Tax Planning & Advice

  • Do you take advantage of all legitimate tax deduction options available?
  • Are your taxes as low as they can be?
  • Identify income splitting opportunities
  • Advice and file return - defer, divide, deduct

Your tax bill is likely your single biggest expense, year in and year out. (Unless you’re prone to buying large yachts and tropical islands, of course.)

Here are a few hints about how to legitimately reduce your tax returns:

Income Splitting: It is Legal and It is Profitable!
Income splitting is one of the few strategies available to most people to reduce their tax bill. And while there are some rules you’ll need to keep in mind, putting income splitting to work for you and your family is often a very simple process.

Essentially, income splitting involves trying to balance out the amount of money the various members in your family make. Although the numbers don’t work in every situation, this can often cut a household’s tax bill because of the effect of different tax brackets.

For example, a household where one person makes a good deal of money and the other person makes very little may pay a much larger total sum to Revenue Canada than a household where both partners have modest incomes. In this case, the goal of income splitting is to simply move some income out of the hands of the person in the higher tax bracket and into the hands of the person in the lower tax bracket.

How Your Investments Are Taxed
Just like your paycheque, the only real number that matters to you when it comes to investing is what you make after Revenue Canada takes its share. Sure, a GIC paying 10 per cent sounds terrific (if such a thing were available today!), but consider your after–tax return. If you were in the top tax bracket of around 50 per cent, and held that GIC outside a tax–sheltered account such as an RRSP, you would only make 5 per cent, which is quite a difference.

What makes things more complicated is that the tax you pay varies with the type of investment. This can have a great impact on your after–tax return, as well as how you arrange your portfolio. (Note that you don’t have to pay any tax on gains earned by money in a tax–sheltered accounts such as an RRSP, RRIF or RESP until you make a withdrawal.)

The most heavily taxed type of investments are those that earn you interest income, such as GICs or CSBs. Stocks, real estate, and other investments that entail more risk but have the potential for higher returns in the form of capital gains are taxed less. Dividends from Canadian corporations have the lowest effective tax rate.

Here is how you are taxed on

Interest Income
Interest–earning investments have the highest tax rate. Any money you make on GICs, T–bills, CSBs and even your savings account is taxed at your full marginal tax rate. So, for example, if you earn $40,000, which would put you in a marginal tax rate of around 42 per cent, you only get to keep 58 per cent of any interest you earn.

Capital Gains
Capital gains are taxed at your full marginal tax rate. So why do we say that they have a lower tax rate than interest income? Because only three-quarters of any capital gain is subject to tax. Say you’re in the 42 per cent bracket, and you make $4,000 on the sale of a stock. Only 75 per cent — or $3,000 of your profits — would be taxable at your rate of 42 per cent, for a total tax bill of $1,260. The result is that the effective tax on your capital gain would be approximately 31.5 per cent as compared to 58 per cent for interest income.

Here are the approximate effective tax rates on capital gains for the different tax brackets (subject to change):

Effective Tax Rate
on Capital Gains
Up to $29,590 27% 20%
$29,591 to $59,180 41% 31%
$59,181 or higher 50% 37%

Dividends from Canadian corporations have the lowest effective tax rate of any investment. A dividend is your share of a company’s profits. These profits have already been taxed before they are distributed to shareholders. To account for this, a complicated formula is used to lower the tax rate you’ll pay.  

The Formula
First, any dividends you earn are increased to the full value of the income the company is assumed to have made before tax. This is done by increasing the value of the dividends you receive by 25 per cent (called "grossing–up"). If you received $1,000 in dividends, you would actually show it as $1,250 on your tax return.

The next step is designed to give you a credit for the amount of tax it’s assumed the company has already paid on that income. This is done by taking two thirds of the amount of the 25 per cent gross–up from the step above. The result is you receive a tax credit worth 13.33 per cent of the inflated figure for dividend income you put down on your tax return. This tax credit is actually worth in the neighbourhood of another 50 per cent, because the reduced federal tax will mean a reduction in your provincial tax as well.

Here’s a look at what this means in terms of the tax rate you’ll pay after the number crunching is done (subject to change).

Tax Rate
on Salary Income
Tax Rate
on Dividend Income
Up to $29,590 27% 7%
$29,591 to $59,180 41% 25%
$59,181 or higher 50% 33%

The different tax rates on investments makes it difficult to compare your investment options. Investment A may look like it pays a lot more than Investment B, but your after–tax rate of returns may mean that B is your best bet.

For those trying to compare different income opportunities, there is an easy trick that allows you to quickly compare dividend and interest investment options. To find the interest rate you would have to get to make the same after–tax return on a dividend–paying investment, multiply the dividend yield by 1.3. For example, say you were looking at a preferred share offering that paid a 6 per cent dividend. To make the same amount after tax, you would have to find a GIC or other interest–bearing investment paying around 8 per cent (To be exact, 1.3 x 6 per cent, or 7.8 per cent).

Self Employed? Let’s Talk Tax
The attractions of greater opportunities for tax planning moves many people to set up shop as independent contractors. One route some people take is to work out a deal with their employer to be removed from the employee payroll and put on the contractor list.

This can be a mistake, and can cause you some entanglements at tax time. It doesn’t matter what you call yourself. In order to file a return as a self–employed person, you must meet Revenue Canada’s requirements. If you don’t, you’ll be treated as an employee, and your self–employed tax planning efforts will go to waste.

Preparing Your Tax Return: Calling in the Hired Help
If you can’t look at a tax form without feeling faint, your tax situation is complicated, or you just don’t have the time or energy to do your return yourself, your first preference should be your financial advisor since this person will know your financial situation in full.

A competent financial advisor will be able to do much more than simply add the numbers together correctly. They will be able to point out money–saving moves you may have missed, as well as suggest planning strategies you can use to cut your taxes down in the future. Hiring help can also reduce your chances of being audited because of mistakes you might otherwise make.

MoneyWI$E Financial Inc. consulting fees are $250 per hour for tax planning and advice, and at least $50 for tax filing.

However, you will incur no cost if the tax advice given is relative to your purchase of mutual funds, for retirement, education or other form of investment planning, through MoneyWI$E Financial Inc.

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