There are various strategies that could be used to either reduce, eliminate, or defer taxes that you pay. Most strategies will make use of multiple rules set forth by the Department of Finance to effectively reduce your taxes. These strategies need to be done in a certain way to avoid the income being attributed back to you. “Attribution Rules” is when there is a tax liability being transferred back to the person who was trying to avoid the tax liability in the first place.
Here are some tax reduction techniques:
A spouse with unrealized capital loss can effectively offset another spouse’s realized capital gains. To understand this strategy, let’s take an example of a couple Scott and Sam. Scott recently sold 10 shares of Company ABC and realized $1,000 capital gains. Scott has no unrealized capital losses to offset his gains, whereas his partner, Sam, does in Company XYZ. In order for the strategy to work, Sam would need to sell Company XYZ shares with $1,000 worth of capital losses and have Scott buy those shares back immediately. By doing this, CRA will not count Sam’s capital loss because it’ll be considered a “superficial loss.” What this means is that CRA will not treat this as a loss because the shares are still in the same household. Now that Scott owns the shares with the capital loss, he can wait at least 30 days and then sell the shares. This would not trigger “superficial loss” rules and be considered a capital loss that could be used against his $1,000 capital gains from selling Company ABC shares.
To understand this solution, let’s take an example of Tim who has a loan against his car with a balance of $50,000. At the same time, Tim also has $50,000 invested in his non-registered account. Tim can use the $50,000 from his investments to pay off his car loan, and borrow $50,000 at the same time to invest in his non-registered account. The end result does not change, Tim has $50,000 in his non-registered account and also has a loan for $50,000. Because the loan is now tied to the investments, rather than the car, the interest payable becomes tax-deductible to Tim.
If both spouses are earning an income, the higher-income spouse should pay for household expenses and the lower-income spouse should invest their income. This solution works best when considering investing in non-registered accounts. By doing this, any interest income, dividend, and capital gains will be taxed in the hands of the lower-income spouse. A similar solution could be used for a parent and a working child too. A parent can give their working child an allowance, and have the child invest his/her income.
By transferring growth-oriented investments to a minor child, any capital gains on the investment will not be attributed back to the parent. One thing to keep in mind when transferring those assets to a minor child is that any Dividend or Interest income will be attributed back to the parent. For example, it might be a good idea to transfer shares of a growth-oriented technology company but not a dividend-paying bank stock. Any capital gains up until the transfer will be attributed back to the person who transferred the assets (the giver).
Please make sure to consult with a tax accountant before making any changes. Alternatively, please feel free to reach out to us at https://www.endeavourwealth.ca/contactand we can help you guide you.
- Jai Gandhi, Financial Planning Assistant
Jai Gandhi is a Financial Planning Assistant at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Jai Gandhi who is an Financial Planning Assistant for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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