With less than a month until taxes are due for Canadians, many families have saving money on the top of mind. While taxes are necessary and nearly everyone believes in paying their fair share, many of the wealthiest Canadians are taxed excessively. Fortunately, there are many tools available to distribute wealth throughout the family, reduce an individual’s tax burden, and help shelter assets from taxes.
Make a Loan to Your Spouse. Many well off families have the opportunity to have one spouse stay at home. This is a wonderful situation for those who want to stay home and can afford not to work, but it can make the tax burden on the high-earning spouse quite excessive. One way to overcome this is to have the high-income spouse lend money to the low-income spouse for investment purposes. The borrowing spouse will need to pay interest back to their higher-earner partner, but the income generated by the invested money will be taxed at the much lower rate of the non-working spouse. The borrower can also deduct the interest cost against the income.
Trusts can help your family to defer taxes on expensive properties when the asset is passed onto the next generation; they can also protect your spouse from automatically being inserted into a higher tax bracket after your death. We work with many clever families, who develop their estate to equally divide their assets. That way neither of the individuals are bumped into a higher tax bracket. However, when one partner passes, years of methodical and strategic income splitting can unravel as the surviving spouse inherits the other half of the assets. The best way to avoid this is to create a testamentary spousal trust. A spousal trust will allow the surviving partner to benefit from the assets, but they’re technically a different legal entity, so the survivor can continue to benefit from income splitting.
Take Advantage of Tax Shelters. Thanks to the Paradise Papers, many people now view using tax shelters as a shady practice. They imagine the most affluent among us storing accounts full of money offshore and never paying a cent of taxes on any of it. But there are many perfectly legal tax shelters right here in Canada, and everyone — not just the wealthy— can take advantage of them. Tax-free saving accounts, RESPs, and RRSPs spring to mind as obvious examples. These Canadian tax shelters should act as your first line of defence against excessive taxation, and it’s a good idea to meet your maximum annual contributions. For wealthy Canadian families with adult children, a great way to invest in your child’s future is to fund their RRSP contributions to ensure they are receiving the largest tax break possible.
We’re honoured to help some of the most successful Canadians create comprehensive, personalized estate plans. As the tax season ends, if you feel your family is contributing an excessive amount, we invite you to schedule a free consultation with MacMillan Estate Planning. It would be our pleasure to help you find new tools for reducing your tax burden.