By Elke Rubach
Special to the Financial Independence Hub
While various government programs have helped many individuals and
businesses during the pandemic, the looming tax filing deadline of April
30th has Canadians facing the harsh truth about how much income they really generate, how much they spend and how much they owe in taxes in a year.
If you are concerned about the prospects of a rising tax bill and want to stay ahead of the curve, we highlight some tax strategies that may help.
4 Strategies for optimizing your taxes
Effective tax planning is highly dependent on your personal situation, so there is no one-size-fits-all solution. However, here are four strategies that may be useful in optimizing your tax situation:
An estate freeze can be used to defer the realization of taxable capital gains in the value of a family business. After a properly structured freeze, any further growth in the company’s value will accrue not to the owner, but rather to their successors or to a discretionary trust set up as part of the freeze.
Estate freezes have many potential benefits, including locking in probate tax liabilities, locking in a purchase price for a business, providing retirement income and strengthening creditor protection.
Stock markets around the world have plunged during the pandemic, and despite some strong rebounds, many investors have stock portfolios with unrealized losses. In some situations, it can be beneficial from a tax perspective to sell holdings and trigger capital losses to offset capital gains.
Capital losses can be applied retroactively up to three years and carried forward indefinitely. However, there are restrictions on how such losses can be applied, so any decisions should be made with advice from a tax professional.
Prescribed rate loan
A prescribed rate loan allows individuals with high marginal tax rates to transfer investment income to family members with low marginal tax rates. Under this strategy, the high-income earner makes a loan to a family member or a family trust, which invests the money and earns investment income. The high-income earner receives interest payments at a rate prescribed by CRA (currently 1%) while the remaining investment income can be distributed to the family member(s) and will be taxed at their lower tax rate.
Spreading corporate losses
Owners with multiple businesses are not allowed to directly consolidate their profits and losses across their corporate group to minimize their overall tax bill. However, there are permissible tax strategies that can be used to spread at least some corporate losses and achieve similar outcomes. Management fees are one example, although there are restrictions on how this strategy can be applied.
Whatever your situation is, there are steps you can take now to proactively optimize your tax exposure and extract any corporate surpluses in a tax-efficient manner.
Elke Rubach, LLB, LLM, CFP, CLU, FEA, is Principal and Founder of Rubach Wealth, a leading wealth management firm she founded in 2012. Her mission is to provide tax-efficient financial planning to help clients build multi-generational legacies. Rubach Wealth is built on her vision that all clients, especially women, need to be financially independent. Elke earned undergraduate and graduate degrees in law, the latter in banking and finance on scholarship at the London School of Economics.