Math wizard to the rescue
John Wonfor as interviewed by Dana Lacey
Financial Post June 26, 2009
In this five-part series, FP profiles the best people to surround yourself with to better your odds of living longer, healthier and wealthier. In this third installment, John Wonfor, a tax specialist, talks about the importance of thinking about taxes before April swings around. Coming up: a lawyer and a broker.
There is one good reason to have a solid relationship with a tax accountant: Most people are totally baffled by their tax return. Of course, you can read through all the guides and try to figure it out on your own. If you spend a lot of time on it, you might do a pretty good job. But if you don’t, you run the risk of not fully disclosing what you have to report. You might also be missing out on tax deductions and credits you’re entitled to. There’s a ton of them out there: Did you have your kids in any fitness programs? Did you pay for day care? Did you renovate your home, buy monthly transit passes? There are credits for all of these situations. People are busy these days — why not hire a professional to help you pay taxes in a more effective, efficient way? And a good accountant will do more than file your taxes. The fee you pay your accountant can be more than covered by the savings he or she finds for you.
On cross-border taxes
People are a lot more mobile these days. They come to Canada from different countries or they may have investments in different jurisdictions. They have to know the different tax filing rules in different regions. Trying to wade through all these different requirements can be a nightmare. You think Canadian tax filing requirements are complicated? Try going south of the border, where tax filing is more complex and the IRS are tougher to deal with if you make a mistake. If you own a rental property in the U. S. and you die, that asset is subject to estate tax. If you have investments in other countries, hiring a professional is paramount.
Last-minute planning (an oxymoron)
Tax planning isn’t something you can do on Dec. 31. There are some things you can do at the end of the year to minimize your tax obligations, but it’s much better to plan throughout the year, thinking about it in advance. That way, you’re making intelligent tax decisions when you’re making investments, as opposed to trying to do things last minute.
But just in case …
Of course, there are ways to minimize your tax burden at the end of the year. If you had some capital gains, look for opportunities to sell some of your losers so the capital losses offset the gains. You can also maximize your charity donations to get the full deduction available. Pension splitting, introduced not long ago, can save you thousands of dollars.
Re-organize and save
If you start thinking of your investments as a whole, you can create a more tax-effective portfolio. What type of investment should I have in an RRSP? What should I have outside my RRSP? Strictly from a tax point of view, things that are taxed more efficiently, like capital gains, where you can control the timing of when you realize the gain, and it’s only 50% taxable, are a better investment outside your RRSP. You pay less tax on a capital gain then you would on interest income. Investments that aren’t taxed efficiently are better inside a registered plan — you want to have interest-bearing income-producing assets, because a dollar earned in an RRSP is a dollar earned. It doesn’t matter what type of investment it is, outside an RRSP, interest income is fully taxable.
The better “borrow”
When you’re thinking about financing your lifestyle and your investments to the fullest extent possible, consider the tax implications of borrowing money. Canadian tax rules look at the purpose of borrowing. It’s much better to borrow money to finance your investments because then the interest is deductible. Where possible, use cash to finance personal expenditures, like a house or cottage, because the interest on borrowing is not tax deductible. Be smart about borrowing: If you make investments outside your RRSP, you can deduct the interest, take that cash and pay down your mortgage to reduce the amount of non-deductible interest you have to pay.
Off the record
People are lousy record holders. That’s what accounting basically is: The process of balancing your financial records. If you know what you spend your money on, you will be in the position to maximize tax savings and take advantage of credits and deductions. If you keep excellent records and get audited it won’t be such a painful process — your records will make it difficult for them to refute a reasonable deduction.