Taking positive action with new opportunities to reduce taxes
1. An historic opportunity right now: the spousal loan strategy
If you pay taxes at the highest rate, you know just how punishing Canada’s marginal tax system can be. But if your spouse earns little or no taxable income, you currently have a historic opportunity to reduce your family’s overall tax bill using the Spousal Loan Strategy.
Here’s how it works. First, you make a loan to your spouse, which is backed by a simple promissory note setting out the terms of the loan. Then your spouse invests the entire loan amount in their own name. This way, the investment income is taxed at your spouse’s lower marginal rate - reducing your family’s overall taxes.
To ensure the income is taxed in your spouse’s hands - and not yours - your spouse must pay you interest at a certain rate, which is set by the Canada Revenue Agency (CRA). However, between April 1, 2009 and September 30, 2009, the CRA-prescribed interest rate on spousal loans dropped to a historic low of 1%, creating an unprecedented opportunity to maximize this proven, yet often overlooked strategy. Bear in mind the rate may be different after September 30, so consult with a professional advisor for the latest rate.
Time to do the math . . . and save!
2. Helping your family while reducing taxes: The Family Trust
You could be looking at some large capital gains over the next few years as the stock markets recover. While this is welcome news, capital gains are of course taxable outside a non-taxable account. One way you can reduce these taxes is through the new RBC Dominion Securities Family Trust. With the RBC Dominion Securities Family Trust, you can effectively transfer the tax-reporting obligation for the taxable income generated in the trust to your children or grandchildren. Because of the basic personal amount they can claim on their tax returns, they can each earn up to approximately $50,000 in tax-free income, depending on the income mix generated in the trust (varies by province of residence).
To qualify for the tax break, the income generated in the trust must be used for the benefit of, or allocated to, the beneficiaries of your RBC Dominion Securities Family Trust. If you are currently paying for things like your children’s education costs from your after-tax income, the Family Trust can make a lot of sense. When properly structured, you don’t pay taxes on the capital gains earned within the trust, so your dollar goes a lot further in covering this sort of cost.
3. Earn tax-free investment income
The new Tax-Free Savings Account (TFSA) is a no-brainer for anyone looking to reduce taxes. With the TFSA, you can earn tax-free investment income and make tax-free withdrawals any time you want for any reason. You can contribute up to $5,000 annually and, while this may seem like a small amount now, over time it can make a big difference, especially with the effect of tax-free compound growth. Please contact us for more information about these, and other, tax-reducing strategies.
Allan Morse is Vice President and an Investment Advisor with RBC Dominion Securities Inc. in Charlottetown, PEI. Allan can be reached at 1-800-463-5544 or Email here. Member CIPF, Insurance products are offered through RBC DS Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products, Investment Advisors are acting as Insurance Representatives of RBC DS Financial Services Inc.
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