Though both tax havens and tax shelters are used by wealthy people to reduce their income tax payments there is a big difference between the two.
A Tax Haven is a locale anywhere in the world that has lax tax laws. This country will often charge very low or very reduced tax rates. Many multinational corporations take advantage of the benefits of tax havens creating subsidiaries to shield their incomes from taxation. Tax havens can also provide offshore banking services to non-resident companies and individuals. Foreigners can easily form an international business corporation or offshore corporation which will often be given tax exemption for a set period of time.
Because of the strict privacy laws enforced by most tax havens owners of these “shell” companies often remain unknown. Although tax havens are technically legal the CRA frowns upon them and the public has a poor view of companies carrying out offshore banking activity. Switzerland is the most well-known tax haven, but others include the British Virgin Islands and Luxembourg.
Tax Shelters are commonly used by all taxpayers as a method of legally reducing their tax burden through the use of specific investment types or strategies. These are often temporary and require a future income tax payment, but they are useful for those wanting to reduce their tax payments during the years when their earnings are highest. The two most popular tax shelters in Canada are Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs).
The TFSA was started by the government in 2009 and it allows anyone over 18 to earn investment income tax free up to a set maximum per year. In 2009 you could contribute up to $5000 which increased to $5,500 per year in 2013 with and $10,000 for one year in 2015. This allowance is cumulative so that if you had not contributed by 2017 you could invest up to $52,000 and in 2019 your total investment allowance Including an increase to $6000 per year will be $63,500. You can withdraw from your account anytime during the year, but you cannot replace it until the following year unless you have sufficient contribution room for it to be considered an additional contribution.
RRSPs - You can contribute to your RRSP each year up to a limit based upon your income and deduct it from your taxable income. You will only pay income tax on your investment and the interest it earns when you make withdrawals from your RRSP. If you have a properly structured investment portfolio you will be able to take advantage of the low tax rate on capital gains and dividend income outside of your RRSP while it shelters your higher taxed investment income.
RRIFs - A Registered Retirement Income Fund is a tax-deferred retirement plan for your RRSP. RRIFs are used by those who do not plan to withdraw their RRSP as a lump sum when they retire but take smaller withdrawals. RRIFs offer more flexibility and tax savings than lump sum withdrawals, but you must withdraw a minimum each year and report it for tax purposes. You may withdraw more if you wish at any time. The CRA will set your minimum withdrawal for each year according to a schedule which will start at 5.28% at age 71 in 2019.
For more information about TSFA’s, RRSP’s or RRIF’s consult your investment advisor or the CRA website
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