A central theme of your financial plan should be estate conservation through the minimization of income taxes both during your life and after death. In Canada, we have a progressive or graduated income tax system.
This means that the more you earn, the higher your tax rate will be.
The marginal tax rate is the rate of tax applied to the last dollar added to your taxable income.
The average tax rate is calculated by dividing the total income taxes paid by your total income. Since it includes taxed paid at all levels of income, it will be less than the marginal tax rate.
The three “D’s” of tax planning are: deduct, defer and divide. It is important to understand these three important functions to do effective tax planning and keep your taxes to a minimum.
Deduct: this is a claim to reduce your taxable income. Each deduction will reduce your tax bill. Some common deductions are:
Defer: this means to delay paying incomes tax to future years, instead of today. Some of the common ways to achieve this are:
Divide: Often referred to as income splitting, dividing taxes implies the ability to take income and spread it among a number of different taxpayers. For example, if you have one person with a high income and the other with a lower income, you can employ some of the common strategies as follows: