Advanced Tax Strategies for High-Income Earners in Canada

As a high-income earner, you may be aware taxes can take a significant chunk of your income. However, there are several advanced tax strategies you can implement to reduce your tax burden and keep more money in your pocket.

Advanced tax strategies for high-income earners in Canada include maximizing investments, incorporating businesses, taking advantage of capital gains exemptions, splitting income, making charitable contributions, and seeking advice from dedicated tax specialists.

A financial advisor can offer tools for tax planning, but a solid knowledge base will help you take steps in the right direction. Stay aware of important deadlines and implement strategies for maximizing contributions and claiming deductions.

Maximize Your RRSP Contributions

One of the most effective tax strategies is to maximize your Registered Retirement Savings Plan (RRSP) contributions. RRSP contributions are tax-deductible, meaning you can deduct the amount you contribute from your taxable income. This can significantly reduce your tax burden, particularly if you’re in a higher tax bracket.

In 2023, the RRSP contribution limit is 18% of your earned income, up to a maximum of $30,780. So if you still need to maximize your RRSP contributions, it’s worth considering doing so before the deadline, typically March 1st of the following year.

Contribute to a Tax-Free Savings Account

Another tax-effective way to save for your future is to contribute to a Tax-Free Savings Account (TFSA). Though yearly limits are lower and TFSA contributions are not tax-deductible, any investment growth and withdrawals from a TFSA are tax-free.

Most tax professionals consider RRSPs a more effective strategy for high-income earners. However, if you’ve already hit the contribution limit on your RRSP and have surplus income, a TFSA could be an attractive supplemental investment to minimize your tax burden.

For 2023, the TFSA contribution limit is $6,500. If you’ve never contributed to a TFSA before, you get to make use of any unused contribution room from previous years.

Consider Incorporating Your Business

If you’re self-employed or own a small business, incorporating your business could allow you to maintain funds within a company structure with a more appealing tax treatment. For example, a corporation’s federal net tax rate claiming small business deductions could be as low as 9%. In comparison, an individual could have a much higher tax rate depending on their bracket. 

You’re also creating a separate legal entity, meaning your business income is taxed separately from your personal income. With limited liability, this separate entity helps prevent you from risking your private wealth if there are problems with your business operation.

However, please note incorporating your business can also come with additional costs and administrative responsibilities. It’s not always as easy as paying a fee and filling out a form. Make sure to weigh the pros and cons before making a decision.

Take Advantage of Capital Gains Exemptions

If you invest in stocks or other securities, you may be able to take advantage of capital gains exemptions to minimize your tax burden. You’re eligible for this exemption if you make a profit after selling a small business, a farm property, or a fishing property.

For 2022, the lifetime capital gains exemption (LCGE) limit has increased to $913,630. However, only half of the realized capital gains are taxable. This means the deduction limit is actually $456,815.

Taking advantage of this exemption can get complex, so it’s essential to work with a qualified tax professional who can provide advice and guidance about the eligibility requirements.

Split Income with Your Spouse or Common-Law Partner

If you or your spouse has a significantly higher income than the other, you may be able to reduce your tax burden by splitting it. This effectively means transferring income from the higher-earning spouse to the lower-earning spouse, which can result in significant tax savings if it brings you into a different tax bracket. This is particularly relevant when it comes to retirement.

Not every type of income is eligible for income splitting. Split income must be derived from a Registered Retirement Income Fund (RRIF) or an RRSP.

Similarly, a higher-income family member can loan lower-income members funds as a prescribed rate loan. This loan may shift the money into a lower tax bracket, and the recipient can invest the money. However, the rate fluctuates, and the Canadian Revenue Agency (CRA) sets it, so this strategy is best implemented when the rate is low.

This strategy, however, is still a loan. You need to document it, and the loanee must pay interest annually. In addition, you’ll want the investment gains to offset any loan structuring expenses, so this strategy does come with a certain amount of risk.

Make Charitable Donations

If you’re looking for a way to reduce your tax burden while positively impacting your community, consider making charitable donations. In Canada, charitable contributions are tax-deductible, and you can claim the tax credits for the previous 5 years if you haven’t claimed them yet.

The federal tax credit for charitable donations is 15% on the first $200 of donations and 29-33% on amounts over $200. This strategy can add up to significant tax savings if you’re making large donations to charity.

In addition to the federal tax credit, there are also provincial tax credits. For example, in Alberta, you can claim a provincial tax credit of 10% on the first $200 and 21% on any amount over $200.

Remember, not all charities are eligible for tax-deductible donations. So do your due diligence to investigate any organization before donating to ensure they’re registered and approved by the CRA.

Dedicated Tax Specialists

Paying taxes is a civic duty, but that doesn’t mean you have to pay more than you owe. Contact Qopia Financial, and our team can help develop personalized tax strategies for minimizing your tax burden so you can enjoy more of the fruits of your labour.