Louis Cote - Strategy

Tax planning strategies for high-income earners

Depending on your province of residence, you may be subject to tax at a rate of 50% or higher when your income exceeds a set amount.

Discover several strategies that make for a tax-smart wealth plan.

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These days it can seem like there's a tax on everything and with Canada's progressive tax system the more income you earn the higher your tax rate.

If you face a high tax burden, you'll be interested in how you can reduce it or at least manage it.

One way is with insurance.

Most people think of insurance for their home, their Auto and life.

But did you know that life insurance can help cover the taxes due when your estate is settled?

What's more there are Insurance based investment strategies that can provide tax free income during your retirement and tax-free benefits to the beneficiaries of your Estate.

Another way is with family income splitting.

Family income splitting involves transferring investment income that would otherwise be taxed at your higher tax rate to family members who are taxed at lower rates.

Here are two additional ways to split income with your family.

One, a family trust which enables you to provide funds for your children or grandchildren’s needs while reducing taxes.

Two, a spousal loan strategy which enables your lower income spouse to earn investment income at their lower tax rate.

Here's some other ways to reduce tax.

If you have an RRSP contribute as much as you can to maximize the tax deferred growth over time.

Also take advantage of the tax free savings account if you haven't done so already to earn tax-free investment income.

Next look at your non-registered savings and how the different types of investments are taxed.

Capital gains and dividends from Canadian corporations received preferential tax treatment while interest income from GICs or bonds is fully taxable at your marginal rate.

Here's a tip - put more of your interest-bearing investments in your registered accounts like your RRSP where they are sheltered from taxes, then put more of your taxed advantage dividend-paying investments into your non registered accounts.

And here's one more tip.

Always make sure you speak with a qualified professional tax advisor to get the right tax advice for you.

This video is provided by RBC Wealth Management for informational purposes only. The comments contained in this video are general in nature, and do not constitute legal, investment, trust, estate, accounting or tax advice. RBC Dominion Securities Inc.*, Royal Trust Corporation of Canada, The Royal Trust Company, RBC PH&N Investment Counsel Inc., RBC Wealth Management Financial Services Inc. are affiliated corporate entities and member companies of RBC Wealth Management, a business segment of Royal Bank of Canada. *Member – Canadian Investor Protection Fund. Please visit www.rbc.com/legal/ for further information on the entities that are member companies of RBC Wealth Management. ®/TM Trademark(s) of Royal Bank of Canada. Used under license. © 2021 Royal Bank of Canada. All rights reserved.

Tax-Free Savings Accounts

With a Tax-Free Savings Account (TFSA), your investments grow tax-free and you can make tax-free withdrawals at any time, for any reason.

Who can open a TFSA?

Any Canadian resident 18 years or older with a Social Insurance Number.
The age of majority is 19 for residents of Newfoundland and Labrador, New Brunswick, Nova Scotia and British Columbia which may delay the opening of a TFSA. However, the accumulation of contribution room will start at age 18.

What are the benefits?

Tax-free investment income, including interest, dividends and capital gains
Any unused contribution room can be used in future years
No upper age restriction on contributions, unlike an Registered Retirement Savings Plan (RRSP)
Make withdrawals any time for any purpose (e.g. car purchases, vacations, home renovations)
Previous year's withdrawals are added back to your unused contribution room
Income earned and withdrawals have no impact on federal income-tested benefits or credits (Guaranteed Income Supplement, Child Tax Benefit, Old Age Security, etc.)
Canadians can contribute to their spouse's or common-law partner's TFSA subject to available contribution room

What are the considerations?

Unlike an RRSP, contributions are not tax deductible
Capital losses within the TFSA cannot be used to offset taxable capital gains outside the TFSA
Interest on funds borrowed to fund the TFSA is not tax deductible
Penalty tax on excess contributions

What investments are qualified for the TFSA?

Cash, mutual funds, guaranteed investment certificates (GICs), publicly traded securities, and government and corporate bonds.

For more information, please contact us or visit the Canada Revenue Agency website.

Prescribed rate loan planning

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Did you know, your family can save on taxes by having a high-income family member loan cash at the current CRA prescribed interest rate — to a lower-income family member?

Any investment income earned by the low-income family member, exceeding the prescribed rate, is then taxed in their name.

For example, a high-income spouse can loan cash directly to a low-income spouse.

Or, a high-income parent can loan cash to a family trust to income split with their children.

The investment income earned in the trust can be used to fund child-related expenses, such as private school fees, lessons, or other expenses that directly benefit the child.

This video is provided by RBC Wealth Management for informational purposes only. The comments contained in this video are general in nature, and do not constitute legal, investment, trust, estate, accounting or tax advice. RBC Dominion Securities Inc.*, Royal Trust Corporation of Canada, The Royal Trust Company, RBC PH&N Investment Counsel Inc., RBC Wealth Management Financial Services Inc. are affiliated corporate entities and member companies of RBC Wealth Management, a business segment of Royal Bank of Canada. *Member – Canadian Investor Protection Fund. Please visit www.rbc.com/legal/ for further information on the entities that are member companies of RBC Wealth Management. ®/TM Trademark(s) of Royal Bank of Canada. Used under license. © 2020 Royal Bank of Canada. All rights reserved.

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