Advanced Tax Planning for High Income Earners and High-Net-Worth Families

For high income earners and high-net-worth families, taxes can pose a significant impediment to preserving and growing wealth, particularly in cases where income or wealth is concentrated in the hands of one individual or held within an entity. Fortunately, thoughtful tax planning can help you, your business and/or your family keep more of what you have worked so hard to accumulate. In this article, we highlight 3 tax saving strategies that can be used without sacrificing the ability to build wealth.

1. Lend to a Family Trust to Split Income

You may be able to defer the realization of the capital gains on an investment portfolio, but dividend and interest income is distributed regularly, adding to your taxable income each year.

If your income is taxed in the higher tax bracket, you may be wondering how this income could be split with family members in lower tax brackets. Perhaps you have considered simply gifting funds to your family members directly or to a family trust with them as beneficiaries, so that the funds can be invested and the resulting income taxed in the family members’ hands.

Unfortunately, income attribution rules will work against you—in this scenario, the investment income will still be taxed in your hands, despite the assets no longer technically being in your control.

A potential solution is to lend the funds to a family trust at the Canada Revenue Agency’s (CRA) prescribed rate with your family members as beneficiaries. The trustee would then invest the funds into an income-yielding portfolio with dividend and interest income retaining its character and rolled out to the beneficiaries to be taxed in their hands (net of the annual interest payment for the loan), while capital appreciation would continue to be tax deferred.

Using a loan at the prescribed rate mitigates the income attribution rules, effectively splitting the investment income with the desired family members, while also allowing you to retain control over the funds as they have not been transferred or gifted, but rather were loaned.

2. Tax Loss Harvesting for Recurring Tax Shields

If you consider your overall investment portfolio, particularly with respect to liquid securities such as stocks, you may find that while some investments have appreciated and are in a capital gain position, others have not done as well and are in a capital loss position.

In taxable accounts, if you sell an appreciated security you would trigger a capital gain, resulting in 50% of the gain being included in your taxable income. Conversely, selling a security that is in a capital loss position, perhaps counterintuitively, may actually present a tax saving opportunity.

When a capital loss is triggered through the sale of a security, it can be used to offset capital gains in the current year, the 3 preceding years, or any year in the future, thereby reducing the capital gain included in your income—and your tax payable.

It is noteworthy that using this strategy does not necessarily mean accepting the loss with no chance at recovery. Having locked-in your capital loss for tax purposes, you can opt to reinvest the sale proceeds in a comparable security, perhaps one that has performed similarly, allowing your investment to participate in a recovery of value. If no acceptably comparable security exists, you will simply need to wait 30 days to repurchase the same security sold (since the CRA’s superficial loss rules will discount the use of this strategy if the same security is repurchased within 30 days before or after the sale).

Whichever repurchase approach you take, this strategy allows you to regularly harvest these tax saving opportunities to make capital gains even more tax-friendly.

3. Using Life Insurance to Preserve the Small Business Deduction

If you are a business owner and your enterprise is classified as a Canadian-Controlled Private Corporation (CCPC), you are likely able to take advantage of the reduced rate of tax on active business income up to the $500,000 threshold provided by the Small Business Deduction (SBD).

To prevent passive investment income unrelated to the active nature of the business from being unduly spared from taxation, the CRA has put a policy in place that will see the $500,000 SBD threshold rolled back by $5 for every $1 of passive income earned inside the corporation in excess of $50,000 per annum, thereby exposing more business income to higher taxation rates.

For instance, if your corporation owns a portfolio of income-yielding securities such as dividend-paying stocks or interest-bearing debt securities, the resulting income is classified as passive income (unless of course these investments are part of the active nature of your business). This passive income could contribute to the reduction of the $500,000 SBD threshold, depending on the size of the portfolio and the income from it.

You can, however, preserve the corporate tax savings provided by the SBD by using your corporation’s excess funds to purchase permanent life insurance instead of investing in portfolio assets. Specifically, participating whole life and universal life policies are ideal for this purpose: their internal investment components not only provide a tax-sheltered investment environment, but also do not result in any passive income.

Assets converted into premiums ultimately contribute to growth of the cash value of the policy as well as the total death benefit, providing significant liquidity upon your passing. Significantly, the death benefit (less the policy’s adjusted cost basis as determined by the insurance company) is tax-free to your corporation and can be paid out tax-free to the shareholders as capital dividends via a Capital Dividend Account.

Lastly, it is also noteworthy that the cash value accumulated inside the policy can also be accessed during your lifetime, both inside the corporation as well as in the event that ownership is transferred to yourself personally, although this does involve some tax implications. Strategies of this nature can be as intricate as they are advantageous, so you may wish to explore this in consultation with your trusted professional advisors.


Bloom Investment Counsel, Inc. is a well-established Toronto-based independent, privately-owned boutique investment management firm providing customized, actively managed, Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions and trusts.

Founded in 1985, Bloom has experience in managing in excess of $2.5B in assets over the years. We believe that generating independent cash flow is central to the success of our clients’ portfolios because it provides capital for the present day, if needed, while continuing to preserve and build wealth for the future.

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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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