Reducing Taxes

How can I reduce the amount of tax I have to pay?

If you’re like most people, just hearing the word “taxes” sends a shiver down your spine. Even though Canada is one of the highest taxed nations in the world, there are strategies you can take while you’re working and when you’re ready to retire to help reduce your tax bill.

During your earning years

• Contribute as much as possible to your Registered Retirement Savings Plan (RRSP). RRSPs are the smart choice because you can deduct your RRSP contribution from your income each year to save on taxes. Plus, your investment enjoys tax-free compound growth
• For couples, try to make sure your retirement income will be roughly equal so it is taxed more favourably by contributing to Spousal RRSPs
• Take advantage of any tax free transfers to your RRSP. For instance, if you receive a retiring allowance or severance package, you are allowed to transfer $2,000 per year of service with your employer before 1996 to your RRSP tax free and an additional $1,500 per year before 1989 for which employer contributions have not been vested
• In the event that you have maximized your RRSP contributions, Empire Life Trilogy Universal Life insurance can offer you further tax sheltering with tax-free growth. Trilogy's Maximizer is a tax-planning strategy that uses universal life insurance to help you shelter your investment growth while minimizing your insurance costs.
• Choose your investments wisely and be aware of their tax consequences: For instance, many people don’t realize different types of investment income are taxed differently. The order of how investment income is taxed is:
  • interest income and foreign income is heaviest hit, because it is considered regular income
  • Canadian dividend income is next thanks to the dividend tax credit
  • capital gains is now the most preferential tax treatment because 1/2 of the gain is tax-exempt (a capital gain occurs when you sell or transfer an asset for more than what you paid for it.) As a result, it usually makes more sense to hold interest-bearing investments, such as GICs and GIOs inside your RRSP where they’ll be fully tax sheltered, and investments producing dividend income and capital gains outside your RRSP if necessary. Capital gains are generally not taxed until you sell or “dispose” of the asset.
• Many people also don’t realize segregated funds offer a tax advantage over mutual funds. When you buy units in a mutual fund, you are taxed when distributions are made, usually once or twice a year. This means you may pay tax on income the Fund received, even if you didn’t hold units at that time the income was earned. Segregated funds, on the other hand allocate income based on your exact share of the Funds’ income for the time you actually owned the units.
• Many insurance products today have an investment component that receives preferential tax treatment. For instance, Empire Life Trilogy, Universal Life insurance, provides solutions for your insurance and investment needs. Trilogy’s internal safeguards ensure your policy maintains its tax-exempt status.

At Retirement

• If you haven’t already done so, buy insurance to cover capital gains taxes on vacation properties and investments so when it comes time to sell or transfer these assets, you won’t face a huge tax bill
• Consider buying a prescribed annuity with your savings. This type of annuity pays you a regular income and spreads the tax evenly over the term of the annuity
• Minimize probate fees by naming a beneficiary on your insurance policies and investment policies
• Investigate these income splitting strategies for spouses:
  
  • Make sure your retirement incomes are as equal as possible so you don’t have any of your Old Age Security benefits clawed back
  • Take advantage of the CPP/QPP split: if your spouse’s marginal tax rate is lower than yours and you are close to retirement, consider splitting your CPP/QPP benefits between you
  • Make sure both you and your spouse have at least $2,000 of pension income when you retire so you can take advantage of the Pension Income Credit. You can do this by purchasing a life annuity if one of you doesn’t have qualified pension income

At Death

Consider these Estate Planning Strategies

This is just a brief overview of some of the tax saving strategies available to you. Talk to an independent advisor for more information.

Registered Retirement Savings Plan
Universal Life insurance
Guaranteed Interest Options
Segregated Funds
Insurance Solutions
Retirement Choices - Annuities
Estate Planning
Why Use an Independent Advisor?