Thursday 1 May 2014

Top ten tax-saving strategies

Canadians may be heavily taxed, but here are steps you can take to keep more of what you earn:
1. [b]Jump on board the RRSP tax-deferral train[/b]. 
Contributing to an RRSP is one great way of reducing your annual tax bill. Say your marginal tax rate is 40 per cent, $10,000 to contribute and sufficient RRSP contribution room. Putting that money into your RRSP makes it fully deductible from income, reducing your tax bill by up to $4,000 (40 per cent of $10,000). Plus there's another major tax benefit: Every dollar of investment income earned inside your RRSP is tax-deferred as long as it stays in the plan.


2. [b]Arrange your investments to be tax-efficient[/b]
If you invest both inside and outside an RRSP, your Consultant can help you create a portfolio that takes all tax implications into consideration. The key is in how different types of income are taxed.
Dividends and capital gains usually receive preferential tax treatment, while interest income does not. But this preferential tax treatment doesn't apply to earnings in an RRSP. As a result, it generally makes sense to hold interest-bearing investments inside your RRSP, where they will be fully tax deferred, and investments that produce dividends and capital gains outside your RRSP so you can benefit from the preferential tax treatment they receive*. Investors Group also has non-registered investment products specifically designed to defer tax even when drawing an income from the investment to fund lifestyle expenses.
*Note this is a general rule. Your overall investment mix, goals and time horizon will affect any decision on which assets should be held in your RRSP.

3.[b] Consider income-splitting with your spouse[/b]
You can reduce your tax bill significantly by implementing income-splitting strategies if your spouse is in a lower income bracket. Here are three strategies worth considering:
Spousal RRSP. If you are the main breadwinner in your family, you'll probably generate most of the retirement income—which may be taxed at high rates. By setting up a Spousal RRSP, you can transfer a portion of that income into your spouse's hands to be taxed at lower rates when it's withdrawn by your spouse. 
Who pays, who invests. Have the higher income spouse pay all household expenses so that the lower-income spouse uses his or her earnings for investment purposes. The investment income will be taxed at the lower-income spouse's rate. 
A prescribed rate loan.  Gifts of interest free loans from a higher income spouse to a lower income spouse result in investment income being attributed back to the higher income spouse.  However, if the gift or interest free loan is replaced by a loan that bears interest at the current prescribed rate, the attribution rules no longer apply and the investment income is taxed in the hands of the lower income spouse.    


4.[b] Maximize family income by employing family members.[/b] 
If you run your own business, consider whether it's possible to hire your spouse or children as employees. As long as the salary paid for the services performed is reasonable, it will be taxed in their hands and you will get the deduction.
By transferring some of your taxable income to your children or a spouse, who earn little or no taxable income, you can shrink your family's overall tax bill. The attribution rules limit income-splitting with children under 18. If you give investments to a child under 18, for example, all interest and dividends on the original gift will be attributed back to you and taxed in your hands. This doesn't apply to capital gains, however, nor to income earned on income. Keep in mind that the attribution rules usually do not apply to children 18 or older.

5. [b]Retirement has its tax benefits.[/b]
If you are retired, be sure to take advantage of the following:
Splitting CPP/QPP benefits. This easy to implement strategy results in quick tax savings. If your spouse's marginal tax rate is lower than yours, consider splitting your CPP or QPP benefits between you and your spouse. 
Pension Income Tax Credit. One retired spouse may be unable to claim the federal tax credit available on up to $2,000 of pension income because he or she has no RRSP or pension income. However, interest income from an annuity may qualify for this credit if you are 65 or older. If your income is too low to take advantage of the pension credit, it can be transferred to your spouse who can use it to reduce his or her taxes, or vice-versa if your spouse is also 65 or older. 
Pension income splitting. Up to fifty percent of any income you receive that qualifies for the pension income tax credit can be allocated to your spouse for tax purposes. Payments from a Registered Pension Plan qualify for this income splitting at any age, while RRIF payments qualify for pension income splitting starting at age 65.


6. [b]Grow your investments faster through a Tax-Free Savings Account [/b]
Invest after-tax dollars into a Tax-Free Savings Account (TFSA) and you will not be taxed on earned interest, dividends or capital gains even when withdrawn. 
Another important feature for retirees is that earnings within the account and subsequent withdrawals do not affect income-tested benefits such as Old Age Security, the Canada Child Tax Benefit or Guaranteed Income Supplement. 


7.[b] Consider an RESP.[/b]
While contributions to a Registered Education Savings Plan (RESP) aren't deductible, the investment earnings accumulate on a tax-deferred basis. In addition, the federal government will pay a Canada Education Savings Grant (CES Grant)* into the RESP subject to certain conditions.
When your child starts post-secondary school, your contributions can be withdrawn by you from the RESP, tax-free. The RESP investment earnings and CES Grants will be taxed in the hands of your child.

8. [b]Consider 'freezing' your estate [/b]
Estate freezes are designed to redirect future growth in the value of an asset, plus the accompanying tax liability, to others. Selling or giving the assets to your children is the simplest type of freeze. They now own the asset and will pay tax on future increases in value. If the asset you give to your child is a capital asset, you will be faced with a disposition for tax purposes, and possibly a significant tax bill. The income attribution rules plus certain tax rules involving trusts can make this a complex issue. Advice from a qualified professional is essential when you are considering any type of estate planning, particularly estate freezes.


9. [b]Defer tax with life insurance. [/b]
Permanent life insurance products, such as Whole and Universal Life policies, can also provide investment options. Typically, the tax on earnings is deferred until there is a payout.


10.[b] Other savings opportunities [/b]
You can ask the Canada Revenue Agency to allow your employer to reduce withholdings if you have contributed to an RRSP early in the year, made large charitable donations, or incurred substantial medical expenses.
Child care expenses, alimony and taxable child support also may lower your income and reduce your withholding taxes.
[b]Get expert advice[/b]
Planning to pay less tax is an important component of any plan but many of these strategies require analysis and guidance. Talk to your Investors Group Consultant today about integrating tax planning into your plan.

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