Tax Minimization Strategies
Tips to Help you Pay Less and Keep More
On July 14, 2014, the Ontario Finance Minister delivered a budget that proposes to increase personal income tax on taxable income above $150,000. The budget proposes to introduce a new tax rate of 12.16% on taxable income between $150,000 and $220,000 and to lower the income tax threshold for the 13.16% tax from $514,090 to $220,000. These measures will result in a combined Ontario and federal top marginal tax rate of 49.53% on taxable income above $220,000 and 47.97% on taxable income between $150,000 and $220,000, retroactive to January 1, 2014.
In light of this, there are several tax planning strategies one may wish to explore. This abbreviated article highlights a non-exhaustive list of tax minimization strategies to consider with your professional advisor. Feel free to request the full article in its entirety.
Tax Minimization Strategies might include:
Income splitting with family members – Family income splitting is the bread and butter of tax planning in Canada, but many Canadians are not taking advantage of simple income-splitting opportunities that have already been acknowledged by the Canada Revenue Agency (CRA) as acceptable strategies.
Family Trust – If you have children, grandchildren, nieces or nephews with little or no income, then you may wish to consider establishing a family trust to shift investment income that would otherwise be taxed in your hands. If structured properly, a family trust can allow income splitting with low-income family members.
Spousal Loan – If you have a low-income spouse, consider a spousal loan. This will allow you to take advantage of your spouse’s lower marginal tax rate. The strategy involves transferring funds to your low-income spouse through a formal loan arrangement at the CRA prescribed interest rate. Your spouse is then able to earn investment income on these funds and pay taxes at their lower tax rate.
Tax-Free Savings Account (TFSA) In addition to investing in a TFSA of your own, consider making a gift to your adult family members to enable them to contribute to a TFSA. All investment income in a TFSA grows tax-free, and future withdrawals are not taxable.
Registered Retirement Savings Plan (RRSP) – By investing in an RRSP, you can deduct the amount of your RRSP contribution from your taxable income, up to your annual RRSP deduction limit, thereby reducing the taxes you have to pay.
Flow-Through Shares – A flow-through share is a type of tax-advantaged investment designed to encourage investing in resource companies. If structured properly, the investment can be tax deductible against all sources of income, thereby reducing net income.
Tax-Exempt Life Insurance – If you have surplus assets that you plan to pass on to your heirs, then you should consider how these assets are invested. By investing the assets in a non-registered account, the income earned is taxed at your marginal tax rate. If you have an insurance need, consider placing surplus assets into a tax-exempt life insurance policy. Permanent life insurance policies (whole life & universal life) provide both insurance protection and a savings vehicle. The income earned on the savings component grows on a tax-sheltered basis. This way, the amount of tax that would normally be paid to the CRA on the income earned can instead be paid to your beneficiaries in the form of a tax-free death benefit.
Donate to Charity – Consider donating to a registered charity to reduce your taxes. Taking into account the Ontario surtax, you can benefit from the combined federal and Ontario donation tax credit of 46.41%. As an alternative, consider donating publicly listed securities with unrealized capital gains to qualified charities. You can do so without being subject to tax on the capital gain when you make the donation. You will also receive a tax receipt equal to the value of the security at the time of the donation. If you have thought about leaving a legacy for charitable purposes but are unsure about the best way to accomplish this, consider the benefits of setting up your own charitable foundation through the RBC Charitable Gift Program.
Retirement Compensation Arrangement (RCA) – If you are an executive and in a position to negotiate how your compensation package is structured, consider the pros and cons of an RCA as a component of your compensation. An RCA is a type of employer-sponsored retirement savings arrangement that permits larger contributions than would be possible with other registered plans.
Other Employment Benefits – Consider speaking to your employer about increasing your non-taxable benefits in exchange for salary, bonuses or other taxable benefits. Non-taxable benefits include private health service plans, registered pension plans such as an Individual Pension Plan, group sickness or accident insurance plans and disability insurance, training or education expenses, home computers and the internet, scholarships, and childcare as long as certain conditions are met.
Tax Residency Planning – While moving to a lower tax jurisdiction is not a decision that should be taken lightly, it may be beneficial for you to consider this strategy if you have ties (e.g. family or a vacation property) in another province. The provincial tax rates you are subject to are based on your province of residence on December 31 of the taxation year. Residency status is always a question of fact and is based on the residential ties you have with each province.
Tax planning should be an ongoing, dynamic process so you do not overlook opportunities. Whether you are able to take advantage of the tax planning opportunities discussed in this brief article or pursue other tax planning strategies, advance planning is the key to success. Now is a good time to review your circumstances to address changes to the law and to your personal situation. Feel free to request the full article in its entirety.