The Times Advocate, 2005-03-02, Page 13Wednesday, March 2, 2005
Exeter Times—Advocate
13
Do you know where your 2005 Barrie Winterfest
tax dollars are going?
Irene Pawlik, B.Sc; B.Ed;
B.Comm.
FINANCIAL CONSULTANT
When NASA first started
sending up astronauts,
they quickly discovered
that ball-point pens would
not work in zero gravity.
To combat this problem,
NASA scientists spent a
decade and $12 billion
developing a pen that
writes in zero gravity,
upside down, underwater,
on almost any surface,
including glass and at
temperatures ranging
from below freezing to
over 300 degrees cel-
sius the Russians used
a pencil
Some people actually
look forward to tax time,
because they expect to get
a refund. They prepare
their return, and then
eagerly await their 'wind-
fall' of several hundred (or
even thousands) of dollars.
If you're one of these
people, consider this: A
refund means you over-
paid Canada Revenue. It
means you gave the gov-
ernment more money
than necessary to cover
your tax liability. Last
year, the average income
tax refund was more than
$1,300. Considering that
the average income per
household is only $41,000,
that means Canadians are
giving the government 2
per cent to 5 per cent of
their annual income for
absolutely no reason.
Refunds are not gifts
from the government;
they're simply the return
of money that was yours
in the first place. We com-
plain of interest payments
of 7, 10, 15 per cent on
loans and credit cards, but
don't bat an eyelash when
we pay 30, 38 and 46 per
cent in income tax. When
you get a refund, it means
you gave the government
an interest-free loan for
the year. Anyone else,
even a bank, would pay
you interest on the money.
But not Canada Revenue.
It returns only the amount
you overpaid, regardless
of how much money you
gave or how long you
`loaned' it the money.
If you do get fairly sub-
stantial refunds each year,
you're probably claiming
too few exemptions on
your T-ls. Talk to a tax
expert to make sure
you're claiming all the
exemptions you can.
Then, take the money you
would have given to the
government and use it to
save for retirement, for
college, or for some other
purpose you deem accept-
able.
Here are some of my key
tax tidbits to keep in mind
throughout the year.
Tax avoidance vs. tax
evasion
The bottom line is: tax
avoidance is legal, and tax
evasion is illegal. Tax
avoidance involves using
tax loopholes in the
Income Tax Act to mini-
mize your tax bill. Tax
evasion is knowingly falsi-
fying statements or failing
to disclose income
sources.
Plan ahead
Many people seek advice
to try to reduce their tax
bills for the previous tax
year in the months before
the tax deadline.
Unfortunately, most of
these people find their
options are few because
effective tax planning
requires that you plan
ahead.
Tax planning vs. tax
preparation
Effective tax planning
can have a different
meaning and emphasis
depending upon your per-
sonal circumstances. Add
in the fact that govern-
ments introduce new tax
legislation every year and
we begin to understand
why Albert Einstein said,
"The hardest thing in the
world to understand is the
income tax."
Tax preparation is really
the act of summarizing
the historical events of a
year — usually the year
just ended. Tax planning
is looking at the future
and trying to develop both
long-term and short-term
strategies to minimize
your tax bill.
Anyone who under-
stands taxation and the
rules will also know that
many tax planning strate-
gies will require years of
planning before you can
reap the rewards. It is this
time of the year that you
should be thinking about
the year ahead and
beyond.
Know your marginal
tax rate
Your marginal tax rate
is the amount of tax that
you will pay on the next
dollar of income. It is the
most important tax figure
to know. Your marginal
tax rate depends on three
things: Level of income;
the province where you
reside; and the kind of
income you earn.
Tax planning is more
important than investment
planning. Most people go
to a financial or invest-
ment advisor in hopes of
earning better rates of
return — say 1 per cent, 2
per cent, 3 per cent or up
to 5 per cent over time.
In my opinion, that is
good value, but you are
far better off starting the
investment process by
doing some good tax plan-
ning because this can help
you to earn benefits in the
range of 10 per cent, 20
per cent and up to 40 per
cent. Investment planning,
incorporated with your
tax planning, is invalu-
able!
The three Ds to effective
tax planning are deduct,
defer and divide. You
must understand each of
these important functions
to plan effectively.
Deduct
A deduction is a claim to
reduce your taxable
income. A deduction will
reduce your tax bill by an
amount equal to your
marginal tax rate.
Defer
A deferral strategy
attempts to delay when
tax will be paid. Deferring
tax means you might elim-
inate the tax this year, but
you will have to pay even-
tually. Generally tax defer-
ral has two advantages: It
is better to pay a dollar of
tax tomorrow than it is to
pay a dollar of tax today;
and tax deferral typically
puts the control of when
to pay the tax in the hands
of the taxpayer instead of
in the hands of the
Canada Revenue Agency
(CRA).
Duplicate Bridge players Lorna Stuart, Barb Harrison, Rosaleen Berends and
Gladys Bierling were among the 900 seniors who took part at Winterfest in
Barrie Feb. 6-9. (photo/Pat Bolen)
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