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Income Tax Planning

2

Key Concepts

• Progressive nature of personal taxation in

Canada

• social, economic and political objectives of

the Income Tax Act

• deferring income tax is beneficial to the

taxpayer because of the time value of

money

Tax Minimization Strategies

• Tax avoidance vs. tax evasion

• GARR

• Tax Minimization Strategies

– Income deferral

– income splitting

– income spreading

– tax shelters

Income Deferral

• RPP - registered pension plan (employer)

• DPSPs - deferred profit-sharing plans

(employer)

• RRSPs - registered retirement savings

plans

• Capital gains

Tax Minimization Strategies

• TFSA

• Make interest tax deductible

• Pension Income-split with spouse

• Transfer used credits from student to

parent

• Spousal RRSPs

Income Spreading Strategies

• Use RRSP to reduce taxable income

during high income years…withdraw in low

income years (when you go back to

school)

• Consider using LLP and HBP

• Set year end for personal corporations and

private companies after the calendar year

end.

Tax Shelters

• Principal residence’s deduction.

Income Splitting

Why Income Splitting?

• The Canadian tax system uses progressive tax rates (the

marginal tax increases as taxable income increases):

• Tax payable on two $30,000 incomes will be significantly less

than that on one $60,000 income

Income Tax Act

• Contains a number of measures to prevent the most

obvious kinds of income splitting strategies, however,

some opportunities do exist. E.g.:

• increase the lower-income spouse’s investment base
• employ your spouse and children
• transfer of business assets
• spousal loans
• reinvesting attributed income
• transfers for fair market value
• transferring capital property to children
• spousal RRSP
• your children’s employment income
• assignment of CPP benefits

General Anti-Avoidance Rule

• The Act provides a general anti-avoidance rule applicable to

all transactions.

• If you come up with a way of avoiding the attribution rules that

is not caught by existing rules, but is a misuse or abuse of the Income Tax Act, it may be caught by GAAR.

Rules that prevent Income

Splitting

• Indirect payments:
  • a payment or transfer made “pursuant to the direction of, or with the concurrence of” a taxpayer to some other person is to be included in the taxpayer’s income to the extent it would have been if paid to the taxpayer… for example, if you direct your employer to pay some part of your salary to your child’s account, that income will still be taxed in your hands.

Rules that prevent Income

Splitting

• Attribution Rules:
  • these rules attribute income from property back to the person who transferred or loaned the property. - Example: let’s say you transfer or loan a bond portfolio to your spouse…the income from that portfolio will taxed in your hands
  • exception: if you transfer for fair market value consideration and report the resulting gain, the rule will not apply.

Income Splitting Opportunities

• Increasing the lower-income spouse’s

investment base:

• the higher-income spouse should pay household expenses…leaving the lower income spouse more disposable income for investing for future income.

• Pay your spouse’s tax bills with your

own funds

• simply make sure that the cheque paying your spouses’ taxes is drawn on your own account. Since the amount you pay goes directly to the government and is not invested by your spouse, there is no property from which income can be attributed. The result is that any funds your spouse would otherwise use to pay income taxes can be invested with the income being attributed back to you.

Income Splitting Opportunities

• Pay the interest on your spouse’s investment loans: - if your spouse has taken out an investment loan from a third party, consider paying the interest. - There will be no attributed provided you do not pay any principal on account of the spousal loan (Since the amount you pay is not actually invested by your spouse, there is no property from which income can be attributed.) - this technique will also preserve your spouse’s assets and thereby increase his or her investment income.

Income Taxation and Tax

Planning

Registered Education Savings

Plans (RESPs)

• Contributions to RSEPs are NOT tax deductible for the contributor.
• There is a tax-deferral opportunity because the contributions accumulate tax-free within the plan.
• On withdrawal, the payments will be taxable in the hands of the beneficiary, provided that the beneficiary is enrolled full- time in a qualifying educational program at a designated educational institution.
• Presumably, the beneficiary will be in a lower tax bracket than the contributor at the time of withdrawal….hence, withdrawals from the plan would be taxed at a lower rate.

The Canada Education Savings

Grant (CESG)

• The federal government will make contributions

to private RESPs to financially assist parents and guardians save for their child’s education.

• CESG is equal to 20% of the first $2,000 in annual RESP contributions per child.
• That amounts to a maximum federal contribution

of $400 annually per child to a lifetime limit of $7,200.

• You can receive CESG grants up to December

31 of the year the beneficiary turns 17.

RESP - Contribution Limits

• Contribution Limits:
  • Maximum annual contribution per beneficiary = $4,
  • Maximum lifetime RESP contribution per beneficiary = $42,
• Unlike RRSPs, if you contribute less than $4,000 in a particular year, you cannot catch up by contributing more than $4,000 in a later year.
• A penalty tax of 1% per month is imposed on excess contributions.
• Maximum period over which income generated in an RESP may be sheltered from tax is 26 years.
• RESPs set up after February 20, 1990 may make payments only to individuals who are full-time students.

RESPs - Use

• Usually established by parents or grandparents

to assist in the financing of a child (or grandchild’s) post-secondary education.

• If the beneficiary (child) does not continue education beyond high school, the accrued income in the RESP remains in the plan or is paid to a designated educational institution……the capital contributed to the RESP can be refunded to the parent (or grandparent) free of tax.

Canada Education Savings

Grant (CESG)

• Federal government will provide a direct grant to the RESP of 20% of the first $2,000 of annual contributions made to the RESP in a year.
• The grant will be worth up to $400 per year for each year the beneficiary is under 18, to a maximum of $7,200 per beneficiary.
• The grant amount will not be included in the annual and lifetime contribution limits for the beneficiary.
• If the $2,000 maximum contribution is not made in a year, entitlement to the grant can be carried forward to a later year (within restrictions).

RESPs

• There are two ways to invest in an RESP:

– enroll in an existing group plan (two or three

major ones which advertise heavily in baby

magazines and pediatrician’s offices) or,

– set up an individual (self-directed) plan, in

which case you have control over the

investment of funds as well as choosing the

beneficiaries of the plan

Where Can you Open an RESP

• Almost any financial institution
• As well as other specialized organizations such

as: Canadian Scholarship Trust (CST) 200-240 Duncan Mill Road Don Mills, Ontario M3B 3P1 CANADA 1 - 800 - 387-4622

Income Taxation and Tax

Planning

Registered Retirement Savings

Plan (RRSPs)

• Introduced by the Federal Government in 1957.
• Specifically designed as an incentive for Canadians who have ‘earned income’ to save during their working years for retirement.
• Is an individual retirement savings plan which has been registered with Revenue Canada
• normally permits deductible contributions to the RRSP and income earned in the plan is exempt from tax until payments are received from the plan.