Strategies for deferring or splitting income, deferring or maximizing retirement contributions, capital gains or losses, property ownership, charitable giving are applied differently in each situation, so they must be developed specific to your needs. Most Canadians wish to contribute to society by paying their fair share of taxes and understand that the services provided by the government are financed out of the taxes they pay. However, Canadians also want to manage their tax expense wisely. An important part of your role as an advisor is to offer general advice about tax issues. You should therefore have a sound knowledge of the federal income tax rules.
What is Tax Planning?
Tax planning focuses on the client’s current and future tax obligations and strategies employed to minimize or defer taxation on personal and/or business income. Tax planning strategies are designed to help strengthen the client’s financial position in current and future tax periods and better enable him to meet his personal goals, needs and priorities. Tax planning is a key financial planning area since financial decisions will generally have tax implications.
Strategies to Minimize Tax
- Hold investments in registered accounts, such as TFSAs, RRSPs and RESPs
- Income splitting can reduce taxes by moving income to a lower-earning spouse
- Maximize permissible tax deductions and tax credits
- Use the Home Buyers’ Plan to make a down payment on a new home
- Charitable giving can help reduce your tax liabilities
Tax Planning Impacts your Financial Plan
Tax management plays a crucial role in every comprehensive financial plan and should be a consideration for every aspect within it. You can reduce your tax bill considerably by taking advantage of all the tax deductions and tax credits that you’re entitled to. Depending on your unique situation, tax planning may help address varied and complex tax obligations, achieve your objectives in the most tax-effective manner or reduce your family’s tax burden. Deductions that will reduce your taxable income including:
- Canada caregiver credit
- Donations and gifts
- Medical expense credits
- Pension income credit
- Realizing capital losses
- Tuition and student loan credits
Save Money by Paying Less Tax
Tax planning strategies can reduce your tax obligations, including on capital gains and investment withdrawals. Minimizing the amount of tax you pay means you keep more of your income and investment growth. This will help you meet your goals faster: from paying off debt to saving for retirement or your kids’ education. One goal of a spousal RRSP is to transfer funds from a higher income spouse to their lower income partner in order to provide them with more investment income. Income splitting can occur before retirement, through spousal RRSPs, or in retirement through splitting a pension.
In a spousal RRSP, the higher-income earner would contribute to the RRSP of the lower income spouse, within their available contribution limit. This transaction can result in a lower overall tax rate for the couple as the higher-income spouse would receive a deduction for tax purposes in the year of contribution.
You Could Reduce Liabilities
Good tax management can lessen an estate’s tax liabilities, as well as ensure you keep more of your investment growth. All individuals and organizations that pay tax can benefit from tax planning. Many tax credits and government assistance programs are calculated based on net income on tax returns. Using tax strategies can help ensure you maximize these benefits and credits, such as by making RRSP and TFSA contributions, so your taxable investment income is lower. Outside of a registered account, your holdings are taxed differently on investment earnings, depending on the type of return: interest, dividends or capital gains. To help you maximize your returns, you will want to know how you can make the most of tax provisions.
Running a Tax-Efficient Business
- Pay yourself a salary large enough to maximize your CPP and RRSP contributions
- Calculate the best mix of salary, interest and/or dividends for your specific circumstances
- Arrange to receive interest on money you have loaned to your business
- If you plan to transfer your business to your children or grandchildren soon, consider whether the Bill C-208 intergenerational transfer rules provide a window of opportunity for your business succession
- Consider purchasing capital property that’s eligible for the new immediate expensing rules. Certain capital property purchased on or after April 19, 2021 by a Canadian-Controlled Private Corporation (or purchased on or after January 1, 2022 by Canadian resident sole proprietors and certain eligible partnerships) that becomes available for use before January 1, 2024 are eligible for immediate expensing. The limit must be shared by an associated group. Similar rules were recently announced by the Ontario government in Ontario Economic and Fiscal Update 2022.
- Determine if you’re eligible for the accelerated investment incentive, which is available to provide an enhanced first-year capital cost allowance (CCA) deduction for certain eligible properties purchased after November 20, 2018 that become available for use before 2028.
- Be aware that the automobile CCA limits have increased from $30,000 to $34,000 for passenger vehicles and from $55,000 to $59,000 for passenger zero-emission vehicles for purchases made on or afterJanuary 1, 2022 (both new and used).
- As a small- to medium- sized business owner, you could receive a dividend or salary from your business, noting that:
- Payment of a salary is deductible to your business, whereas dividends are paid from after-tax profits
- Paying dividends to a family member may be subject to the “tax on split income” (TOSI) rules and trigger taxation at a higher marginal tax rate.
Conclusion
Taxes are a fact of life. They affect every Canadian in most aspects of their lives. Whether it’s earning an income, making a purchase, owning real property, investing, running a business, or transferring your estate, life is full of taxable consequences that, if left unchecked, could consume an ever increasing amount of one’s livelihood. While the Income Tax Act was created specifically to ensure that everyone pays their fair share it also affords all taxpayers the right to organize their financial affairs in such a way so as to minimize their taxes whenever and however possible within the legal confines of the Act. And that is the objective of tax planning.
