Clients too often overlook some basic tax strategies that can help keep the long arm of the Canada Revenue Agency from digging too deeply into their pockets.

Here are a handful of tools and techniques that clients can employ to help avoid paying too much taxes.

> There’s gold in RRSPs. Most Canadians are aware of the tax value of a registered retirement savings plan, says Terry Carter, an accountant with Levy Casey Carter MacLean in Halifax. He strongly recommends maximizing RRSP investment, even if means borrowing.

In many cases, clients should also consider spousal RRSPs, says Jamie Golombek, vice president of tax and estate planning with AIM Funds Management Inc. in Toronto. “A spousal RRSP means that you can do income-splitting upon retirement. And it is completely sanctioned by the government.”

A spousal RRSP is also a way to defer taxes for a client who has passed the magic age of 69 and is no longer allowed to contribute to his or her own RRSP. As long as his or her spouse is less than 69 years old, the elder spouse can make a contribution to a spousal RRSP and claim the tax deduction.

Advisors can also help a client’s children to build their own RRSPs, says Sandy Cardy, vice president, tax and estate planning, with Mackenzie Financial Corp. in Toronto.

This can be done by paying the children for work — such as a reasonable salary for cleaning the family-owned business — and then filing tax returns for the children, who now have earned income. The children’s annual RRSP room accumulates over time.

“This is a strategy that is underutilized,” says Cardy.

> Spousal investing loan. This is an effective strategy that few clients take advantage of because they are discouraged by the fairly simple legalities involved.

This works by having the higher-income spouse lend money to the lower-income spouse at the prescribed quarterly interest rate set by Ottawa, which is presently 3%.

The lower-income spouse then puts the money into non-registered investments.

The higher-income earner must declare the interest as income, but the lower-income spouse can deduct the interest paid (and it must be paid) on the loan as an expense.

These loans are usually set for five- to 15-year periods.

No matter what happens to interest rates in the larger world during the initial fiscal quarter, the rate of interest for the duration of the loan stays at the prescribed rate.

To get this strategy past the CRA, your client should be able to provide legal evidence of an actual loan.

A loan agreement, such as a promissory note, which could be drafted by your client’s lawyer, would suffice.

One way to enable the transaction financially is for the couple to agree that the higher-income earner will pay all the household bills as well as the investment loan, and the lower-income earner will dedicate his or her income to investing.

> Lending shares or mutual funds. A corollary strategy to the spousal investment loan is doing a transfer of non-registered shares or mutual funds. Again, any income earned by the investments is subject to higher taxes in the hands of the higher-earning spouse, so why not transfer the investments to the lower-income spouse and have them taxed at his or her lower marginal tax rate?This could be done in the same manner as a spousal loan, charging the lower-income spouse the prescribed rate of 3% interest.

Normally, under the Income Tax Act, transferring property from one spouse to another is done on an “adjusted cost base” basis, so no gains or losses are triggered by the transfer, and any income earned by the transferred assets will be attributed to the transferee and taxed in his or her hands.

To make this strategy work, the higher-earning spouse will have to opt out of the spousal rollover, trigger any capital gains and pay the requisite taxes. However, in the long run, the couple will still get the benefit of long-term tax savings by having the investments subsequently taxed in the hands of the lower-income spouse.

> Small-business windfalls. As a first step, says Cardy, anyone making money outside full-time employment should also file based on his or her self-employed income.

“Once you are self-employed, doors open to deduct myriad expenses,” she says.

@page_break@Many deductions that are not allowed as part of regular personal income tax returns are acceptable expenses for a company. Supplies, transportation, equipment and long-distance phone calls are all legitimate expenses.

It’s very important for business owners to keep accurate records of their business expenses to deal with CRA queries or, even worse, an audit.

In the case of a car used for business — even part-time — a log should be kept.

For self-employed clients, the CRA will allow deductions for the proportion of auto expenses that represent business use — usually based on the amount of kilometres that are driven. Expenses can include: washes, repairs, insurance, financing interest and leasing (or capital cost allowance, if the car is owned). However, there are limits. For the 2005 tax year, the limit is $30,000 for a purchased car and $800 a month for a leased car, plus federal and provincial sales taxes.

Finally, there are income-splitting options for small-business owners that can take a big bite out of their tax bills. A business that has a profit of $100,000 will pay $18,000 in taxes. But, if a spouse (or other family member) has been working for that business at an annual salary of $25,000, the profit drops to $75,000 and the taxes to $13,500. Add to this the fact that the spouse can now contribute to an RRSP and is eligible for Canada Pension Plan payments.

> Charitable giving. It is important to remind clients that donations to charities must be made before Dec. 31 if they want to get the tax credit for that tax year. You can also point out that they can carry forward any unclaimed donations for five years.

Many of your clients are sitting on publicly traded stock with accrued capital gains that they don’t want to sell because they don’t want to pay capital gains taxes.

Normally, they would pay taxes on 50% of a capital gain. But recent changes to the Income Tax Act have made it more attractive to donate the stock to charity. If they do so, they will pay on only 25% of the gains.

The transfer to the charity is a “deemed disposition.” The inclusion rate for making the transfer directly to the charity is only 25%, says Cardy. If the client sold the shares and then donated the stock, the taxes would be 50%, she adds.

“A lot of people make donations at the end of the year and they are [also] trading on their investments, but they’re not combining both,” she says. Thus, they’re missing out on a tax-saving opportunity.

> No refund is the best refund. The individual who gets a tax refund from the CRA is an individual who paid too much tax to begin with. The biggest reason for the overpayment is employers who take more than what is necessary off a paycheque. This situation is easily rectified by filling out a T1213 form — a Request to Reduce Tax Deductions at Source — from the CRA .

“Where advisors can really play a role,” says Golombek, “is by having a stack of these forms on their desks. Advisors should [also] ask clients for copies of their tax returns.”

At the same time as advisors are helping clients fill out the T1213, he adds, advisors can help clients set up pre-authorized chequing accounts to invest the additional money
throughout the year in non-registered accounts.

“This is the most basic overlooked thing,” he says. “Otherwise, the tax refund will be spent.” IE