My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, March 5, 2012

Is Personal Income Tax Planning a Fallacy for most Canadians?

As a tax accountant, I could make your head spin with all the income tax planning machinations I can undertake for corporate income tax clients in the correct circumstances.

But what about personal income tax planning? In my opinion, for the average middle class Canadian, personal income tax planning is almost a fallacy. Surprisingly, probably to most, personal income tax planning for higher income earning Canadians is also somewhat restricted. However, there are greater planning opportunities available that I discuss below.

I understand the "middle class" has stratified over the years and is not easily definable; but for purposes of this post, I will define middle class as a family, with either one or both spouses earning T4 employment income with a family income between $70,000 to $100,000, with no self-employment income (self-employment provides for some tax planning opportunities).

To be clear, I don’t consider the maximization of personal and family credits, medical expenses credits or charitable tax credits, etc. as tax planning. Although there can be some planning involved, the reality is that in most cases if you purchase an income tax software program, these credits will be maximized automatically for you.

Why do I say income tax planning is a fallacy for the average person? Because other than purchasing a RRSP, for all intents and purposes, there are no significant planning opportunities. Really, think about it. I am sure you have already read several income tax planning tip columns in your favourite newspaper this year; what was the best tip you read? That you can claim your safety deposit box fee? For those who incur employment expenses, maybe you can claim some employee expenses such as your car on your return. 

Even as I review a tax tips column I wrote for Jim Yih’s Retire Happy Blog last year, I am struck by how limited income tax planning is for the average person.

For all you socialists out there, I will tell you that as usual, higher income and higher net worth people do have some personal income tax planning opportunities. But, compared to the planning possibilities my corporate clients have, they are still very limited in nature.

Some personal income tax planning opportunities available to higher income Canadians (and in some cases middle income earners) include:

Income Splitting- For example, the use of a prescribed loan.

Capital loss utilization- See the 3rd paragraph from the bottom of this blog post on transferring capital losses to a spouse.           

Rental Properties – For those with enough disposable income to purchase a rental property, I discuss the income tax implications of purchasing a rental property in this blog post.  

Flow Through Shares- Higher income Canadians often purchase Flow Through Shares to reduce their income tax liability. I discuss this opportunity in this blog post.

Interest deductibility- In this blog post I briefly discuss how to mitigate your income tax exposure when claiming investment interest.

This post is not like an April fool’s joke where you reach the bottom and I provide you with ten great personal income tax planning tips. Unfortunately, all I can tell you is that for most Canadians, the personal tax planning joke is on you.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.