Which ones can I use? I do not attempt to list all the tax strategies available to you here as with more than 1,500 pages in the income tax act I’m sure it will bore you to tears. Besides, you should have an accountant who is up to date on what you can and can’t do. Just remember tax avoidance, where you take advantage of the rules to pay less tax, is encouraged, whereas tax
evasion, where you try to hide income or deceive CRA, will get you into hot water. I am speaking here of the deductions you can use in advance of your accountant filing them, or ones that I see in my field that get overlooked.
- Insurance. In most cases you cannot deduct the premiums on life insurance, but sometimes if you have used your life insurance policy as collateral for a loan related to your business, you may be able to deduct some of the premiums.
- RSP contributions will give you a 100 percent deduction at your highest marginal tax rate.
- Interest costs on a loan for business purposes, or if used to buy qualifying investments, have the same deductible status. The trick is not to co-mingle the deductible portion of the loan or investments with a personal use portion.
- Your CCPC is eligible for the small business deduction of $500,000 which provides for reduction on the corporate income tax of your active business income.
- In some instances you can deduct disability, critical illness, health and dental insurance costs by having them paid by the corporation.
Divide And Conquer
How can you divide your income? Do you know how much money you can save by doing this? The main reason for splitting your income is to transfer assets or income to low income family members, because they pay taxes at a lower rate than you and it allows them to earn an income at this lower rate.
This splitting of income can lower your household taxes and also reduce claw backs of benefits such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS).
Have you and your family taken advantage of your lower marginal tax rates?
Thirteen ideas about ways to divide your income and pay less tax:
Have you considered the following:
- Paying appropriate salaries to your spouse or children who may be in lower tax brackets?
- Having family members become shareholders through a family trust?
- Loaning to your spouse or children at a prescribed rate that is presently at one percent?
- Loaning money from your corporation to a low income spouse or children to invest?
- Loaning money to a trust at the prescribed rate? Growth above that rate will go to the beneficiaries.
- Loaning or giving money to your children for their TFSAs? No attribution rules on the growth here.
- Loaning or giving money to your children to buy a home? If no income is generated, then there is no attribution.
- Gifting money to your adult children? They can invest it to earn their own income, taxed at their lower rate.
- Gifting money to your parents if they are financially dependent on you, for the same reason as above?
- Setting up an RESP for your grandchildren?
- Splitting CPP benefits with your spouse?
- Using spousal RSPs to split income at any age and not be limited to transferring only 50 percent?
- Have you used a testamentary trust?
I defer to your authority. How to defer with distinction
According to many accountants the three rules of taxation are defer, defer, defer.
One advantage you can use is to leave your money in your company and defer paying about 30 percent in tax (the difference between 15.5 percent for the company and your 46.41 percent tax bracket) for the 30 odd years you leave it in there before you retire.
RSPs are the simplest and most widely used method of deferring your income. The idea is to keep your money growing as long as possible. You have to be careful with this, as it’s not advisable for some of my business owner clients as there are often better methods to use. You have to consider what your current tax bracket is and what it is expected to be in retirement. It becomes advantageous if you are claiming your tax deductions in a high tax bracket while in your working years and you expect to be in a lower tax bracket in your retirement years. If you will stay in the same high tax bracket in retirement or move to a higher one, this becomes less attractive.
You can defer the growth of corporate class investments inside the corporation, and later use them for your retirement.
Capital gains or losses. Some ways to use them:
- Delay a sale of an asset until early in the next year to delay triggering a gain and pay your tax the following year.
- Claim a loss before the end of the year, and remember you can carry them back three years to be used in whichever year you were in the highest bracket.
- Watch out for the superficial loss rule though. You need to wait at least 30 days after selling to buy the same fund you may have sold to trigger a capital loss.
Don’t pay? No way!
How can you avoid paying tax on an asset? You want to be on the right side of the law on this one. In Canada there are three ways you are allowed to not pay tax on the growth of an asset.
- Set up TFSA
- Buy a home
- Grow money inside of a permanent life insurance policy
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