Tax Planning 101: Maximize Your Savings
With proper tax planning you can grow your wealth faster and use it in the way that you want, including taking care of your family in the long-term and even building a legacy of philanthropic goals.
Tax planning can be especially complex for High Net Worth (HNW) individuals as the tax landscape is multi-faceted, with tax laws and regulations constantly changing.
Tax Strategies to Maximize Savings
Income Splitting
Income splitting is a strategy that is acceptable to the Canada Revenue Agency (CRA). If you have a low-income spouse or low-income children, you can set up a prescribed rate loan through the CRA for income splitting.
This can be done directly with your spouse or through a family trust structure. You will have to include the loan interest in your income.
Family Trust
If you have children or grandchildren with little or no income, you can establish a family trust to earn investment income that would otherwise be taxed in your hands at a higher marginal tax rate.
The investments in these trusts could eventually be passed on to the trust beneficiaries as part of your estate.
Spousal Loan
This is similar to income splitting, but in this case you are moving investment income and capital gains to your lower-income spouse rather than employment income.
Like income splitting, you will have to set up the loan arrangement through the CRA.
Invest in a Tax-Free Savings Account (TFSA)
All investment income in a TFSA grows tax-free and future withdrawals are not taxable.
Invest in a Registered Retirement Savings Plan (RRSP)
Investing in an RRSP allows you to deduct the amount invested from your taxable income, up to the amount of your annual RRSP deduction limit. Investments in your RRSP also grow on a tax-deferred basis.
You may also contribute to the RRSP of a lower-income spouse.
Invest in a Registered Education Savings Plan (RESP)
If you are planning on paying for your children’s post-secondary education, consider setting up an RESP. Your contributions will be made with after-tax dollars and the RESP investments will benefit from tax-deferred growth and government grants.
Life Insurance
Insurance policies can protect your assets for your beneficiaries. They can be used to cover tax obligations, leaving your estate intact for your heirs
Make Charitable Donations
A charitable donation in cash can significantly reduce the amount of income tax you pay.
Prior to 2024, by donating publicly listed securities, any capital gains realized are not subject to tax. However, with the new Alternative Minimum Tax (AMT) rules, for significant donations of publicly listed securities, AMT may arise. Consulting a tax professional would be wise in these circumstances. When donating shares you will receive a tax receipt for the fair market value of the securities at the time of the donation.
Your Overall Financial Plan
By incorporating tax savings strategies and being proactive with your tax planning, the effort you put in today will set you up for a more financially secure future. Tax planning can be a very complicated process and you should obtain all the professional advice you can from tax lawyers, accountants, and estate planners.
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.