When personal income exceeds $200,000 in Canada, the earner has to pay taxes at a rate of 50% or higher depending on the province of residence. If you’re a high-income Canadian, there are tax minimization strategies that will help you reduce your tax burden. A professional financial planner can help you develop a tax strategy based on your unique financial situation and goals. Therefore, before you implement any tax-saving strategy, don’t forget to consult a competent tax advisor. Here are some of the most effective tax minimization strategies for high-income individuals:
Registered Education Savings Plan (RESP)
If you need to pay for your children’s’ post-secondary education, you should consider setting up an RESP. You will use your after-tax money to make contributions to RESP which will be beneficial in terms of government grants and tax-deferred growth. When withdrawals are made and your child signs up for a post-secondary education program, the income earned in the plan will be taxed at a lower rate than your own.
Income splitting
Income splitting with family members is a simple and effective tax planning strategy. Nevertheless, many high-income Canadians don’t take advantage of this opportunity. Canada Revenue Agency (CRA) has acknowledged income splitting as acceptable. You can talk to a financial planner to learn more about income splitting and how you can use this method to optimize your wealth.
Registered Retirement Savings Plan (RRSP)
RRSP is a great opportunity for high-income individuals to save on taxes. You must consider investing in RRSP and make contributions from your taxable income. It will help you reduce the taxes. Moreover, funds in RRSP grow on a tax-deferred basis. Contributing to a spousal RRSP is also a good idea to equalize future retirement income. A financial planner can show you the right way to use a spousal RRSP to reduce taxes in the long run.
Related: How RRSP is an Important Tax Planning Tool For Canadians
Family trust
If you have grandchildren, children, nephews or nieces with little to no income, you can consider setting up a family trust to shift investment income, which would otherwise be taxed at a high marginal tax rate, to the hands of your low-income children or family members. While attribution rules apply, the income earned in the trust and made payable to the beneficiaries may be taxed at their marginal tax rate. Tax-free income can also be received annually because of the tax credits. You can also use the income earned in the trust to pay for your child’s expenses.
You should consult a tax advisor for further guidance before establishing a family trust. There are other tax planning strategies high-income Canadians can utilize to optimize their wealth.
“… in this world, nothing can be said to be certain, except death and taxes.”
― Benjamin Franklin
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