I once engaged in a discussion on X (formerly known as Twitter) about the importance of having a tax plan. As I’ll usually do, I posted about the significance of establishing a yearly tax plan early in the year. While I was aware that some people consider tax planning to be overrated, I was not prepared for an argument with someone who truly believed that it offers no benefits.
“Let me put it simply – if you only think about taxes when it’s time to pay or file them, you’re likely paying more than necessary or missing out on benefits you’re entitled to.”
Tax planning is a critical component of financial management that is often neglected. In Canada, where the tax system can be complex and multifaceted, effective tax planning is crucial for individuals and businesses alike as it could be the difference between financial stability and unnecessary losses. Contrary to the popular belief that tax planning is merely about knowing how much to pay in advance, the real advantage lies in maximising financial potential by making informed decisions at the right times. I’ll cut to the chase; here are a few ways in which an effective tax plan can benefit you.
Prepare for Future Liabilities
Each tax season, many taxpayers discover whether they owe taxes, are due a refund, or the amount they owe. Those facing a tax bill must then figure out how to pay it. Although it’s challenging to predict the exact tax amount owed at the year’s end, proactive planning helps anticipate tax obligations, preventing surprises and ensuring funds are available for tax payments. If you’re an individual employee with a single job, this point may not apply to you. Employers are legally obligated to withhold income taxes and other statutory deductions from your salary, which means the correct tax amount should have already been deducted and remitted to the Canada Revenue Agency (CRA). However, employees with multiple jobs may find that taxes haven’t been adequately withheld due to incorrect tax brackets. Similarly, contractors paid in
gross must calculate and remit their taxes to the government.
Optimize Financial Resources
Canada offers various tax incentives and credits that, when leveraged, can significantly reduce taxable income or result in a tax refund. Contributions to the Registered Retirement Savings Plan (RRSP) and the First Home Savings Account (FHSA) can be deducted from income during tax filing. Other credits, such as those for charitable donations, tuition, and examination fees, can also enhance tax benefits. These deductions may shift individuals to a lower tax bracket, reducing taxes owed or resulting in a refund. By contributing to these accounts, individuals can reinvest refunds, pay off high-interest debts, or enjoy extra spending money. For corporations, a substantial tax refund can improve cash flow and capital.
