- Tax Minimization Strategies
- Income Tax Preparation Services
- Revenue Canada Audits
The planning is a basic building block of any successful financial plan. Without it, despite significant returns gained on investments over your lifetime, your financial and personal goals can be delayed or even denied. Thus, individuals must carefully assess investments with respect to their own tax position, because it is certainly net income after taxes that is important to all Canadians.
There are several effective strategies to reduce the amount of tax Canadians must pay. Many of these strategies can be explained by your CANFIN FINANCIAL GROUP Advisor. He or she is uniquely qualified to determine which of these strategies may apply to you and determine the most direct path to helping you achieve your objective of tax minimization.
Contribute to Your RRSP and Maximize Contributions
The single most important way for you to reduce your tax burden is by contributing to your RRSP. For every $1,000 contributed to your RRSP, there is a $270 to $530 tax saving, depending on your marginal tax bracket. In addition, your RRSP is the vehicle that allows your retirement savings to grow tax-free until you retire and withdraw these savings.
Catch Up On Unused RRSP Contributions to Minimize Taxes
One strategy you may want to consider is catching up on previous years’ unused RRSP contribution room. The government allows Canadians to carry forward unused RRSP contribution room to future years.
If you find yourself in a particularly high income year, this may be the opportunity you are looking for to maximize the value of your RRSP, to shelter your income from taxes, and to receive a larger tax refund than you ever thought possible.
If you don’t have the money to invest, you may wish to capitalize on this unused room by borrowing the money to top up your RRSP. This may make more sense now than ever, since tax savings far outweigh borrowing costs in today’s low interest rate environment. Your CANFIN FINANCIAL GROUP Advisor will be happy to help you determine if this strategy is for you, since it should only be undertaken after careful consideration of your investment risk tolerance levels.
Split Your Income Through Spousal RRSP Contributions
By splitting income between a higher income earner and a lower income earning spouse, the overall tax paid may be reduced. The spouse with the higher income can contribute to an RRSP that belongs to the lower income spouse. The lower income spouse’s RRSP contribution limit is unaffected by the funds placed in the spousal plan, so he or she can still contribute up to the yearly maximum. When the RRSP funds are eventually withdrawn as income, they are taxed in the hands of the lower income spouse (as long as the minimum holding requirement is met).
Income splitting can also be used to extend RRSP contributions past the age of 71. While you can’t contribute to your own RRSP after age 69, you can contribute to a spousal RRSP until your spouse reaches age 71. You can still claim the tax deduction on the amounts you contribute.
Borrow "Correctly" to Reduce Taxes
There are distinct and significant advantages to borrowing for investments held outside of your RRSP. Because you can deduct interest costs on loans taken for the purpose of making an investment in a business, mutual funds, stocks, bonds and other investments, you are better off from a tax perspective to borrow for the purpose of investment than for personal reasons (e.g. to purchase a car), where interest costs are non-deductible.
So, if you have some cash on hand and need to make a personal purchase or pay down your mortgage, as well as make an investment outside of your RRSP, use the cash for the personal purchase or to pay down your non-deductible mortgage. Then, borrow for the purpose of making the investment to take advantage of the deductible nature of the interest paid on the investment loan.
Know Your Tax Rates When Investing Outside of Your RRSP
The treatment of investment income varies depending on the source of that income. Each type of investment income - interest, dividends and capital gains - results in varying levels of taxation.
Interest income, whether it is earned from GICs, Canada Savings Bonds, or a bank/trust company savings account,, is generally the least-favourably treated source of income, followed by capital gains and dividend income. This tax discrimination translates into a simple investment strategy - when you can, and if it suits your investment objectives, invest in equities and equity mutual funds to take advantage of the favourable treatment of dividends and capital gains over other sources of investment income.
Ask your CANFIN FINANCIAL GROUP Advisor how you can start converting your highly taxed interest-bearing investments into more tax-advantaged investments.
Explore Other Tax - Advantaged Investments and Vehicles
If they suit your investment objectives, and depending on the level of taxation you face, tax-advantaged investments will help you defer taxes. Specifically, these investments may give you the ability to claim a tax deduction equal to a portion or in some cases the entire amount of the investment, over a period of time. They may also allow you to defer taxes until income from these investments are received in a subsequent year.
For the highly taxed individual or corporation, more sophisticated arrangements such as off-shore trusts, may be the solution. Your financial advisor can help you determine if this strategy may work for you and if it may form part of an integrated investment and Estate strategy for deferring taxes.
Minimize The Taxes Your Heirs Pay
Estate planning is often neglected as an area in which you can reduce the tax burden you leave for your loved ones. A substantial amount of taxes and probate fees may be payable upon your death, depending on how your affairs have been planned and your investments have been structured. Some of this tax burden may be spared from your beneficiaries by establishing a well structured Estate plan, with the objective of reducing your Estate for probate and tax purposes, as well as for providing income and liquidity for your loved ones in the event of your death.
We Can Help You
These are just a few examples of strategies you may implement for the purpose of minimizing the amount of taxes you pay. A no-obligation review of your current tax situation and a strategic plan for reducing the amount of tax you pay is available by contacting your CANFIN FINANCIAL GROUP Advisor today.