Last updated: Aug. 31, 2020
In our last few articles we’ve highlighted elevated government spending programs and the inevitable increase in the accumulated debt to alleviate the worst economic impacts brought on by the COVID-19 pandemic.
Both current and former senior civil servants, economists and at least one former prime minister are all predicting that while these spending programs have been necessary, there is a light at the end of the tunnel that is likely to shine on tax hikes and program cuts to get the federal debt back in line.
Taxes are the primary source of revenue that all levels of government need to fund programs. These are programs that either we ask governments to supply us with or they choose to undertake based on their understanding of what is in our best interest.
Taxes make up a large portion of your family budget. First and foremost, we think of income taxes, but many other taxes such CPP, EI, fuel and carbon taxes, health taxes, GST and sales taxes, property taxes and indirect taxes take a major slice of the family income.
The total tax bill represents about 45 percent of the average Canadian family’s income. In some provinces it is more than that. Placing this in perspective, the necessities of life such as food, clothing and shelter combined amount to at least 34 percent of family income. This means that the largest portion of the average Canadian family’s budget goes to supporting government.
Tax freedom day in Canada as calculated by the Fraser Institute last year was June 9. That is how long it takes you to pay all your taxes before you start earning money for yourself according to the Institute. Oddly enough that day has fallen back to May 19 this year because the pandemic has dropped many Canadians into lower tax brackets.
But there is something else you can do to prepare for tax increases if you don’t wait too long to put a plan in place. That is working with your tax or financial adviser before the end of the year to analyze your financial exposure to various tax scenarios so you can move quickly to minimize any adverse effects of changes in tax structure.
Some basic strategies include:
Strategies specific to farming might include providing wages to family members, supplying non-cash gifts and awards to employees, structuring retiring allowances if you plan to exit your farming business and prepayment of suppliers within certain limits.
Deferment of additional cash inventory sales and grain tickets and advanced payment programs are also legitimate, as long as certain timing and other conditions are met.
RELATED: Year-end tax planning for farmers.
There are also many personal and family-based strategies that can help you reduce your tax load. Such as:
CPP benefits splitting
Eligible pension income splitting
Dividend income transfer
High vs. low-income expense distribution
Tax loss selling
Capital loss spousal swap
Permitted flow-through share investments
Conversion of non-deductible to deductible interest
Absorbing full RRSP/TFSA contribution room
Keep in mind, however, most of these actions must take place before your year-end. Consult with a tax professional to ensure that you pay the least amount of tax possible in these uncertain times.
Originally published on The Western Producer.