Most people think that tax season starts when you contact your accountant in April, but the reality is there are several tactics to think about well before the Spring. Here are some ideas especially for high-net-worth individuals:
- Tax loss selling in a non-registered account: This can be done throughout the year, however, the latest you can sell and take the deduction in the current year is two trading days before the last trading day of the year. When you sell a stock for a gain CRA taxes you on part of that gain. There may be other securities with losses in the portfolio that can offset these gains and the sale proceeds can be redeployed in a similar asset, a different asset, or just kept in cash.
- Flow-through investments: Depending on your income, flow-through investments can be made to lower your income. Typically, an investor would not consider this unless they make $250K or more. Flow-through is a tax-deductible investment in the mining or oil and gas sector. CRA allows the investor to deduct the investment from their income if it is used for exploration or development of resources.
- Spousal loan: If you have a low-income spouse, consider establishing a spousal loan to shift investment income and capital gains to them by transferring funds to your low-income spouse through a formal loan arrangement at the CRA prescribed interest rate. Your spouse is then able to earn investment income on these funds and pay taxes at their lower marginal tax rate. Provided the rate of return on investments is higher than the interest paid, and this strategy is properly implemented, the tax savings should more than compensate for the tax you pay on the interest you receive from the loan.
- Registered plan contributions: RRSPs are the most common tax deduction. You have 60 days after the end of the year to make your RRSP contribution for the previous year. RRSP contributions can also be made throughout the year and can be deducted from paychecks directly into the RRSP on a monthly basis. You may also want to consider contributing to a spousal RRSP if you have a low-income spouse to equalize future retirement income. Also, contribute the maximum to TFSAs for you and your spouse, and contribute to RESPs for your children.
- If you are self employed or are a commission-based employee, keep track of your expenses that you incur for business purposes and deduct those from your income.
Planning ahead makes a big difference when it comes to taxes, so don’t leave it until next Spring to think about.