Effective Tax Planning and Management to Avoid Penalties

Effective tax planning and management to avoid penalties seems difficult, but it’s actually as easy as A-B-C – well, actually, D-D-D! While the Three D’s (retirehappy.ca/three-d-s-of-tax-planning/) of tax planning – deduct, differ, and divide – will vary according to your individual and business needs, understanding how these basic investment strategies work will save you time and money in the long run and help you avoid unnecessary penalties.


Put simply, a tax deduction is something you can deduct from the amount of taxable income you have to claim. Depending on your profession and employment status, these will vary, however, some examples of tax deductions include pension and RRSP contributions, employment or moving expenses, union fees, and childcare expenses. Most people are not even remotely aware of what aspects of their lives and business are tax deductible, and deductibles usually vary from region to region as well. But it is important to know what items or services you can legitimately deduct, as this is a crucial component of effective tax planning and management to avoid penalties. Attempting to deduct something that you shouldn’t be is never a good idea, and could trigger an audit.


As the popular advertising slogan goes – why pay now when you can pay later? Essentially, that is how tax deferrals work. You can defer paying your taxes for now, but you will eventually have to pay what you owe. There are two main benefits to tax deferrals. The first is that tax deferrals give you more control over when you pay the tax collector. The second is that it provides you with more control over how much of your money is coming in and going out at any given time, which gives you the option to invest your money into strategic investment plans. While you will eventually have to pay your taxes, you will have more control over when you do, which allows you to plan and invest your money more wisely.


Dividing taxes or tax splitting, as it is sometimes called, allows you to take one income and divide it among a number of taxpayers. Confusing? Let me break it down. If one person is paying tax on $80 000, wouldn’t it make more sense to have two people paying tax on $80 000? See what I mean? Each person is only responsible for paying tax on $40 000, which would decrease the amount of tax being paid overall because it is in a lower tax bracket. This is an excellent way of effective tax planning and management to avoid penalties, but is typically only possible between spouses.

Of course, there are rules and regulations to dividing taxes that must be followed. For example you cannot randomly decide who can claim what amounts of income. Some of the categories of tax-division include Spousal RRSP’s, CPP and Pension Splitting (for spousal retirement benefits), and transference of wages to family members (through a legitimate business). If you have children, you can also invest the child tax benefit under your children’s names. These are but a few ways of dividing taxes. Before next tax season, why not check out what options are available to you?

The Fourth D

Tax deductions, deferrals and dividing are all great ways to help you to implement effective tax planning and management to avoid penalties, but there is another very important ‘D’ involved: documentation.

Document, document, document! The word bears repeating, as this is so important to effective financial planning, tax planning and management to avoid penalties, but many people forget to do it. When it comes to tax-time, however, how are you going to prove that business dinner was tax-deductible without a receipt? How are going to claim moving costs if you misplaced the invoice for the movers you hired or the van you rented? Keep track of all your receipts and expenses in an organized and accessible system in order to save yourself a lot of hassle and headache in the future.

Death and Taxes

As the old saying goes, the only constants in life are death and taxes. The amount of taxes you are paying, however, does not have to be a constant. Even small penalties on your investments and returns can, in fact, amount to a whole lot of money lost – or gained – over the long term. Take control of your life, your money and your future. Learn effective tax planning and management to avoid penalties today!