Kerr Financial turns 40 years old! Over the years we have worked with many successful Canadian families, helping them maximize their personal finances. To celebrate this momentous milestone we would like to share 40 Tax Tips to help you maximize your personal wealth.
40 Tax Tips!
Split income with family members
- Direct ½ CPP/QPP to spouse to reduce the family tax bill.
- Lend interest-free to lower-income spouse who must pay 2% interest to you, but will earn 5% – 6% investment income with your money. Safeguard your assets by signing an agreement and a pledge of investments back to you.
- Split pension income/RRIF income between two spouses, if age 60 and over, so that higher tax rate retiree, reduces family tax but keeps the money.
Donate tax appreciated securities to registered charities
- Gain tax credit worth close to 50% of market value, and avoid tax on capital gains accruing on the security. That may be worth another 25%. So a total tax saving of up to 75%.
- Larger gains? Consider funding a charitable foundation, private for your family only, or community based, where you join with others to set up the fund. Either way, you get the charitable funds and give out the money over 30 years or more. Get the tax deduction now when you need it, but pay out the charities over many years.
- Establish a charitable gifting program funded year after year, with appreciated securities to make sure that you don’t have a large tax bill from capital gains in your final tax return. You save tax money for your family, while benefitting charities year after year.
Reduce the taxes arising from your Investment Income
- Consider income taxes when setting your Investment Policy. It is what you keep after-tax that counts.
- Interest income, net rental income and foreign source investment income is taxed at your top tax rate. So blend this with lower-taxed capital gains and Canadian-sourced dividends.
- Alternatively, direct fully-taxed investment income to others in the family with lower tax rates.
- Organize your borrowing so that any loans you take are for business or investment purposes, not for personal use. For example, pay down your mortgage with available cash, while borrowing for investment if you feel confident.
- Keep track of every possible deduction from investment income, such as interest expenses on funds borrowed for investment.
- Deduct investment management fees, custodial fees, private bank fees, accounting fees, advisory services fees.
- Take care to report foreign investment income and capital gains using the most favourable exchange rates. You may use an average exchange rate for the year, or the month, or even the actual transaction date exchange rate.
- Sell to create capital losses to offset capital gains of the current year or the prior three years. Losses can be a good thing to reduce taxes on gains.
- Harvest capital gains to use up unused income tax credits where they would otherwise go to waste. This can happen when excess charitable donations are made, or large dividend tax credits are available.
Health
- Should your health leave you less able to carry out daily activities, your doctor may provide a Disability Certificate. Request it and reduce your taxes with a Disability Tax Credit, or with enhanced claims under medical and senior support tax credits.
- If you care for a sick or disabled person, you may benefit yourself from a Caregiver Credit, whether the patient is related to you or not.
- You may have a disabled child or relative who collects Social Security Benefits. You can help now and in the future by creating and funding a Disability Savings Plan. Do it the right way and the Government of Canada will provide substantial matching funds, which will accumulate tax-deferred investment income, along with your contributions.
- Plan your Will to provide a Henson-like discretionary trust for distribution after your death to support the disabled person without causing a reduction of social benefits. And while you are drafting Wills, make sure the disabled person drafts one too, and prepares a Power of Attorney to nominate a trusted person to provide continuing financial assistance.
Debt
- Paying off debt quickly can help you avoid painful interest charges which delay saving for retirement and investments. How, you say?
Don’t borrow for personal use items, or if necessary, repay before interest charges start. Or set up a plan to repay debt regularly and quickly.
Mortgages to purchase residential property are a good and necessary borrowing. Seek the lowest rates available. If your income/job is stable, get lower rates by taking short term mortgages. If less certain, lock in five-year rates, when rates are historically low.
Sell off investments to repay debt. Then borrow back to buy similar investments, if secure. The interest will then be tax-deductible (as incurred for investment purposes), and cost your half as much.
- Regular savings every month can help you to avoid debt on credit cards, and allow you to have funds available for retirement savings, company stock plans, and emergencies.
RESPs
- Registered Education Savings Plans help you to provide for post-secondary education at universities, colleges and technical schools, by setting aside annual contributions to accumulate on a tax-deferred basis for students in your family. The governments help by matching your contributions. Investment income will only be taxable in the student’s hands and only when funds are withdrawn. And at that time the student will have tuition tax credits and low taxable income, so the income may be tax-free.
- RESPs not used may be applied to other students in the family, including yourself if named as a beneficiary and if you return for more classes or technical training.
- Government grants and investment income in RESPs not used by a student will be taxable. Contributions made over the years to an RESP may be rolled into an RRSP for your retirement.
- It is no longer easy to pay salaries to non-working students, or split investment income or dividends with them. So savings for education become more crucial. Accumulate students’ earnings in an education savings account, which allows you to demonstrate that they earned the funds themselves.
Tuition Fees
- Tuition fees paid for post-secondary education are precious. They provide tax credits which must first be used by the student to reduce his or her taxable income. Then any excess credits can be passed along to a designated parent or grand-parent, up to $5,000 credit amount per annum. Excess tuition credits can be carried forward to reduce the student’s taxes in subsequent years.
- You must impress upon the student how valuable it is to report these credits annually for use themselves or for their parents or grand-parents. They could result in a tax-free year for their first year of working. The required tax slips are provided in the student’s digital website or by request to the school registrar.
- Students learning outside Canada often pay even larger tuition and may obtain the same tax relief, often on much larger tuition fees. If the tax credit is not used by the student it can be made available to a parent to the extent of $5,000, and/or carried forward by the student. But the student has to ask the registrar to complete the required receipt.
- Bequests from grand-parents may be invested in a student’s name, and provide investment income and capital for educational use.
Retirement
- Retirement planning calls for a couple to work together to build savings in the hands of the lower-taxed partner. This could mean contributing to a spousal RRSP, building investment portfolios, reducing debt including school debt. Just make sure you document these steps in case of a marriage breakdown.
- If not fully provided by the employer, pension and RRSP contributions may be deductible within limits prescribed by tax authorities. These should be used to the maximum to provide income after you stop working.
- Employees can also benefit from childcare expenses paid.
- Employees and executives can benefit from stock options plans and share purchase programs. Both provide ways to participate in the growth of the employer corporation, and to convert some gains into stock options gains or stock sales capital gains, taxable at one half the normal tax rate.
- Employer scholarship programs can help children who qualify. Some employers will hire sons or daughters to provide them with valuable experience.
Business Expenses
- Operating a business can be profitable and less taxing if you practice good accounting, follow the rules, and report on time. Several expenses can be partially for business and partially for personal use, so don’t forget to claim the business portions. When in doubt ask your accountant.
- Paying salaries to a spouse and to children may be permitted as a business deduction if you can honestly make the case that they really are for business purposes, and that they are reasonable.
- Travel for business purposes could include travel expenses to study competitor operations or to seek new markets. But not to create a whole new business.
- Expenses for use of a truck or car for business purposes can be acceptable provided you document how the vehicle was used, and separate out the personal portion. The same can go for computers, telecommunication equipment, and even partial use of your premises for a permanent office.
- A business can be incorporated, and result in a lower tax rate than reporting all the income personally. This can help you build up the business and make new investments to expand. Now you will need a good accountant to help you make the most of your new opportunities.
- Employees cannot usually deduct business expenses, which are presumed to be chargeable to the employer. If however the employee must provide her own automobile or office premises, if working remotely, then these may be deductible if supported by the employment conditions.
