Tax Deductions Credits and Shelters

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Tax deductions,tax credits and tax shelters form very important components of wealth creation and preservation.

The amount of income and the subsequent taxes payable can be reduced, minimized or eliminated by applying

Deductions which are taken directly from income,

Credits which are applied against the actual taxes payable and

Tax shelters which encourage investors by allowing business losses.

Some of the more familiar to reduce taxes include the RRSP, RPP, union and professional dues, childcare expenses, employment expenses.

Tax credits include medical expenses, charitable donations, tuition amounts, pension, disability, CPP and employment insurance. They can be refundable or non-refundable.

Tax shelters may include Limited partnerships and flow through shares for resource companies.

Tax deductions

The impact of these and other deductions on tax reduction depends on the tax payers marginal tax rate.

As income increases through higher tax brackets, the marginal tax rate also increases. Thus a higher income earner would receive more tax savings from the same amount of deduction.

Generally speaking most deductions are associated with expenses incurred to earn income and are deducted before income is taxable. e.g. Union dues, employment expenses, carrying charges

Tax Credits

Tax credits are applied against actual taxes payable and generally are associated with expenses incurred for our lifestyles and circumstances. e.g. Marital status, medical expenses, disability, tuition, amounts transferred between individuals.

Some tax credits and tax deductions have various features which make them particularly attractive for tax reduction and tax planning strategies.

Features such as the ability to carry forward amounts to future years make the RRSP deduction, tuition amounts, charitable donations and to a lesser extent medical expenses very valuable.

Tax Shelters

A tax shelter is an investment which is usually sold on the basis of the underlying tax savings.

Investors can claim a tax deduction equal to all or part of their investments in a short period of time.This creates a current loss from the shelter which can be used to reduce other current taxable income.

Income from the investment is taxed at a later date, when received, thus the taxes currently payable have been deferred.

When the investment is financed with a loan, the cost of the loan should be taken into account. Some times the tax savings can be greater than the investment costs, when the loan is financed by the shelter promoters on the assumption that it need not be repaid in whole or in part.

Some of the popular tax shelters include investments in

  1. Resource investments

  2. Films

  3. Computer software

  4. Acquisitions to be gifted to charities

  5. Mutual fund fees

In recent years however, the government has taken a very aggressive stand towards some tax shelters so individuals need to be very cautious when investing in any tax shelter. Resource investments appear to be the most acceptable at present.

The main attraction for most tax shelters is the tax savings to be had. The return on investment, however, is still rather uncertain.

Registered Savings Plans

Calculating your Tax Deductions

Disability Tax Credit