Nine Tax-Saving Tips for Individuals
Many clients I deal with are particularly interested in various forms of tax savings that could help in long term financial planning. Below you'll find nine great methods you may consider:
- Family loans – lend money to a family member in a lower tax bracket for investment purposes. As long as you charge interest on the loan at CRA’s prescribed interest rate at the time the loan is made (currently 5%) there will be no attribution back to you on the income earned on the invested funds for which the loan was used. Interest must be paid annually to you (the lender) by January 30 of the following year. The borrower (your family member) can deduct the interest paid when he prepares his/her income tax return. You, as the lender, are required to pay tax on the interest payments received. Depending on the investment yield, tax savings may be achieved.
- Invest inheritance in separate names – a spouse with a lower income who receives an inheritance should invest it in a separate account, not a joint account, so any investment return is taxed solely in the lower income spouse’s hands.
- Contribute to a spousal RRSP – a higher income-earning spouse should contribute to a spousal RRSP in the name of the lower income-earning spouse (the annuitant), with the goal of having both RRSPs equal in contribution amounts. The spouse with the higher income can use the RRSP deduction now to reduce income tax paid, while the lower tax bracket spouse will pay income tax on the RRSP withdrawals in the future.
- Contribute to an RESP – a great way to save for post-secondary education for your child and achieve income-splitting. The contributions are not deductible to you, but the investment grows tax-free and the future withdrawals are taxed as income to the student at a time when he presumably has very little or no income (i.e., in a low tax bracket), so the income tax paid is minimal. Also, through a CEGS, the government will match 20% of your contributions up to $2,000 ($2,500 as proposed in the 2007 Federal budget, but not yet enacted) of contributions per year per child.
- Medical expense credit – you may include premiums paid for private health insurance in your medical expense credit. It may be possible to claim eligible medical expenses incurred from dependents such as: a child over 18, a grandchild, you or your spouse’s parent, grandparent, brother, sister, aunt, uncle, niece, or nephew who was a resident of Canada at any time in the year, depending on their income level and up to a maximum of $10,000 per dependent.
- Donations – consider donating publicly-traded securities with accrued capital gains to a registered charitable organization instead of donating cash. No tax is payable on the unrealized capital gains by donating listed shares to a charitable organization. Under these circumstances, the charity receives a larger amount than it would have if you were to have first sold the shares and then donated the proceeds after paying tax on the capital gain. You will receive a donation tax receipt, and hence a tax credit, for the full market value of the shares, while paying no capital gains tax on this disposition.
- Employ your spouse and children – if you own a business (either incorporated or as a sole proprietor), consider paying a salary to your spouse and children. Note that the salary must be reasonable and in line with the services they perform. CPP contributions are not required for children under the age of 18. EI deductions should be discussed with your tax adviser. Minors, even with no taxable income for the year, should still file tax returns in order to build up RRSP contribution room based on their salary, to use for future income tax deductions.
- Interest deductibility – interest paid on a home mortgage and car loans are not normally deductible, while interest on loans used to earn business or investment income is deductible. Therefore, try to ensure that all loans you take out are for a deductible purpose. For example, if you have excess funds that you would like to invest, pay off your mortgage first, then take out a loan for investment purposes.
- Estate planning – speak with your tax adviser regarding: the benefits of ‘freezing’ the current value of your estate with future growth accruing to the next generation; establishing one or more family trusts and a spousal trust in your will; planning for charitable donations in your will; joint tenancy for investments; use of multiple wills for probateable and non-probateable assets; etc.
It is highly advisable to consult with your professional tax adviser before implementing any tax saving plans to ensure adherence to current income tax law, and that the transactions are undertaken in a legal and tax-effective manner.