April is just around the corner, which means the 2022 personal income tax return filing deadline is fast approaching.

If you’re reviewing your tax documents and shocked by the amount of tax you sent to Ottawa, you may want to enlist the help of a professional and consider a tax reduction strategy.

What is tax planning?

Tax planning is an analysis of your financial situation followed by the implementation of a plan to ensure you pay the lowest tax possible. It allows you to use various tax exemptions, deductions, and benefits to minimize the taxes you may owe. The more you can reduce your tax liability, the more you have to contribute to other financial goals.

How is tax planning done?

Tax planning considers income, when it’s received and the amount, planning for expenses and purchases. For example, in retirement, there are 3 different types of accounts, taxable accounts such as brokerage accounts, tax deferred accounts such as RSPs, RIFs, LIRAs and LIFs and tax-free accounts such as the TFSA. We use the tax status of each account to plan your retirement income. Tax planning also includes selecting the right investments in the right accounts to maximize your tax status and deductions to create the best possible outcome.

What are the benefits of tax planning?

The goal of tax planning is to reduce the amount of household income tax you pay so you can keep more for your family.

Here are 7 effective strategies to lower your tax bill:

1. Income splitting - A business owner can split income with his or her spouse by employing him or her in the business
2. Tax gain-loss harvesting – If you have realized capital gains, you can use offset those gains with capital losses. Consider carrying back losses to offset any capital gains you’ve reported in any of the three previous tax years. By doing so, you may receive a refund of some of the taxes you paid in the previous years.
3. Understand the tax implication of investment income – Not all income is taxed the same. Capital gains receive favourable tax treatment since only half of the capital gain is subject to taxation. Dividends paid on stocks issued by Canadian corporations are tax preferred since dividends received the federal dividend tax credit. Interest income is taxable at your highest marginal tax rate, just like wages, making it the least tax efficient.
4. Loan to your spouse – This strategy involves loaning funds to your spouse at the CRA’s prescribed interest rate at the time the loan is made. Your spouse will invest the loaned funds which may generate investment income which will be taxable to your spouse at their lower marginal rate.
5. Spousal RSP - This allows a higher earning spouse to contribute to a lower earning spouse’s RSP to maximize their tax refund.
6. Pension income splitting - A retired couple can split up to 50% of their eligible pension income with their spouse to lower their overall family tax bill.
7. Donate securities in-kind to charity – Charitable donations of qualifying publicly listed securities are exempt from capital gains tax. In-kind donations qualify for the donation tax credit.

 

Tax planning is a cornerstone of any wealth management plan. Through proper planning you may have the ability to lower your largest expense.

Whenever you’re ready, here’s 1 way we can help.

We help high-net worth investors and entrepreneurs to grow and protect their wealth.