The goal of tax planning is to minimize your income tax liability. You can achieve this in different ways.

Techniques for Tax Savings:

Income Splitting

Income splitting is simply the process of moving income from the hands of one family member who will pay tax at a higher rate, to the hands of another family member, who will pay tax at a lower rate. Typically, income splitting involves moving income from the hands of one spouse to the other, or from a parent to a child. There are many ways to split income with these family members, and we will show a few of those ideas:

• Paying expenses through the high income earner and investing through the low income earner
• Split investment income with your spouse
• Split investment income with your kids
• Spousal RRSP
• Pay a salary or consulting fee to family members
• A loan/transfer to a "Small Business Corporation" controlled by spouse

To prevent the abuse of income splitting, the Canada Customs and Revenue Agency (CCRA) enforces several rules (called the attribution rules) that, if triggered, will force all or a portion of the income, loss, or capital gain or loss to be taxed in the hands of the transferor (the high-income earner).

Deferred Income

Any plan that provides a tax deduction for a contribution to the plan will provide a deferral of tax on the amount contributed. These type of plans include:

• Registered Pension Plans,
• RRSPs,
• and Deferred Profit Sharing Plans.

In addition, certain plans permit a deferral of tax by providing tax-sheltered growth of the assets in the plan. These plans include:

• Registered Pension Plans,
• RRSPs,
• Deferred Profit Sharing Plans,
• RESPs,
• certain types of annuities,
• Life Income Funds (LIFs),
• RRIFs,

Tax Shelters

A tax shelter is any investment that is protected from taxation due to preferential tax treatment. In order to seriously consider such an investment, you should be in a high tax bracket and consult a qualified professional. Due to the need for continuous legal and tax advice, there are considerable accounting and legal expenses associated with tax shelters. Furthermore, these types of investments tend to be highly risky (in some cases, the government has provided preferential tax treatment for these investments to encourage investors to consider the investments; without these incentives, some of these investments tend to be too risky to induce people to invest in these areas).

Here is a list of tax-sheltered areas:

• Residential or Commercial Real Estate
• Mining Exploration
• Oil and Gas Ventures
• Farming
• Canadian Films and Video Production
• Provincial Venture Capital Programs
• Labour Sponsored Venture Capital Corporations (LSVCCs)
• Limited Partnerships
• Whole and Universal Life Insurance

Paying Income Tax at a Lower Rate

Canadian residents are taxed under a progressive tax system. This simply means that, the higher your income, the higher the percentage of that income that you will pay in taxes. There are certain thresholds where the tax rate increases.

Ontario 2007			Marginal Tax Rate (%)
Taxable Income			Interest and Regular Income	Capital Gains	Non-eligible Canadian Dividends	Eligible Canadian Dividend*
$  -	To	$9,600	-	-	-	-
$9,601	To	$11,826	15.00	7.50	2.71	(5.02)
$11,827	To	$15,100	27.60	13.80	5.01	(6.92)
$15,101	To	$35,488	21.55	10.78	3.86	(5.97)
$35,489	To	$37,178	24.65	12.32	7.74	(1.47)
$37.179	To	$62,490	31.15	15.58	15.86	7.95
$62,491	To	$70,976	32.98	16.49	16.87	8.66
$70,977	To	$73,616	35.39	17.70	19.88	12.15
$73,617	To	$74,357	39.41	19.70	22.59	14.48
$74,358	To	120,887	43.41	21.70	27.59	20.28
$120,888	And	Over	46.41	23.20	31.34	24.63

*Eligible Canadian Dividends include dividends paid after December 31, 2005 by:

• Canadian Public corporations;
• Other corporations that are not Canadian-controlled public corporations (CCPCs) and are subject to the federal general corporate tax rate; and
• CCPCs to the extent that the CCPC income is not investment income and is subject to the general federal corporate tax rate.

 

In order to be put in a lower tax bracket you must reduce your taxable income. To do so, you must take advantage of all available deductions. The type of deductions you can claim will depend on whether or not you are self-employed, or employed. Deductions to consider include:

• auto expenses,
• travel expenses,
• meals and entertainment (for business meetings),
• supplies and equipment to perform your job, etc.

