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Back to Tax section Learning Centre - Taxes
Tax Saving Strategies

Reduce your monthly income tax bite by eliminating the year end tax refund

Saving for retirement reduces the annual tax bill

Consider contributing towards a Spousal RRSP

Income splitting

Using up the contribution room and adding more to your RRSP.

Borrowing for your RRSP

Tax-free transfers of severance and retiring allowance into RRSPs.

Retiring soon? You can take advantage of the CPP/QPP split

Tax advantaged investments - consider a portfolio review

Designating a beneficiary can minimize or eliminate probate fees

Redirecting tax obligations by “Estate freezing”

Education Savings Plans
Nobody likes to pay taxes, and finding ways to pay less is more than a pastime. With a quick review of the tax saving strategies below you'll see the rewards some tax planning could bring. Understanding how different investments attract higher taxation rates might help you decide differently about your present RRSP or RRIF portfolio. The way your investments are being held could also have large taxable consequences for your estate.

Reduce your monthly income tax bite by eliminating the year end refund.

If you're receiving large year end tax refunds, chances are you're paying too much tax on each pay cheque and lending the government your money interest-free.

Your employer should have a TD1 form on file. Review it to ensure your tax situation is correct and to ensure that too much tax is not deducted from your pay. If you make regular monthly contributions to an RRSP or to your favorite charities or if you make regular Alimony or Child Support payments you may apply to CCRA for an approval to have your income tax reduced at source. The CCRA approval would be sent to your Human Resources Department and providing they are willing, they could reduce the tax withheld from your pay so you receive an immediate benefit of your tax refund.

Saving for retirement reduces the annual tax bill

Contributing to an RRSP is the most popular tax deferment method left for reducing your annual income. The RRSP contribution (within the prescribed limits) is fully deductible. Every dollar of investment income that you earn inside your RRSP escapes the taxman as long as remains within the plan. Individuals who have large amounts of contribution room and plan to use a cash windfall or an RRSP catch up loan to make a significant RRSP contribution should pay special attention to how the RRSP tax receipt is applied. To maximize its value only deduct that portion which saves you tax at your highest marginal tax rate. Any deduction that would save you tax at a lower tax rate should be saved until future years (future income and age permitting).

Consider contributing towards a Spousal RRSP

If you're the individual who will have a higher retirement income than your spouse consider transferring your RRSP contribution to an Spousal RRSP in your spouse's name. You receive the tax deduction while the funds when eventually withdrawn are taxed in your spouse's hands not yours. Attribution rules apply to spousal RRSPs so make sure that the appropriate time period has passed from the date of your last spousal contribution to the date when the funds are withdrawn to avoid having the tax attributed back to you. The current requirement is that no spousal contribution can be made in the year of withdrawal or the preceding two tax years to avoid attribution of the tax.

Income splitting

- Have the higher-income spouse pay all the household expenses, while the lower-income spouse uses their income for investment purposes. Then the investment income will be taxed at the lower-income spouse’s rate.

- Income earned is not attributed, give or lend the lower income spouse funds for investment. The earnings on the original loan or gift will be attributed back to you, but the interest earned on the earnings will be taxed in the spouse’s hands.

- If you’re self-employed, hire your spouse as an employee. As long as the wages paid for services performed are reasonable, they will be taxed in your spouse’s hands and your business will get the deduction.

- You can also employ your children with the same caveats as above.

Using up the contribution room and adding more to your RRSP.

Your annual RRSP contribution limit is the total of any previously unused contribution room carried forward from past years plus new contribution room which is limited to 18% of your earned income from the previous year to a maximum amount of $15,500 (2004) less any pension adjustment from the previous year. Pension adjustments only apply to those individuals who are members of a registered pension plan or deferred profit sharing plan.

CCRA should have sent you a notice of assessment after you filed your last year's tax return which will detail your contribution limit for the current year.

