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Planning is essential to successfully minimize the income tax liability within the legal framework. Not only do our clients save penalty charges from the failure of tax compliance but also from recommendations of tax saving strategies that maximize their after-tax income. Our team is constantly staying up to date on current tax laws and new tax regulations to best assist our clients.
Here are just a few of the tax saving strategies that we use:
• Utilizing certain investment choices (such as RRSPs) to defer tax liabilities to years of lower income
What is RRSP
It’s a registered retirement saving plan in which you or your spouse or common law partner can contribute.
Benefits of RRSP
- 1. Contributions made to the plan are tax-deductible
- 2. Income earned by plan are only taxable upon withdrawal
So you can reduce your current tax liability by making contributions to the plan and will pay tax at a lower rate in future when your income will fall in lower tax band usually upon retirement.
Please contact your tax advisor for further plans suited to your specific circumstances.
• Income deferral strategies to have it subject to a lower tax rate in a later year
Transfers to Family Members
1. Transfers to a spouse or common law partner
Transfers among the spouse or common law partner of all capital properties are treated as tax-free by CRA although you would have to report any capital gain or loss on sale of this property by a spouse to third party. Which means it will be taxed at your tax rate. Although you can elect to transfer this property to your spouse at FMV in which case you would report a capital gain, you would not have to report any future income or capital gain on these assets if the following conditions are met:
- a. FMV must have been paid by a spouse or common law partner at the time of the transfer
- b. FMV election must have been made by you and interest must have been paid on unpaid purchase price by 30th January of the following year.
Hence any income (interest or dividend) on this property will be taxed at lower earners spouse rate.
2. Transfers to other Family Members
If you would transfer capital property to other family members, it would be deemed as sold at FMV to a third party and you would report capital gain. If this property is transferred to a minor child, you would have to keep reporting any income on this property until the child reached 18 years of age. So, any income or capital gain is thereon being taxed at recipient’s hands.2
• Income splitting amongst several family members or legal entities in order to get more of the income taxed at lower rates
If you are running your own business in Canada and your business income is being taxed at a higher rate you can lower your tax liability by transferring some of your business income to your family members2
Business income can be split among the family members in two ways
- 1. Paying a salary or wages to a family member
- 2. Issuing dividend to family members
Paying a Salary or Wages to a Family Member
Hire your spouse or child paying tax at lower rate. By paying them salaries your net business income will reduce, and you will pay tax at a lower rate while your spouse or child will also pay tax at a lower rate on this employment income.2
Besides this double tax savings, your spouse will be contributing in CPP. This tax saving strategy would enable your spouse to contribute in RRSP, and even you can contribute to your spouse’s RRSP and defer tax for years until the withdrawal of funds.2
However, the CRA has defined the rules that must be followed to consider your family member as an employee of your business:2
1. Defined duties: Your family member must have a designation and duties to be performed. You will have to keep employee records of your family member just like other employees of the business.
2. Salary must be reasonable: CRA closely examines whether the salary paid to a family member is reasonable by considering the following factors
- a. Hours of work
- b. Nature of work done by family member
- c. Importance of work
- d. Timing and duration of work
If the level of salary paid to the family member is equal to what a similar business would pay to an unrelated employee for such work, then it seems to be reasonable.2
Issuing Dividend to Family Members
The second method of splitting income among family members is by issuing dividends but only if your business is incorporated and your family members are shareholders. This tax strategy provides you flexibility about how much dividend should be paid to each family member in a tax year to avail maximum tax savings i.e. level of dividends could be varied depending on the taxable income of the recipient for the year.2
However, the CRA has tightened the rules for split income through dividends from the tax year 2018. Under this new proposal split income received by certain family members under the age of 18 and now expanded to some members above 18 too, would be subject to TAX on Split Income rule where it is taxed at the highest marginal tax rate. Although there are some exclusions as highlighted below, I would suggest taking expert tax accountant advice before adopting this tax strategy as it has become quite complex and tricky.2
Exclusions from Tax on Split Income Rule
Tax on Split Income rule would not apply to income received by a family member aged 18 or older if it comes from “excluded business”.2
“A Related Business where the individual was actively engaged on a regular, continuous and substantial basis (“Actively Engaged”) in the activities of the business in the taxation year or in any five prior taxation years of the individual.”2
“An individual will be deemed to be Actively Engaged if the individual works in the business at least an average of 20 hours per week during the portion of the taxation year of the individual that the business operates, or meets that requirement for any five prior years. The five taxation years need not be consecutive. In any other case, whether an individual is Actively Engaged will depend on the facts and circumstances of that case” (Guidance on the application of the split income rules for adults, Canada Revenue Agency).2
• Taking advantage of various tax-deductible items and tax credits to minimize your taxable income
Meal & Entertainment
50% of expenses incurred on food and entertainment are tax deductible.2
You can claim all vehicle expenses incurred in the ordinary course of business. If you own a car used for business purposes, then CRA requires you to maintain a log of the business millage. So, you can deduct following expenses:2
- 1. Fuel and lubricant expenses
- 2. Repair & maintenance of vehicle
- 3. Vehicle lease payments
- 4. Parking fees
- 5. Toll charges
- 6. Insurance
- 7. Registration fee
You can also claim depreciation (CCA) at the rate of 30% only if you own the car.2
You can deduct rent expenses paid for office or machinery and equipment used for business. You must keep rent receipts and a lease agreement to prove these expenses if CRA opens an audit to verify your claims.2
Home Office Expenses
If you are working from home and using a specified area in the home specifically to carry out your business activities like a home office then you can deduct a portion of the following expenses:2
- 1. Rent
- 2. Utilities
- 3. Repair & maintenance
- 4. Home insurance
- 5. Property taxes
- 6. Interest on home mortgage
A portion of these expenses that is deductible would be equal to a %age area of home office out of the total area.2
Note: I have provided here general information and I would strongly recommend you contact a professional tax accountant for your specific tax 2 scenario.