Tax planning strategies for individuals

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Tax-Preferred Investments

There are many ways to decrease taxes.  In the retirement phase of the financial life cycle, we strive to hold interest-bearing investments like GICs and bonds in registered plans (RRSP, RRIF, TFSA) where the income is sheltered from taxation.  Investments that generate dividends and capital gains are placed in non-registered accounts where the income receives tax-preferred treatment.

If possible, try to have interest-bearing investments in the name of the lower-income earning spouse. Interest income is taxed at the same rate as earned income. The lower the spouse’s earned income, the lower the taxes owed on interest income.

RRSP Contributions

There are many ways to decrease taxes.  For a single person, maximizing your RRSP or pension contribution is one of the most effective ways simply because you are lowering your taxable income.  For couples, the person in the higher marginal tax bracket should have savings allocated to his/her RRSP to maximize his/her RRSP deduction limit (which in turn will maximize the family’s tax refund). 

If one spouse earns significantly more income than the other, consider using a spousal RRSP. This allows the higher-income earner to make a contribution in the name of the lower-income earner. The tax deduction is applied to the higher-income earner, but the actual asset is in the name of the lower-income earner.

Portfolio Tax Efficiencies

If possible, try to have interest-bearing investments in the name of the lower-income earning spouse. Interest income is taxed at the same rate as earned income. The lower the spouse’s earned income, the lower the taxes owed on interest income.

We strive to hold interest-bearing investments like GICs and bonds in Registered Retirement Savings Plans (RRSPs) where the income is sheltered from taxation.  Investments that generate dividends and capital gains are placed in non-registered accounts where the income receives tax-preferred treatment.

Charitable Donations

Registered charities in Canada perform valuable work in our communities, and Canadians support this work in many ways.  The Canada Revenue Agency (CRA) regulates registered charities under the Income Tax Act and is committed to providing donors with relevant information and just as importantly, tax credits for assets donated to a charity.

Tax credits are calculated as a percentage of the amount you donate in a given year. For example, in 2008, the first $200 you donate is eligible for a federal tax credit of 15% of the donation amount and 29% on any amounts in excess of $200.  You may also be eligible for a provincial tax credit for your donations (the amount of the provincial tax credit varies between provinces).

Generally, you can claim all or part of your donations up to a limit of 75% of your net income.  As an exception, gifts of capital property are limited to 100% of your net income.  Also, for the year a person dies and the year before, the 75% limit is extended to 100% of the person's net income.  Unlike other donations, cultural and ecological gifts are not limited to a percentage of net income.

You do not have to claim all of the donations you made in the current year on your current-year return, as these tax credits can be carried forward and applied to any of the following five taxation years.  You can also combine your receipts with your spouse and have only one person claim the entire amount (this is generally preferable to maximize the higher 29% tax credit rate).

If you have investments (stocks, bonds, mutual funds) that have an accrued capital gain, it is more tax preferential to gift the physical investment to the charity as CRA will allow you to avoid paying tax on the accrued capital gain (as opposed to selling the investment, crystallizing the taxable capital gain and gifting the residual cash proceeds to the charity).

For updated donor information, including current donation tax credit rates, please visit the CRA website

Non-Registered Funds

It is generally more tax-effective to generate retirement income from your personal or non-RRSP savings and investments first– thus allowing your RRSP savings to remain tax-sheltered for as long as possible. Personal savings/investments are most often in the form of:

  • Bonds
  • Pooled funds
  • Term deposits
  • Stocks
  • Mutual funds
  • Real estate
  • Segregated funds
  • A business

For many of us, this will amount to more money than we have in our RRSP or RRIF.

Accumulate, Maintain or Deplete?

Whereas your RRSP savings must be used to produce income after you reach age 71, your non-RRSP savings can be used in any number of ways, depending upon your objectives.

Tax Free Savings Accounts

Investing in a Tax Free Savings Account (TFSA) is a tax effective way to help build retirement savings.  A TFSA is a new registered account that allows Canadians over the age of 18, or 19 in BC,  to set money aside in eligible savings vehicles and earn investment income tax-free inside the account throughout their lifetimes.  While TFSA contributions are not deductible, growth is tax-free, as are any withdrawals.

For more information on Tax Free Savings Accounts, please visit the TFSA page on the CRA website, or feel free to contact a Rogers Group Financial advisor.

Income Splitting

Income Splitting allows you to shift the income and capital gains of the higher household income earner to the lower earner, thereby reducing taxes.  A Canadian resident can split up to 50% of any income with their spouse that qualifies for the existing pension income tax credit. For those under the age of 65, these payments include annuity payments made under a Registered Pension Plan (RPP) and certain death benefits. For those over the age of 65, the payments include any income derived from their registered plans (RRSP, RPP, RRIF, LIF, PRIF, LRIF, DPSP).

It is important to note that Old Age Security (OAS) and the Canada Pension Plan (CPP) cannot be split under this provision.  However, CPP can be split with your spouse – this declaration must be made directly with the government.
 

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