# Learning Tax minimizing strategies



## Underworld (Aug 26, 2009)

Hi guys - I'm trying to educate myself on tax strategies and am currently reading this book http://www.amazon.com/Tax-Tips-Shelters-Canadians/dp/1897178565/ref=sr_1_5?ie=UTF8&s=books&qid=1265052268&sr=8-5 on tax tips.

My question is - does any one know of any good tax tools/software I can use to plug in my current money situation and for it to recommend any areas I can change to save on tax?

Also is what I am thinking of called Quicken tax (ive never used it), im just after some educational tool i can play, learn and optimize what I am doing with moving of money.

Thanks!


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## Robillard (Apr 11, 2009)

Underworld,

If you want to be able to play around with your tax liability, I suggest that you do your taxes on your own, by hand. When you are filling out the tax forms, create a spreadsheet that simulates the calculations.


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## steve41 (Apr 18, 2009)

Looking at simply what you are going to pay in taxes in the current (or next) year, is not going to get you anywhere. Tax is a complex issue, and the only measure which has any meaning is the present value of ALL those future tax pmts, including the very final pmt on death.

Remember, tax interacts with different forms of capital: registered, nonreg (tax accrued), equity (tax deferred) and tfsa (tax free) in vastly different ways over time. As these various forms of capital come in and out of play, tax will do all sorts of strange things.

Making a simplistic assumption of how your marginal tax rate might look over time is fraught with inaccuracy. The issue is tax (not an average or marginal tax rate)

Here is a good description of the different approaches (ranked by sophistication) to determining an optimum (tax efficient) financial plan...

http://www.finiki.org/index.php?title=Cash_Flow_Financial_Planning_Software


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## the-royal-mail (Dec 11, 2009)

IMO you are being a bit too scientific about this. Short of fraud, the way to reduce taxes is to reduce your income in the eyes of the gov't. This happens by RRSP, significant medical expenses, charitable donations and such. I don't think you need software or spreadsheets, rather, a few questions to your accountant should answer your questions. Everyone's situation is different.


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## FrugalTrader (Oct 13, 2008)

As others have mentioned, if you are a regular employee (T4 income) without a business, then the ways to reduce taxation is fairly limited. RRSP is probably the biggest tax break/deferral available. Otherwise, keep all your investments within tax sheltered accounts if possible.


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## steve41 (Apr 18, 2009)

FrugalTrader said:


> As others have mentioned, if you are a regular employee (T4 income) without a business, then the ways to reduce taxation is fairly limited. RRSP is probably the biggest tax break/deferral available. Otherwise, keep all your investments within tax sheltered accounts if possible.


Again.... reduce taxation when? Certainly, investing in your RRSP will reduce taxation now, but when you go about cashing it in (in retirement), you get taxed on 100% of those withdrawals. Investing outside your RRSP (tfsa or nonreg) imposes a near term tax burden, but when it comes time to withdraw those savings, tax is zero.

Tax over time and the effect of the various forms of capital on tax is hugely important. (and complicated)

Oh... and good luck with your accountant... most of them are clueless when it comes to tax-based cashflow forecasting.


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## humble_pie (Jun 7, 2009)

" ... investing outside your RRSP (tfsa or nonreg) imposes a near term tax burden ... "

i'm curious, how does investing in a tfsa impose a near term tax burden.

??


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## steve41 (Apr 18, 2009)

humble_pie said:


> " ... investing outside your RRSP (tfsa or nonreg) imposes a near term tax burden ... "
> 
> i'm curious, how does investing in a tfsa impose a near term tax burden.


By the fact that you are walking away from the tax deduction that the RRSP contribution would have afforded. Sorry, I should have explained that a bit better.


