We are fortunate as Canadians to live in such a wonderful country; however, this comes at what is seemingly a higher and higher price each year. It’s true that a penny saved is equal to approximately two pennies earned after taxes (for those in the highest income tax bracket), and that for many working and retired Canadians our largest single expense is taxes.
Paying what is rightfully owed is essential, and certainly the law. However, there are solutions available to investors that are designed to reduce the tax burden in the short- and long-term. Investment returns are important, but more important is how much you keep in your pocket.
Tax-advantaged investment strategies:
Understanding the tax treatment of non-registered investment strategies is essential to long-term investment success. By including certain managed investment solutions within a taxable portfolio, you may be able to reduce and/or defer taxes in one of the following ways:
- REIT income: qualified Real Estate Investment Trusts pay investors a tax-advantaged yield generated from Canadian property rental income. This means that a portion of income taxes may be deferred until the investment is sold, triggering capital gains, the taxes upon which are paid with cheaper dollars in the future (inflation adjusted).
- Capital Gains Deferral: most of the gains earned and accumulated in this type of strategy are paid upon the sale of the fund. Similar to REIT income, this provides for more tax-effective compound growth of capital and allows investors to pay taxes owing with cheaper dollars in the future (inflation adjusted). Different from REITs, these funds don’t generally pay an income, rather compounding gains over time.
- Business Income: applicable to active corporations (i.e., business and professional income earned), business income is taxed much more favourably than interest and other investment income. Caution should be exercised for corporations concerned with exceeding the allowable passive income limits, set out in the 2018 Canadian Federal Budget.
Select strategies may include an internal structure allowing for greater tax-efficiency, differing greatly from mass-market mutual funds. Including these types of strategies for their investment merits and their tax-efficiency promotes long-term investment success.
Depending on individual circumstances, properly placed life insurance policies (term or permanent) may offer income tax benefits depending on long-term objectives:
Corporately owned life insurance may pay a part of the death benefit as a tax-free capital dividend to shareholders, reducing corporate taxation. Considering the 2018 Canadian Federal Budget and newly established rules setting passive income limits, corporately owned insurance may allow for a tax-effective withdrawal of tax-trapped capital.
Personal Pension Plan:
A Personal Pension Plan (“PPP”) combines the Canada Pension Act with the Canada Income Tax Act and creates a super-charged RRSP of sorts, designed for operating and professional corporations.
A PPP offers numerous tax-saving measures and allows for greater retirement savings deposits compared with RRSPs. Compared with other corporate pension plans, a PPP offers greater flexibility, investment selection and tax-savings.
Due to the 2018 Canadian Federal Budget and taxation around passive investment income, interests in PPP’s has increased amongst business owners and incorporated professionals.
Income paid from a Tax Free Savings Account (“TFSA”):
TFSA’s provide a tax-sheltered means by which to grow savings, with an allowable total deposit, per individual, up to $63,500 as of 2019. For clients that require income, we are paying out yield earned inside a TFSA tax-free and without penalty. This process becomes more significant each year, considering future annual deposits and replenishing any cash withdrawn in prior years.
There are many myths and misconceptions around TFSAs. We can help you use this type of account to your advantage, understanding the various rules and parameters.
Giving back with financial support:
For many Canadians, giving back to a cause or a charity they believe in is a normal and regular occurrence for them — whether it is through volunteering time or by providing a financial gift. How you and your family choose to provide charitable funding is unique to you. Donations to a charity or by way of a personal/family foundation or bequests in your will — all of these strategies can provide tax benefits.
Charitable gifts: to maximize the value of a charitable donation, it is suggested that clients donate securities from taxable accounts that have appreciated in value. Income tax is not paid on capital gains accrued and you will receive a donation receipt for the total fair market value of the securities received by the charity. This is a far more tax-effective gift compared with donating cash.
Private Foundation: for larger, longer-term, multi-generational philanthropic goals, a private foundation may be a solution worth considering. This allows for a more personalized and engaged form of giving, appropriate for donors who would like to be more closely involved in their giving efforts, creating a legacy together with generations to come.