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Avoiding Taxes While Building Wealth

Do you want to pay less taxes next year?
Now is the time to start adjusting your strategies to ensure that you take advantage of every opportunity available to you.

Tax rates have declined in Canada over the past five years, and are continuing to decline. The provincial government was first to jump on the tax cutting bandwagon. The federal government has slowly lowered your taxes in the last couple of years, but has now committed to cutting taxes dramatically over the next few years.

Our top 5 strategies for avoiding taxes while building wealth are as follows:

1. Go for capital gains. Capital gains income is taxed more favorably than interest or dividend income. before the February budget, 75% of capital gain was taxable. Now only 50% of a capital gain is taxable. This means that for a person in the top tax bracket, the tax rate will be approximately 46% on interest income, but only 31% on capital gains. The 15% difference should be a huge incentive to convert interest-bearing investments to mutual funds that generate capital gains.
2. Use your RRSP carry forward this year. Tax rates are falling, so RRSP contributions will have a bigger impact while the rates are still at higher levels. We recommend borrowing (though the interest is not tax deductible) to maximize your RRSP contributions this year. If you own stocks or bonds outside your RRSP they can be contributed "inkind" as part of your RRSP contributions to a self directed RRSP. RRSP contributions will always be important, but they will have less immediate impact in the coming ears as federal and provincial income tax rates continue to fail.
3. Split incomes. If you are self employed you can pay your spouse a salary to even out your incomes. More and more individuals are working out of their homes on contract work and can pay their spouse or children a salary and deduct the expense from their income. The requirement by Revenue Canada is that the work performed is legitimate and the salary is reasonable. Retirees can split Canada Pension Plan to help equalize incomes.
4. Deduct your interest. The following is an example. If you have $50,000.00 mortgage on your house, then sell your investment portfolio and use the proceeds to pay off your mortgage. Now take a new mortgage on your house and buy back the assets you sold. You still own the same stuff, but now your mortgage has been turned into a tax-deductible one. You need to review the tax consequences of selling any existing investments with your tax advisor, and be aware of any fees for all the above transactions.
5. Accumulate a pension tax free outside your RRSP. This strategy is for those who have topped up their RRSP's and have extra cash. Using Universal Life you can take advantage of a loophole in the Income Tax Act which allows you to overfund Universal Life by thousands of dollars a year. The extra money will be sheltered from tax and can be invested in growth assets. At retirement time, the cash can be withdrawn on a monthly basis to provide you with income. At retirement time, the cash can be withdrawn on a monthly basis to provide you with income. At death, all the remaining proceeds in the plan are paid out tax-free.

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