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## the-royal-mail (Dec 11, 2009)

But it's not a burden. You are mentally banking on money that you don't even have. Though, I do understand your point. I would suggest thinking about it another way. Yes, you miss out on the initial tax kickback by putting the money in TFSA instead of RRSP. But that is the ONLY benefit. Flip the coin and FFWD to retirement. When you want to take your TFSA money back (assuming it stays and is invested between now and then) you can get it back without paying a cent of tax on the principle or on the interest. It's a feather in your cap when you can retire knowing that cash is available for you anytime dollar for dollar without owing the gov't anything.


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## steve41 (Apr 18, 2009)

www.fimetrics.com/tax-study.pdf

Above is an illustration of the the disparate effect tax has on the savings process (TFSA or RRSP?)

It is a mythical 35 yrold earning $65k and just starting out. In one case he saves the conventional RRSP method and in the other case using his TFSA.

It is a 'needs-based' projection using full T1 accuracy (with indexed brackets)


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## Underworld (Aug 26, 2009)

Great input guys thanks. I also appreciate the point about doing my own taxes. There can be no other better way of learning than doing it myself and i thoroughly enjoy learning everything anyway  A bit sadistic I guess when it comes to tax.

FrugalTrader - I have a company but currently work both full time employment from a regular employer and do my stuff on the side (its hard work). 

I now realize peoples points with regards to being a full time employee and my tax sheltering being relatively limited. I get the idea of a corporate body being a good place to shelter money.


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## steve41 (Apr 18, 2009)

Just as an afterthought.... here is that exact plan projected as if there were no TFSA. In this case the 'outside the RRSP' option used taxable accounts (T5ed as 50% capgains and 50% dividends)

www.fimetrics.com/tax-study-2.pdf

Notice in this case, projecting the same level ATI resulted in the capital running out early. Also, I started to pull down the RRSP after retirement so as to equalize tax throughout the retirement period.


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## bean438 (Jul 18, 2009)

the-royal-mail said:


> But it's not a burden. You are mentally banking on money that you don't even have. Though, I do understand your point. I would suggest thinking about it another way. Yes, you miss out on the initial tax kickback by putting the money in TFSA instead of RRSP. But that is the ONLY benefit. Flip the coin and FFWD to retirement. When you want to take your TFSA money back (assuming it stays and is invested between now and then) you can get it back without paying a cent of tax on the principle or on the interest. It's a feather in your cap when you can retire knowing that cash is available for you anytime dollar for dollar without owing the gov't anything.



A dollar is always better in my pocket than CRA's.

Take the refund now, use it to fund the TFSA, or taxable account. When you draw the RSP you can take a loan with interest payments equal to your draw down and offset the tax. Purchase dividend paying stocks and essentially lower your tax rate on RSP with drawls. 
I think I got it right. RSP melt down technique I read somewhere. (here maybe?)


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## Underworld (Aug 26, 2009)

> Take the refund now, use it to fund the TFSA


Why would you stick it in the TFSA instead of re-investing in the RRSP? 



> When you draw the RSP you can take a loan with interest payments equal to your draw down and offset the tax.


Is this to do with taking a loan out for investment and getting a tax credit?



> Purchase dividend paying stocks and essentially lower your tax rate on RSP with drawls.


When you say purchase divident paying stocks - is that when you extract from your RRSP?


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## Underworld (Aug 26, 2009)

I found the technique you referred to - is it still legal?

http://www.milliondollarjourney.com/rrsp-meltdown-strategy.htm


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## Underworld (Aug 26, 2009)

Also found this regarding TFSA and RRSPs using the strategy

http://blog.taxresource.ca/what-the-new-tfsa-rules-prevent/


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## bean438 (Jul 18, 2009)

I contribute monthly to an RSP so I get a big refund at the end of the year. I could dump that into next years RSp but I can afford the monthly contribution. I can actually afford both RSP and TFSA contributions, so i guess my point was that contributing to the RSP gives my some cash today that I can deploy (pay down mortgage, taxable account etc) that I would not have if I just contributed to a TFSA and taxable account.
The RSP melt down is legal. I take out a loan for 150K (legal), and withdrawl 4125 from my RSP each year (legal). Buy my 150K worth of stocks (legal) and generate lets say 4500 a year in dividends (3% yield). I still pay taxes (illegal in my opinion!) but at a lower rate than I would without the loan and simply withdrawing 4500 from the RSP. As a bonus I would enjoy an increasing dividend income, and a perpetual deduction which would be nice as I would be retired and not have an RSP deduction.

