Things you may not know you can do with your RRSP
An RRSP is a great way to save for retirement and cut your tax bill. But there are other ways you can use your RRSP to achieve your goals.
For most people, a registered retirement savings plan (RRSP) is a way to save for retirement and pay less income tax. True, RRSPs remain a great tool for retirement planning. But, there are some other really useful things you can do with them. Check out some of the other ways you can use your RRSP to achieve your financial goals
Buy your first home with the RRSP Home Buyers’ Plan
RRSPs give first-time home buyers the ability to co-ordinate their RRSP strategy with their home purchase. What can you do under the Home Buyers’ Plan? You and your spouse can essentially each borrow up to $25,000 from your RRSP to buy your first home.
Go back to school with the Lifelong Learning Plan
You can also use an RRSP to fund your or your spouse’s education under the Lifelong Learning Plan. Similar to the Home Buyer’s Plan, any withdrawals for the purpose of training or education are tax free. This is, provided you use the government form RC96.
Split your income with a spousal RRSP
Splitting income between yourself and your spouse is a great way to reduce taxes. There are two ways to accomplish this using an RRSP.
Why tax planning should not be the key driver of investment decisions
Ishan has just started his career. Of late, he has been getting calls from vendors trying to sell him products with tax benefits, pushing him to invest in them before the financial year ends. The list includes PPF, Ulips, life insurance, ELSS, pension fund, and NPS, which takes his total tax deduction to around Rs 2 lakh. Ishan struggles to meet the annual target given his limited income, but the lure of tax saving is high.
Personal financial situations are different at different stages of life. As he is still young, Ishan can save and invest, but it is likely that his shortterm needs would be higher. By locking his money in tax saving products, which are typically long-term products, he might be making a mistake. He may find it difficult to keep up the investment required, or draw on it when needed.
This common mismatch, especially for young investors results in dormant PPF accounts, discontinued subscriptions and missed premium payments. If Ishan tries to access the money in need, he is likely to face penalties, lower realisation values or high costs. What he does to save taxes should, therefore, fit his overall personal financial situation and needs.
Tax planning is an integral part of financial planning, but should not be the key driver of investment decisions. Once he figures out his financial plan, putting aside money to make the most of the available tax breaks will become easier. Given his young age, if he finds that setting aside about 20% of his income for retirement is adequate at this stage, he may find that he is already doing it with his PF (Provident Fund). He may, therefore, not need PPF, NPS or VPF at this time.
For investors like Ishan, liquidity needs may be higher due to unexpected expenses in the early stage of their lives. He may need a term insurance much more than a Ulip; health insurance to cover his family; and might invest in a property and get tax breaks. It might be a wiser thing to actually pay the taxes and retain the flexibility.
Tax Guide for Small Business
This publication provides general information about the federal tax laws that apply to you if you are a self-employed person or a statutory employee. This publication has information on business income, expenses, and tax credits that may help you, as a small business owner, file your income tax return.
Are You Self-Employed?
You are a self-employed person if you carry on a trade or business as a sole proprietor or an independent contractor.
Trade or business. A trade or business generally is an activity carried on to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need to make ongoing efforts to further the interests of your business.
Limited liability company (LLC). A limited liability company (LLC) is an entity formed under state law by filing articles of organization. Generally, for income tax purposes, a single-member LLC is disregarded as an entity separate from its owner and reports its income and deductions on its owner’s federal income tax return. For example, if the single-member LLC is not engaged in farming and the owner is an individual, he or she may use Schedule C.
Sole proprietor. A sole proprietor is someone who owns an unincorporated business by himself or herself. You also are a sole proprietor for income tax purposes if you are an individual and the sole member of a domestic limited liability company (LLC) unless you elect to have the LLC treated as a corporation.
Tax Planning Strategies For Year End
Year-end for many farm operations and many farmers means scrambling to find ways to reduce or defer tax bills.
• Are you continually deferring grain or livestock cheques to the new calendar year because your taxable income is too high?
• Do you buy inventory, such as chemicals, seed or fuel to raise your expenses and lower your tax bill?
• Do you ever buy new equipment to avoid lower your taxes?
