Five Key Tactics for Maximizing Wealth and Minimizing Taxes
January 2015
You work hard for your money. You want to maintain or improve your lifestyle and you want to retire comfortably. Most people want to maximize their wealth while minimizing the income tax they pay. Below are five key approaches we recommend you consider to accomplish these goals. With the right strategy in place, you can take advantage of these tactics to increase your wealth.
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Debt Management
Recent reports show that Canadian household debt is at an all-time high as consumers take advantage of low interest rates to finance their purchases. While repayments may be affordable now, will you be able to meet your obligations once interest rates rise? Instead of adding to the balance owing, take advantage of the low rates to reduce or restructure your debt today and strengthen your financial position for tomorrow. -
Tax-free Return on Investments
Arranging your savings to grow in a tax-free environment is one of the most effective means of building wealth and splitting income to reduce overall tax paid. Four tax-sheltered plans you may benefit from are:- Registered Retirement Savings Plan (RRSP)
- Tax Free Savings Account (TFSA)
- Registered Education Savings Plan (RESP)
- Registered Disability Savings Plan (RDSP)
Most people understand the benefits of contributing to these tax sheltered plans. Where it becomes tricky, and where you may need advice is determining how your contributions should be distributed between these vehicles to minimize your family’s tax burden. For example, contributions to a spousal RRSP may be a good strategy if your spouse earns less than you because it would provide your spouse with retirement income while reducing your tax bill.
It is helpful to have funds available outside of an RRSP such as a TFSA or non-registered account in order to avoid tax consequences when funds are withdrawn from an RRSP. Contributions to your TFSA do not generate a tax deduction but any income earned on the investments plus any withdrawals are tax-free.
You may confirm your RRSP and TFSA contribution limit on your annual income tax notice of assessment.
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Income Splitting
If you earn more income than your spouse, you as a couple will end up paying more tax than if your earnings were equal. The high income earner may have significant investments but tax law prevents the lower income spouse from declaring this investment income. If this applies to you, consider a spousal investment loan.A spousal investment loan works by allowing the high income earner to loan money to the other spouse to invest. The income on these investments will be taxed at a lower rate. A spousal loan is required to bear interest at the CRA prescribed rate in effect when the loan was made. Right now, this rate is very low — only 1% per year so there has never been a better time to establish or restructure a spousal investment loan. See our example of how a spousal loan cuts the amount of tax paid on a $100,000 investment by close to half (link to example). Over time, these tax savings can really add up.
If you think a spousal loan would be beneficial for you, contact us. Advice from your tax advisor is imperative because this arrangement must be documented properly.
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Wills and Estate Planning
You may have a will but does it reflect your current circumstances? If you marry or re-marry, your existing will is likely invalid. It is important that when family or asset changes occur, your will is also changed. Proper planning will ensure that your survivors are looked after. A current will should also include tax planning opportunities to minimize estate tax. A properly structured will also reduces conflict among your beneficiaries when its terms are properly explained to your heirs while you are still alive. -
Tax Reporting and Compliance
It is important to keep your income tax filings up to date. When life gets busy, it is easy to think that annual income tax filings are not a priority. You may be unconcerned because you are expecting tax refunds. But by not filing, you lose the use of the refund and may also lose credits such as the child tax benefit and HST credits. If you owe taxes, late filing results in costly penalties and accumulating interest that increases your total liability. If you are behind in your income tax filings, it may be possible to apply CRA’s voluntary disclosure policy to file the late returns without incurring costly penalties. Professional tax advice is needed in this case.
We encourage you to consider these strategies and can work with you to understand your situation and develop a plan that builds wealth and minimizes the tax you pay on your hard earned money.
Contact us today!
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