High-income earners must carefully consider their salary, investment income, and capital gains in a web to reveal how to pay their taxes every year when tax season rolls around. Uncovering tools to reduce taxes is in high-income earners’ best interest.
Tax strategies for high-income earners can include using registered accounts like a TFSA, RRSP, and RESP, transferring income to your spouse, and making tax-efficient investments such as flow-through shares and Canadian Dividend Tax Credit.
Using these strategies, you can reduce your taxable income and make the most of your money from all sources.
Using Registered Accounts
Registered accounts are investment accounts given tax-deductible, tax-deferral, or tax-exempt status. These accounts are registered with the government and typically come with a host of rules, including contribution limits and withdrawal restrictions.
The main benefits of registered accounts are they offer versatility and flexibility regarding your income and tax-deduction strategy.
Tax-Free Savings Account
A Tax-Free Savings Account (TFSA) allows you to earn non-taxable income from an investment portfolio. A TFSA generates income from investments, capital gains, and dividends without being subject to a marginal tax rate. Withdrawals from a TFSA are also non-taxable.
TFSA contributions are limited to dollar amounts prescribed by the Canadian Revenue Agency (CRA). The annual dollar limit is indexed to inflation. For 2022, the annual contribution limit is $6000.
High-income earners can also make a gift to adult family members to invest in a TFSA. This money is not subject to income attribution as long as it remains invested in the TFSA, making it an effective tax-saving strategy.
Registered Retirement Savings Plan
Earners can deduct the amount they contribute to their Registered Retirement Savings Plan (RRSP) from their annual taxable income. RRSP income is also tax-deferred, meaning the investment income and capital gains are non-taxable until a withdrawal is made.
When an earner contributes to an RRSP, they effectively reduce the amount of income available to be taxed, which could mean significant savings come tax season.
Registered Education Savings Plan
A Registered Education Savings Plan (RESP) can help if you have children and plan to pay for post-secondary education. RESPs are tax-deferred, similar to RRSPs. However, when a withdrawal is made, the income is typically taxed at the child’s rate, which will likely be lower than yours.
Transferring Income to Your Spouse
Transferring income, sometimes referred to as income-splitting, is an effective tax planning strategy. Every year on your taxes, you can opt to share some of your income with your spouse. This method is often used in instances where one spouse makes significantly more money than the other.
Earners in Canada can elect to split up to 50% of their eligible pension income with their spouse. In Canada, earners can only do this if one partner is above 65 years of age. However, there are other methods you and your spouse can use to reduce your tax burden.
For earners under the age of 65, a higher-earning spouse can contribute to their partner’s RRSP to equalize future retirement income. The higher-earning spouse can’t contribute more than their maximum allowable contribution to their own RRSP, and contributions reduce the higher-income spouse’s limit.
A spousal RRSP equalizes after-retirement income, reducing the family’s tax burden. This reduction means more funds are available for endeavours during retirement.
A spousal loan allows high-income earners to transfer investment income and capital gains to their spouses to take advantage of the lower-earning spouse’s lower marginal tax rate. The loan is made at the CRA’s prescribed interest rate.
Once the loan is made, the lower-earning spouse can create a portfolio in their name to generate their own investment income. Any income earned on top of the loan is taxable to the higher-income spouse who made the loan.
For a spousal loan to be effective, the lower-earning spouse must pay the interest on the loan every year. If they don’t, the CRA’s attribution rules come into effect, meaning the income generated by the loan is attributed back to the higher-earning spouse.
Making Tax-Efficient Investments
If higher tax rates worry you, then you can stop that anxiety at the source by making tax-efficient investments. These types of investments can make up a large portion of your overall income strategy, all while reducing your taxable income.
Flow-through shares (FTS) are typically granted to mining, oil and gas, renewable energy, and energy conservation corporations. FTSs are generally awarded to corporations needing help raising capital for development projects.
FTS grant tax credits when the corporation renounces expenses to you personally, which you can deduct from your income on your annual tax return. Tax deduction from FTS’ is not limited to income generated from the corporation issuing the flow-through, so they reduce your net income, which is an overall benefit.
Canadian Dividend Tax Credit
Dividend-paying corporations already pay tax. When corporations pass dividends along to shareholders, the shareholders are then able to claim a credit since the tax has already been paid to the CRA. The Canadian Dividend Tax Credit is an excellent way to reduce your taxable income if you hold dividend-paying stocks.
Only dividend income from recognized Canadian companies is eligible for the Canadian Dividend Tax Credit. Using it can significantly reduce your taxable income and lead to yearly savings.
Get Financial Advice
Here at Qopia Financial, we strive to provide earners with the advice they need to make the most of their wealth. From tax consultation, estate and financial planning, and tactical investment advice, a financial advisor can make a world of difference when it comes to making your money go further.
Qopia Investments is a trade name of Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and a Member of the Canadian Investor Protection Fund (www.cipf.ca). Qopia Investments is registered to advise in securities and mutual Funds to clients residing in Alberta, Ontario, Saskatchewan, and British Columbia. This publication is for informational purposes only and shall not be construed to constitute any form of investment advice. The views expressed are those of the author and may not necessarily be those of ACPI. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.
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