The more money you have the more tax planning you can do with it, but you don’t have to be in the top 1% of income earners to incorporate these tried and true tax strategies into your own planning.
You might think that the wealthy have all the answers to making more money while reducing their tax bill. From using offshore tax shelters to trust funds it seems the opportunities for them dodge the tax man are endless. Tax lawyer Dale Barrett says "There are numerous legal ways for the average tax payer to reduce their taxes depending upon the amount of money that they have to work with and their present and future employment status. If you are a wealthy person or corporation you can take advantage of different tax structures and levels, but even if you are not part of the 1% you can still incorporate some of the tried and true tax strategies in to your own planning."
Sheltering Investment Income
For any Canadian with the ability to save money, the government makes available two main ways to shelter income - Registered Retirement Savings Plans (RRSP's) and Tax Free Savings Plans (TFSA's).
Contributions to a RRSP are tax free so that you don't have to pay any tax on them in the year that you contributed so it is a good idea to put away the maximum that you can into your RRSP. There is no tax on your gains until the age of 71, at which point the taxpayer must start to withdraw their funds, which is treated as taxable income, but for many people their income will be much lower than when they were working meaning that they will pay less tax.
The money that you contribute to your TFSA is post-tax income and any interest, dividends or capital gains in it are tax free for life so you do not have to pay tax not your withdrawals. Wealthy Canadians also use these ways to shelter money but they usually max out the amounts that they contribute every year. However they go further by using TFSA's to fund for their children once they reach the age of 18 for them to put into their own TFSA's thereby transferring wealth intergenerational and keeping all the investment income tax free.
Many wealthy Canadians run a business to take advantage of lower tax rates, business write-offs and tax deductible individual pension plans. If you are self employed or doing freelance or contract work it is worth considering incorporation depending upon your income. If you are using all the money that you are bringing in then incorporation is not ideal for you. However if that income even from a small side business is extra for you then incorporation is worth thinking about for the benefits. In 2019 the small business tax deduction rate was 9% after the federal tax abatement meaning that you would have been taxed at the lower corporate rate on your income. The downside to incorporation is the amount of money that it costs to incorporate, and the accounting costs to do financial statements and tax returns which can run into the thousands of dollars. So you have to decide if spending that is worth it for the tax benefits you will receive.
This is a an effective strategy for wealthier Canadians in the highest tax bracket, but there are benefits for the average Canadian. If one spouse is in a higher tax bracket they can transfer some of that taxable income to another family member including children in a lower tax bracket.
Permanent Life Insurance
Most people are familiar with term life insurance which covers you for a set time. Permanent life insurance, on the other hand, lasts for life. This life insurance comes with an investment component that grows free of annual taxation. Unfortunately most people are not able to afford this as it is sometimes 6 to 10 times the cost of term life insurance. It is however an additional investment option for those who have already maxed out their RRSP's and TFSA's.
Whatever your income if you have done a good job of your tax planning you will acquire some savings that will be beneficial to you even if it is not the thousands and millions that the wealthy have earned from their investments.
From an article by Julia Mastroianni Financial Post
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