PERSONAL INCOME TAX SEASON IS HERE ARE YOU DOING ALL YOU CAN TO SAVE TAX?
It is personal income tax season, a time when many of us are focused on keeping as much of our hard-earned dollars as possible. As we deal with receipts and returns, it may be a good reminder that we should be doing all we can to minimize taxes. Here are some actions to consider: Take Advantage of the Deductions and Credits Available — Tax law changes each year. If you prepare your own tax returns, be aware of these changes. You may also consider the support of an expert to assist with your tax return to ensure you are taking full advantage of the credits/deductions available. This can also provide continuity in the event something were to happen to you or a spouse. Encourage younger folks to file a tax return if they have generated income, even if it is below the basic personal exemption, so that they can generate Registered Retirement Savings Plan (RRSP) contribution room. Maximize Tax-Advantaged Accounts — Have you fully contributed to your RRSP and Tax-Free Savings Account (TFSA)? Recent statistics suggest many of us aren’t doing so (see page 3). If you need support, consider setting up a monthly contribution plan for your RRSP or TFSA. If you are working, filing Canada Revenue Agency (CRA) form T1213 Request to Reduce Tax Deductions at Source may decrease withholding taxes on your paycheques as a result of your RRSP contribution. Optimize Asset Location — The location in which you hold certain types of assets can make a difference. Different types of income — interest, dividends, capital gains — may be taxed differently depending on the type of account from which income is generated. For example, if you hold foreign investments that pay dividends in a non-registered account, you may receive a foreign tax credit for the amount of foreign taxes withheld. If the same asset is held in a TFSA, no foreign tax credit is available. By having a comprehensive view of your assets, there may be opportunities to optimize asset location across different accounts
Plan with Your Spouse — If you are part of a spousal/common-law partner unit with a higher-income and lower-income earner, there may be income-splitting opportunities. For instance, if you expect your spouse to have significantly less income than you in retirement, there may be an opportunity to contribute to a spousal RRSP for the low-income spouse. Or, retirees may be able to split eligible pension income on their tax returns or elect to split Canada Pension Plan benefits.
“Reduce” Your Refund — If you receive a tax refund from the CRA on a regular basis, this shouldn’t be a cause for celebration. You’re effectively providing an interest-free loan to the government. Instead, consider completing a new TD1 form with your employer, the form used to calculate how much tax to deduct from your paycheque. You may also file CRA form T1213 if you know you’ll have significant deductions in a given year. This will reduce the tax taken from your pay.
If Over 64, Consider Opening a Small RRIF — The pension income tax credit kicks in at age 65, allowing for a tax credit on up to $2,000 of eligible pension income. If you don’t have eligible income, consider setting up a small Registered Retirement Income Fund (RRIF) for the year you turn 65 (or sooner if you’re widowed) to create pension income. You don’t have to convert your RRSP to the RRIF until the year you turn 71, but this way you can still claim the pension tax credit. These are just a handful of ideas to help minimize taxes. As always, seek the advice of a professional tax advisor as it relates to your personal situation. Saving tax is an all-year exercise; consider taking action today
ARE YOU DOING ALL YOU CAN TO SAVE TAX? SHIFT INCOME, SPLIT TAX
Do you feel as though you are paying too much tax? A recent study suggests that high-income families pay a disproportionately large share of all Canadian taxes — in fact, the top 20 percent of incomeearning families pay 61.4 percent of the country’s personal income taxes! In contrast, the bottom 20 percent of income-earning families pay only 0.8 percent of total income taxes. This study was done by the Fraser Institute to debunk the political misperception that top income earners do not pay their fair share of taxes. This is a good reminder that we should be doing all we can to legitimately reduce our tax liabilities. On page 2, we outline some actions to consider during tax season, including the opportunity to split income. In more detail, here are some ways to shift taxable income from higher-income to lower-income spouses/common-law partners (“spouses”) and adult children: Pension Splitting — Up to 50 percent of eligible pension income may be split between eligible spouses on their respective tax returns. This may also allow both spouses to claim the pension income tax credit of up to $2,000 per year depending on age. For those aged 65 or over, payments from sources such as a life annuity, registered pension plan, or RRIF could qualify. For those under 65, payments from a registered pension plan (except Quebec) and certain other payments received resulting from the death of a spouse may qualify. CPP/OAS payments and certain foreign pension receipts do not qualify. CPP/QPP Sharing — Spouses can apply to have their Canada/ Quebec Pension Plan (CPP/QPP) pensions split between them. It is important to note that the CPP pension sharing rules are separate from the pension income-splitting rules and work differently. For example, pensioners must proactively apply for CPP pension sharing, while a couple can elect to apply pension income splitting when they are filing their income tax returns after they have already received the pension income. Transferring Unrealized Capital Losses in Open Accounts — In some situations, it may be possible to transfer unrealized losses in a portfolio between spouses using the superficial loss rules. This could allow a spouse who cannot effectively use unrealized capital losses (i.e. due to a lack of capital gains and/or being in a low tax bracket) to transfer those losses to a spouse who would be able to realize and utilize the capital losses more effectively.
Spousal RRSP — If the high-income spouse contributes to a spousal RRSP for the benefit of the lower-income spouse, future withdrawals may be taxed in the lower-income earner’s hands. Be aware that the spousal RRSP would be owned by the lower-income spouse, so any funds withdrawn are considered that spouse’s assets to be included on their income tax return and, if withdrawn within three years of contribution, income attribution will apply.
Household Expense Allocation — Household cash flow could be allocated so that the higher-income spouse could pay for the family expenses. After tax-advantaged accounts have been maximized, the lower-income earner’s funds could then be used for investment purposes to enable future investment income to be taxed at their lower marginal tax rate.
Gifting to Adult Kids — Gifting money to an adult child who is in a lower tax bracket can put subsequent capital gains and income in the hands of the child. The adult child may also be able to contribute the funds into tax-sheltered accounts such as a TFSA. However, it is important to consider the loss of control over the funds once they have been gifted.
Business Planning — For business owners, reasonable salaries for services rendered in the business may be paid to lower-income family members. This not only has the potential to take advantage of the individual’s lower marginal tax rate, but also build up RRSP contribution room and generate pensionable CPP/QPP earnings. Business owners who operate through a corporation should also consider speaking with their tax advisor to discuss their situation and identify potential tax planning strategies which could reduce taxes associated with the sale of the business or passing down the business to the next generation (which could be a significant taxable event without proper planning).
Seek Assistance
While some income splitting techniques can be implemented without much advance planning (i.e. pension income splitting, gifting to adult children); others, such as maximizing spousal RRSP benefits, require planning well in advance. For more information or advice relating to your particular situation, please consult a tax advisor.
The information contained herein has been provided for information purposes only. Graphs, charts and other numbers are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information has been provided by J. Hirasawa & Associates and is drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document. Wellington-Altus Private Wealth Inc. (WAPW) and the authors do not guarantee the accuracy or completeness of the information contained herein, nor does WAPW, nor the authors, assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances. WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. ©️ 2023, Wellington-Altus Private Wealth Inc. ALL RIGHTS RESERVED. NO USE OR REPRODUCTION WITHOUT PERMISSION
