitted in the year of acquisition -- so buying assets before December 31 will speed up your write-offs.

Invest in your kids' education. You're allowed to contribute up to $4,000 each year to a Registered Education Savings Plan (RESP) for each child's future post- secondary education. Your RESP contribution is due December 31 and if you miss it, you're not allowed to carry forward that contribution room to a future year. RESP contributions aren't tax deductible, but that money grows tax-deferred until needed to pay for university or college.

There are plenty of ways that planning now will help you save on taxes later. Talk to your financial advisor before year-end to take full advantage of every tax break available to you.

(Information supplied by Damon Smith, Investors Group. For more information call 888.335.1362.)

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.

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