Borrowing for your RRSP

Borrowing to make an RRSP contribution usually makes financial sense. Most financial institutions will offer you a preferred rate loan if the proceeds go into one of their RRSP products. If you wish to place the proceeds elsewhere be prepared for a higher loan interest rate. Try to limit the loan amortization to one year as you may need to borrow funds next year for a similar purpose. If you are considering a large loan to make use of substantial RRSP contribution room make sure that you also consider the tax rate at which you can apply the RRSP deduction. You want to save tax at your highest marginal tax rate and therefore should avoid applying deductions that reduce your tax savings to a lower tax rate. If this could happen in your case consider only borrowing and contributing enough this year that you can deduct at your highest marginal rate.

Tax-free transfers of severance of retirement allowance into RRSPs.

If you have been laid off or retired and have received a lump-sum payment from your employer, you may be able to transfer part or all of it, tax-free to an RRSP. If your former employer makes the transfer to your RRSP, no income tax is withheld. Otherwise, you can transfer up to $2,000 for each or partial year of service prior to 1996, plus an additional $1,500 for each year up to 1989, for which you did not earn pension or deferred profit sharing plan benefits.

Retiring soon? You can take advantage of the CPP/QPP split

The pension plan splitting strategy is very simple to do and results in quick tax savings. If the marginal tax rate of your spouse is lower than yours and you’re eligible for CCP or QPP benefits, consider splitting them equally between you and your spouse. The best time to split the benefits is at the time you file the application with the government.

Tax advantaged investments - consider a portfolio review

The key to this strategy is recognizing which investments have a preferred/lower tax rate. It’s normally considered prudent to have a majority of interest bearing investments inside the RRSP and having investments that produce Canadian dividends and capital gains outside. Capital gains and dividends from Canadian firms receive preferential tax treatment over interest income and thus are more beneficial for non-registered investments. The overall portfolio mix will affect your decision as to what assets should be held in the RRSP. Your advisor can provide that information.

Taking advantage of investments that defer tax means that every dollar of tax not paid this year can earn more income in the following years.
Capital gains are generally not taxed until the investment is sold or marked as a deemed disposition. For example, if you hold equity type mutual funds for 15 years and they have increased in value, the capital gains are not taxable until you sell the investments and actual realize the (gain) profit.

Certain Life insurance contracts and annuities have favorable tax treatments. “Permanent” life insurance products usually contain investment components where any earnings are deferred until there’s a payout. “Prescribed” annuities equalize the tax over the length of the term of the annuity so that an equal amount of tax is applied each year.

Designating a beneficiary can minimize or eliminate probate fees

Probate is a legal procedure designed to validate your will. Fees are assessed on the value of the assets that pass through probate. Fees vary depending on the province of residence.

With planning you can designate a beneficiary for your RRSP or RRIF, the amounts remaining go directly to the named person and in most cases would escape probate. To the same extent, proceeds from a life insurance policy bypass probate as well. Investments and property held in joint tenancy with right of survivorship go to the surviving owner directly and are not included in probate.

Redirecting tax obligations by “Estate freezing”

This strategy is designed to pass future growth in the value of an asset, plus the ongoing tax liability to others.

Be mind-full that when you transfer capital assets you may be faced with the asset being declared a “disposition” by the tax department and be presented will a tax bill - review the current attribution rules with your investment advisor or accountant.

If you wish to retain control over the asset, you could transfer it to a trust.

Gifts to charities - You could gift a capital amount to the charity and as a proviso retain an income from that investment, and claim a percentage of the gift to the charity as a tax deduction.

Education Savings Plans

Although the contributions to a RESP are not tax deductible like an RRSP, the interest or the growth of the investment is tax deferred until withdrawn, and at that time are taxed at the student's marginal tax rate. The amount of tax they pay, if any, is likely to be lower, because of their smaller income. The government and plan sponsors apply and set maximums and restrictions on who can and is eligible for the RESP program. Not all programs are the same.

Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this Executive Notes are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein, readers should seek advice that is appropriate to their personal circumstances from a professional advisor.

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