METHODS

Four Methods to Minimize Tax

Save now, tax-free • Pay taxes later at a lower tax bracket
An RRSP is the most effective retirement savings and investing tool available to most Canadians. It lets the money you invest grow unaffected by taxes until it is withdrawn. That means your money has the potential to grow faster and accumulate more returns. What’s more, you’ll get a tax deduction for every dollar you put into an RRSP, reducing your annual tax bill. Here’s how it works:

Tax Sheltered Investment Growth
Investments in an RRSP grow on a tax-deferred basis until money is withdrawn. The fact that your plan is “registered” with the Canada Revenue Agency allows you to benefit from this tax-deferred growth. Outside an RRSP, most investments are taxed. Interest earned is fully taxable, half of capital gains are taxable and dividends are taxable but eligible for the dividend tax credit. Inside an RRSP, none of these taxes apply. Because you pay no tax on investment growth while your money remains inside an RRSP, your investments compound far more quickly. At the end of the road, that makes a huge difference. Even though you’ll be taxed on amounts you withdraw from RRSP savings during retirement, your tax rate will likely be lower than during your working years. So the tax bite will be considerably smaller. And the money left in the retirement plan continues to grow sheltered from tax.

Tax savings that benefit the whole family
RESPs permit savings to grow tax-free until the beneficiary is ready to go to college, university or any other eligible post-secondary educational institution. Under the family RESP plan, if your child decides not to attend higher education, the RESP can be transferred to another beneficiary such as a sibling. RESP assets can also be transferred into parental RRSPs, provided the parent has enough contribution room left.

Tax Free Savings Accounts (TFSA) help us save and invest for our future. Canadians who are 18 years of age or older may contribute up to a maximum amount per year to a TFSA. TFSAs are great because the earnings are tax-free. In Canada, only your principal residence and your TFSA are true tax free investments.

Here are the highlights:

• Your TFSA contribution can go to a wide array of savings or investments, such as a savings account, GICs, Mutual Funds, etc.
• The unused contribution room can be carried forward, so if you can’t make the full contribution one year, you can catch up in a subsequent year.
• Withdrawals are tax free and the earnings are too.
• Unlike RRSPs, if you make a withdrawal from your TFSA one year, it creates new room. You can therefore put the amount withdrawn back into the plan in a subsequent year.

A multifaceted tool to serve your insurance, investment and tax sheltering needs
Whereas temporary life insurance covers a variety of short term risks, such as providing mortgage protection or income replacement, permanent life insurance not only covers risks but also acts as an important vehicle to maximize estate and retirement planning as well as business succession planning.

Beyond the pure insurance aspect, most policies provide the owner with the option of contributing more money into the policy than is necessary to pay for the cost of insurance (COI). This additional money is invested and grows tax sheltered, similar to an RRSP. The policy holder is limited by certain government guidelines for how much extra money they can contribute, but this amount can be substantial.

Tax sheltered growth • Tax free death benefit • Flexibility for withdrawals
Although the extra funds contributed are not tax deductible, they do grow tax sheltered, and, if not withdrawn, will pay out tax free to the insured’s estate. It is one of the few outright, tax free, intergenerational transfers allowed by the CRA. In addition to the tax free death benefit, the policy owner can access the funds for other purposes prior to death, for example, to pay off a mortgage or supplement retirement income.

The benefits of tax sheltering and eventual tax free payout of the invested funds becomes even more valuable in Corporate Planning, where other tax advantaged plans such as RRSP’s and TFSA’s are not available, graded tax categories do not apply, and all passive investment assets are taxed slightly above the higher marginal personal tax rate.

Tax efficient strategies are available for every individual’s needs. Contact a qualified financial advisor today to explore the options that are right for you.

Take the first step today to better achieve your financial goals.