Incorporation

In general, corporate tax rates are lower than personal tax rates. In addition, being incorporated allows for more tax deductions since things like travel and entertainment can be partially written off. Furthermore, income can be split between yourself and your corporation by keeping income in the company when it is earned (if the corporate tax rate is lower) or by paying yourself a salary (if the personal tax rate is lower). For example, if you have a corporation, you should pay yourself at least the basic minimum claim of $9,600 since you pay no personal income tax on this amount, but beyond that you should compare the corporate and personal tax rates (if the personal tax rate is higher, then keep the income in the company and if the corporate tax rate is higher, then pay income out as a salary to yourself).

A further benefit to incorporating is the small business tax rate. If your company can be categorized as a "Small Business Corporation," then you are eligible  for this reduced tax rate(depends on province) of 14% to 21% on the first $400,000-$500,000 of active business income and 32% to 38% on the remainder.

Residences

Principal Residence
Your principal residence is that place where you regularly reside. You or your family unit (spouse and unmarried children under 18) are exempt from capital gains on the sale of the structure itself, the land that the structure is directly on and up to and up to one half hectare of extra land. Anything beyond that may be taxable (although there may be cases when land in excess of half a hectare will qualify for the exemption). Your principal residence provides a good opportunity to earn a tax-free capital gain. However, if you buy and sell houses on a frequent basis, it is possible that CCRA may consider these transactions to be "adventures in the nature of trade" and could tax any profits as business income and not permit you to claim your principal residence exemption on those properties.

Secondary Residence
A secondary residence is any residence that you own but where you do not regularly reside most of the year. Gains on such residences are subject to capital gains tax and capital losses are deductible against any capital gains.

Employee Benefits

Some benefits are taxable and some benefits aren't. In order to claim benefits as one or the other, it is imperative that you maintain accurate records.
List of Taxable and Non-Taxable Benefits

Taxable Benefits	Non-Taxable Benefits
Interest free or low interest loans Traveling expenses of employee's spouse, board and lodging Wage loss replacement plans Gifts Travel benefits Premiums under most government health care programs Cost of tools Personal use of employer's vehicle Trips and other prizes Rent-free or low-rent housing	Moving expenses Premiums under a private health services plan Subsidized meals Subsidized school services Daycare facilities Transportation to work Discounts on merchandise Employer contributions under provincial hospitalization and medical care insurance plans Uniforms and clothing for work Educational assistance Employer provided recreational facilities Club memberships for business purposes

 

Optimizing Investment Income Taxation

The tax treatment of investment income is different from that of regular income. Essentially there are three types of investment income: interest, dividends and capital gains.

Interest Income
Investments that earn interest income include the interest portion (not repayments of principal) of: term deposits, GICs, Canadian Saving Bonds, mortgages (where you are lending), bonds (the coupons or, in the case of stripped bonds, the entire return) or any interest that is received from a lending instrument
Investment income that comes in the form of interest is taxed at your going personal rate if it is held by you and at the corporate rate if it is held by your corporation. Therefore, from a tax perspective there is no advantage to receiving income in this category, relative to other investment income categories. Annually you will receive a T5 slip from your financial institution indicating your interest income for your tax return.

Dividend Income
A dividend is a distribution of profits from a corporation to the owners (shareholders). A dividend can be from a preferred share or a common share and can be in the form of shares or in the form of a cash distribution. Since Canadian corporations usually pay tax on profits before they are then distributed to shareholders as dividends, dividends from a Canadian corporation receive a somewhat more favorable tax treatment than interest income in your hands personally.

Capital Gain
Capital gain (loss) occurs when you sell an asset or investment for more (less) than you purchased it. A capital gain or loss can only occur when an asset is sold, not when the asset value increases while still in your hands. In general, these types of investments do not guarantee a return. Just 50% of capital gains are taxable. Just as 50% of a capital gain is taxable, just 50% of a capital loss can be deducted against taxable capital gains.

Investments that give rise to capital gains or losses include: stocks, equity mutual funds (all proceeds whether set up as a trust or corporation), gains and losses on bond sales (i.e., when you sell a bond for a different price than you bought it for), real assets (i.e., machinery), real estate and basically any asset that you purchase that is sold for a different price. Types of investments that may be exempt from capital gains tax include: your principal residence, your listed personal property, and investments eligible for the lifetime capital gains exemption (qualifying farm property or qualified small business corporation shares).

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