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Tax planning for individuals and families in an ongoing process to reduce the overall taxes owing by the family. It is usually the cumulative result of different tax planning strategies. The following tax planning techniques should be considered in consultation with our experienced Canadian tax lawyers:

FAQ’s Individual & Family Income Tax Planning:

What does income splitting mean?

The higher your income, the higher your tax bracket and the more tax you’ll need to pay. Income splitting is a practice used to reduce the overall tax bracket of a household. The partner earning the most money and in the higher tax bracket transfers a portion of his/her income to the lower-earning spouse taxed at a lower rate.

What types of payments can I put in my RRSP?

You can make continued cash contributions to your RRSP or build an investment portfolio with the money that you contribute. Investment options include Guaranteed Investment Certificates (GICs), mutual funds, real estate investment trusts, and exchange-traded funds. You can put funds to your RRSP up to the allowable limit determined by the unused contributions from the previous year and your income earned in the current year.

What kind of distributions qualify for income splitting with my spouse or common-law partner?

You are entitled to transfer up to 50% of qualified pension income to a lower-income spouse, and to deduct contributions you make to your spouse’s or common-law partner’s RRSP. Both distributions provide income splitting advantages by effectively reducing tax on income. Another popular strategy is employing a spouse or common law partner and paying that partner a reasonable salary for employment activities. The spouse or partner must actually be engaged in an activity for the business, and the salary paid should reflect the importance of that work.

FAQ

You should be aware of the three “D’s” to tax planning strategies.

Deduct: Simply put, a deduction is a claim to reduce your taxable income. Common deductions include Pension plan contributions, RRSP contributions, interest expenses and professional fees.

Defer: A deferral is whereby you pay the taxes that are due today in the future. This also means even though you’re not paying taxes this year, you’ll have to pay it somewhere down the line.

Divide: Dividing taxes mean taking an income and spreading it among different taxpayers. For example, instead of you paying taxes on $70,000 of income, it would be more beneficial to have that amount be paid between two people, such as husband and wife. However, rules of division must comply with the CCRA.

While the list is non-exhaustive, here are 12 tips for high income earners to reduce their taxes: child care expenses, maximize RRSP contributions, maximize spousal RRSP contributions, claim medical expenses, donate generously, split your pension, transfer tax credit to your spouse, contribute to RESP, home office tax credits, employ in-house, incorporate and open a TFSA.

I’ts a bit complex.

According to the Canada Revenue Agency, tax avoidance is generally within the letter of the law, but actions of tax avoidance may sometimes transgress tax law.

For example, assume you own a business and you hired your spouse as an employee. However, if you overpay your wife to reduce your own taxable income, then you are transgressing the law. Alternatively, contributing to an RRSP is a type of tax avoidance, which is not only accepted, but is actually encouraged.

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Pro Tax Tip

Tax Audits in Ontario

There are over 350,000 tax audit and review actions conducted by the Canada Revenue Agency on a yearly basis. Around 15,000 of these tax audits deal with “cash only” businesses (i.e. the underground economy). Additionally, an estimated 35,000 are tax shelter audits.

We are a Toronto tax law firm with a Canada wide full service income tax law practice.

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