As you plan with your advisor, consider these 10 strategies as you seek to increase and manage your wealth creation plan:
1. Deduct interest if you own a business. If you borrow money to finance your business expenses, you can write off most of these purchases in the transaction year (larger purchases must spread out the capital cost over a longer period). Consider arranging your financial affairs to recognize the portion of your loan or credit card repayments that is interest and include this annually as a write-off.
2. Consider income splitting. Income splitting is the idea of moving income to family members who are in a lower tax bracket than you. To split family income with your spouse, you can invest the lower-earning spouse’s income, while the higher earner pays family living expenses and taxes. You may also want to contribute to a spousal RRSP. If you own a business, where applicable, pay your spouse a salary for work performed on behalf of your business. To split income with children, you can give them cash or any other assets (if they are over 18). For children under 18, consult with your financial professional to learn more about attribution rules. Also, make sure you maximize your CPP as much as possible for both spouses to ensure a higher CPP payment at retirement.
3. Structure your investments for tax. To avoid paying high taxes on income from earnings or interest, structure your investments to earn primarily capital gains outside your registered accounts.
4. Defer the tax. If you are investing in non-registered holdings but have not maximized your RRSP, you may be losing the opportunity to deduct up-to-the-maximum contributions from income. You also miss out on the pre-retirement tax deferral during all the time that elapses until you retire. You could be deferring these tax liabilities on investment income until you withdraw the funds held within your RRSP or your RRIF.
5. Create trusts. Trusts are ideal if you hope to transfer income and/or capital gains to a beneficiary. If you own a business, you can use trusts to pass the business to your children for tax purposes while still retaining some control. Make sure you obtain expert advice.
6. Donate. Charitable donations are effective wealth management tools because they provide you with a tax break while making a real difference for a cause important to you.
7. Develop a strategy. As with all things in life, good intentions are seldom enough. A written professional investment process can ensure you reach your financial goals while not depending on Canada Pension Plan (CPP). Begin to envision independent financial success.
8. Start early because time adds value to money. Habitually pay yourself first every pay-cheque before you pay your bills. Consider that when all items in Canada are considered, the costs of goods rose 3.4% from 2020 to 2021. Source: Statistics Canada
The Rule of 72: divide your annual percentage rate of return (yield) into 72. The answer will tell you how many years are necessary to double your money.
9. Maximize your RRSP contribution. As long as one earns an income (or where an individual has unused contribution room), an RRSP contribution creates the biggest tax break available to most Canadians. Canada Revenue Agency (CRA) allows you to contribute up to 18% of your previous year’s earned income up to a maximum threshold, minus pension adjustments reported by employers.
Note: The tax savings are calculated at a compound annual rate of 10%, without income tax deducted. Taxation is deferred until income is withdrawn from a registered investment. Conservative calculations can also be run at 5%, which may be safer, given the recent market decline.
10. Implement TFSA investments. Consider using TFSAs to delay your CPP payments. The annual TFSA dollar limit for contributing is now $6,000 per annum (2020). Money that you earn or withdraw from a TFSA is tax-free. Conversely, the sooner you begin withdrawing money from your RRSP or RRIF, the sooner you will pay withholding taxes on the withdrawals. Thus, use a TFSA strategy to hold off taking CPP payments to gain the increased payments later.
You will accumulate TFSA contribution room for each year even if you do not file an Income Tax and Benefit Return or open a TFSA.
- The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.
- The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
- The annual TFSA dollar limit for the year 2015 was $10,000.
- The annual TFSA dollar limit for the years 2016 to 2018 was $5,500.
- The annual TFSA dollar limit for the year 2019 and 2020 is $6,000.
1 Covey, Stephen R. (2015-06-20). The 7 Habits of Highly Effective People: Interactive Edition (Kindle Locations 562-563). Mango Media. Kindle Edition.