Tax Planning for Canadian Individuals

There are not a lot of ways for middle-class, working Canadians to reduce their taxes. The tax system here is designed to capture income from people working in Canada, and whatever loopholes there were, have long since been closed.

1. Take advantage of registered accounts: Canada offers several types of tax-sheltered registered accounts, such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). Contributions made to these accounts are tax-deductible (in the case of RRSPs) or tax-free (in the case of TFSAs). These are by far the most common way ordinary Canadians can reduce their tax payable now and in the future. Everyone’s tax situation is different, as are their retirement goals and capacity to save. For example, if you have some form of pension (from your employer perhaps), then often the priority should be on putting funds into TSFAs over RRSPs.

2. If you receive dividends from Canadian corporations, you will need to pay taxes on those dividends. However, there are tax credits on dividends from Canadian companies reduce the tax on dividends. The ‘gross-up’ and credit regime can be very tax efficient, particularly if you have little other income other than dividends.

3. Consider capital gains taxes: In Canada, when you sell an investment for a profit, you may be subject to capital gains taxes. However, there are several ways to minimize these taxes, such as using tax-loss harvesting to offset gains and making use of the lifetime capital gains exemption. In general capital gains

4. Stock-options are great. If you work for a company that offers stock options, you should participate to the greatest extent possible. Please note that conventional stock options work well in the Canadian tax system, other equity-based compensation structures (such as Restricted Stock Units etc.) commonly used by US companies in particular, do not work very well in Canada and can cause significant tax issues for Canadian residents.

5. Almost all “tax shelters” DO NOT WORK. Often, we see clients who have been sold tax shelters that promise an outsized tax benefit relative to the amount spent. Again, there is long-standing case law that consistently shows that these structures, for the most part, do not work. Please note that just because the CRA has issued a tax shelter number, that does not mean the CRA has ‘approved’ of the structure as allowing for any tax benefit. All that the tax shelter number means is that the CRA is aware so they can eventually audit you, and most likely deny the tax benefits, and charge taxpayers penalties and interest on the benefits received.

6. Business owners have greater opportunities to reduce their taxes, but many of those have also been closed in recent years. If you own your own business, with careful planning and good tax advice you may be able to reduce your tax burden.

7. Intergenerational transfer of wealth is an issue facing many Canadian families. If not planned properly with a combination of proper corporate structuring, as well as an appropriate estate plan, the family can end up sharing more of its worth with the taxman than strictly necessary.