Tax Minimization Tips
Updated: May 9, 2020
We’re entering that time of year when the realization of how much tax we pay rears its ugly head gain. The reality is that for the 2013 tax year that ship has sailed, but for 2014 and future years there are a number of changes we can make now to minimize the tax we pay going forward. In an interview with Tim Laceby, CPA, CA, Senior Tax Manager and Spence Walker, CPA, CA, Partner of Kreston GTA LLP, they outline a few strategies that Canadians can implement to minimize the tax burden.
How can retired couples take advantage of pension splitting and tax credits? If you’re between the age of 65 and 69, consider converting some of your RRSP to a RRIF before the mandatory deadline. This opens up two opportunities: First is the ability to split some of this pension income with a spouse; taking advantage of potential lower tax brackets, and secondly, there is a pension tax credit that becomes available only after receiving income from a RRIF or other pension income.
For those who have not reached retirement - what are your thoughts on RRSP planning? Simply maximizing your RRSP contributions to the available limit is not always the best strategy. A more effective plan may involve paying down high interest debt, contributing to a TFSA (tax free withdrawals in the future), contributing to an RESP, or potentially investing in an unregistered account all together. These decisions need to be based on other factors such as the need for cash-flow now and in the future, the stage of your career and expected tax brackets in the future, etc.
With all the recent changes to taxation of testamentary trusts, what opportunities continue to exist for reduced taxation when it comes to Estate Planning?
As a beneficiary of an inheritance, your first inclination may be to request that the assets be distributed as soon as possible. However, the estate has three years where income is taxed at the same graduated personal tax rates as an individual. By leaving the inheritance in the estate and letting it earn income, there is the opportunity to have that income taxed at significantly lower rates. Prior to proposed changes from the recent federal budget, it was possible for a beneficiary of a testamentary trust to take advantage of graduated personal tax rates within the estate/trust indefinitely. The recent changes to the income tax act have limited this to three years for an estate, however if you are a beneficiary who is eligible for the disability tax credit, the proposed changes permit the graduated personal tax rates to continue indefinitely for the testamentary trust.
What is one of the tax minimization strategies most often over-looked by Canadians? Interest rates prescribed by Canada Revenue Agency have never been lower. Currently they are at 1%. One way of taking advantage of this is to transfer income generating assets to a spouse or child in exchange for an interest bearing loan. The loan will create income to the lender at the 1% prescribed rate and that rate of 1% (if made before March 31, 2014) will remain at 1% for the duration of the loan. Meanwhile as long as the interest is paid and reported as income, the recipient of the loan can generate income on the transferred assets, which are taxed in their hands at the presumed lower tax bracket rates that they fall under. If you are considering making a prescribed rate loan to a minor child, consider using a family trust as minors cannot be held liable for debts. Care needs to be taken to structure it properly to ensure the investments don’t fall under the Kiddie Tax rules.
Working with your wealth management team in conjunction with your accountant provides you with professional insight and expertise necessary to identify and/or develop effective strategies to reduce the amount of income tax payable during the various stages of your life. To complete a full review of your family’s exposure to excess taxation, as well as other impediments of wealth generation, please contact our office to begin laying the foundation of your integrated Wealth Plan.