Your second link was something completely different. I had no idea people could do this. Sounds like a technical loophole that greedy, shifty people were taking advantage of (possibly lawyers, and politicians) and the govt had to shut it down (after the politicians took advantage of it) so that they can continue to squander our money away


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## FrugalTrader (Oct 13, 2008)

Underworld said:


> I found the technique you referred to - is it still legal?
> 
> http://www.milliondollarjourney.com/rrsp-meltdown-strategy.htm


What would be illegal about it?


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## Underworld (Aug 26, 2009)

Sorry - wrong word. Is it still allowed?


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## FrugalTrader (Oct 13, 2008)

There's nothing illegal about it. It's simply having an investment loan, and using the RRSP withdrawals to pay the interest. There have been numerous calculations however that show that the RRSP meltdown has very little benefit.


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## bean438 (Jul 18, 2009)

FT, I would be interested in seeing some of these calculations.

I quickly calculated:

100K RSP with 4K per year withdrawal @42% bracket leaves you with 2320.

100K loan with 4K per year interest using RSP 4K to pay it cancels out the tax on RSP withdrawal.
100K portfolio with 4% dividend yield leaves you with 3120 after tax.

Only 800 per year difference, but 800 bucks is 800 bucks, plus you will have a growing income, and a deferred capital gains tax on the portfolio if you sell. 

Plus you would still have a non reg portfolio even after the RSp is gone, rather than just a depleted RSP.

You could also donate the portfolio to charity, and avoid taxes if you really dont want to donate to Canada.


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## FrugalTrader (Oct 13, 2008)

Yes, I realize how it looks good on paper. Preet did an analysis a little while back, check out his series:

http://www.wheredoesallmymoneygo.com/the-two-types-of-rrsp-meltdown-strategies-part-1-of-3/


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## cardhu (May 26, 2009)

underworld said:


> Is it still allowed?


Sure its allowed, but its an illusion ... this is one of those bits of misinformation that has captured the imagination of many many people, including some prominent and well-known personalities who endorse and promote the scheme ... unfortunately, there is no meat on dem bones ... this so-called “meltdown” doesn’t actually accomplish what it purports to accomplish ... its just a shell game to make it _seem_ like you’re not paying tax on your RRSP withdrawal, when you actually are.



bean said:


> 800 bucks is 800 bucks


Yabbut, but guess how much you’d be ahead if you initiated the same leverage scenario, *without* taking an RRSP withdrawal, and instead used the dividend income to pay the interest ... ... that’s right, 800 bucks ... plus you’d have a growing income and deferred capital gains tax on the leveraged portfolio if you sell ... plus the full RRSP portfolio remains undisturbed, so you’d have a growing portfolio with deferred taxation instead of a depleted RRSP portfolio ... and you could donate the portfolio to charity to minimize tax, if you really don’t want to donate to Canada. 

The leverage scenario you’ve created works for one reason, and for one reason only ... it works because you assumed that the rate of return exceeds the interest expense, on an after-tax basis ... (that isn’t a criticism, it’s merely a fact ... EVERY leverage scenario that “works”, works for the same reason).


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## bean438 (Jul 18, 2009)

Preets analysis provides a counter look at the strategy. While I am confident i can achieve a higher return than 5.3%. Nonetheless, it lists the risks and downside.

Even with a straight RSP with drawl it is still a good deal. Early tax refund and years of tax free growth.

WHen I retire I would rather have a tax problem than a money problem.

Can't blame a guy for trying to look at every angle. A dollar in my pocket is better than in anyone else's.


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## Armi (Feb 23, 2010)

Get a fee-based financial adviser + read Money Road. That was the best I have ever done


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