• Do you panic in late November and ask your accountant for last-minute tips on reducing your taxes?
Commodity Marketing Plans
If you currently sell grain or livestock as the bills and other financial obligations come due, you could benefit greatly from a marketing plan. Producers who don’t have a solid plan can be forced to sell at lower prices. Others put off paying bills hoping to get a few extra cents per bushel, when the interest on the bills accumulates and their credit rating drops.
Incorporation
Farmers who incorporate their operations may find significant tax savings because the business is taxed at a lower rate than personal income. Individual shareholders of the corporation report dividend income or income earned from share redemption on their personal tax returns. The corporation will typically assume ownership of the inventory, machinery and equipment from the sole proprietor entity. The incorporated business owner can choose the fiscal year end that is best suited to the operation. It can be December 31 or any other time during the year that provides the best financial results for you. Discuss incorporation with your accountant to make sure it will benefit your operation. Incorporation can also be used as an effective part succession plans.
Long term planning
It’s a good idea to meet with a tax accountant if you are planning to retire in the next five years. It can help ensure you and your operations minimize taxes. This is particularly important if the farm is going to be sold. The sale of land will generate a large amount of capital that carry you through many years of retirement. Tax specialists can help you shelter taxes as much as possible and reduce the amount you must pay. If your succession plan involves selling land to the next generation to fund your retirement, then capital gains exceptions will be important. This exception allows for $1,000,000 per person before taxes are calculated on the sale. It is important to discuss any potential land sales with your accountant to get advice on how to minimize the amount of your income tax.
Other Options
Simple things, like changing or setting loan payments to match periods of strong cash flow can be used as an overall strategy to manage income. This can reduce the panic selling that can sometimes happen when loan payments or bills need to be paid by a certain date. It is a good idea to review your operating line of credit on an annual basis to make sure that the size is still sufficient for your operation. If you find it tight, it may be worth a discussion with your lender to see about a possible increase to provide some more room. Cash advances may also be a tool that can be used to reduce interest costs by allowing you more time to market your grain.
Tax Planning Guide
The end of another financial year is fast approaching and as your accountant, we believe part of our client brief is to help you minimise your tax liability within the framework of the Australian taxation system. The purpose of this guide is to highlight some end of year tax planning opportunities, but you need to act quickly and we encourage you to schedule a meeting as soon as possible to assess your options and the steps you need to take well before
Delay Deriving Assessable Income
Please note, not banking amounts received before June 30 until after June 30 does not qualify because the income is deemed to have been earned when the money is received or the goods or services are provided (depending on whether you are on a cash or accruals basis of accounting).
Cash Basis Income – Some income is taxable on a cash receipts basis rather than on an accruals basis (e.g. rental income or interest income in certain cases). You should consider whether some income can be deferred in those instances.
Consider delaying your invoices to customers until after July 1 – this will push the derivation of the income into the next financial year and defer the tax payable on that income. If you operate on the cash basis of accounting you simply need to delay receiving the money from your customers until after June 30.
Lump Sum Amounts – Where a lump sum is likely to be received close to the end of a financial year, taxpayers should consider whether this amount (or part thereof) can be delayed or spread over future periods.
A tax deduction can be brought forward into this financial year for expenses like:
Employee Superannuation Payments including the 9.5% Superannuation Guarantee Contributions for the June quarter (that have to be received by the Superannuation Fund by June 30, to claim a tax deduction).
Superannuation for Business Owners, Directors and Associated Persons
Wages, Bonuses, Commissions and Allowances
Contractors
Travel and Accommodation Expenses
Trade Creditors
Rent for July (and possibly extra months)
Insurances
Printing, Stationery and Office Supplies
Advertising including Directory Listings
Utility Expenses – Telephone, Electricity & Power
Motor Vehicle Expenses – Registration and Insurance
Accounting fees
Subscriptions and Memberships to Professional Associations and Trade Journals
A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2019 for services to be rendered within a 12-month period. While this strategy can be effective for businesses operating on a cash basis (not accruals basis), we never recommend you spend money on items you don’t need. However, paying expenses in June that are due in July could save you some tax this financial year and provided your cash flow permits, it makes good business sense.