Investment Planning

When choosing investments, there is a clear bias to investing in capital gain or dividend producing investments due to substantially lower tax rates.

• Income splitting opportunities are still available, despite CCRA’s attempts to eliminate it. It is possible to split capital gains with minor children if properly structured.
  
• Dividends can still be paid to adult persons who have little or no other income with substantial tax savings. (Note: A person with no other income can receive approximately $49,000 in eligible dividends each year or $35,000 in other dividends without feeling the effect of any taxation at all.)
• If you have property, that has an accrued capital loss, you might consider selling the property in order to offset the capital gains realized in the current taxation year. Furthermore, to the extent that the capital losses cannot be used to offset your current capital gains, they can be carried back three years and carried forward indefinitely. If you are thinking of triggering a capital loss on a property and then repurchasing the property afterwards (e.g. shares traded in the stock exchange) you must bear in mind the "superficial loss" rules. Under these rules if you reacquire the property or an identical property within 30 days of the sale of the property, the capital loss will be denied. In order to avoid the superficial loss rules, you will have to wait until the 31st day after the sale of the property before you reacquire it.
• If one spouse has unrealized gains and the other unrealized losses, they generally cannot be offset if sold directly - the spouses feel trapped! However with a little fancy footwork, we may be able to get you out of that particular tax trap.
• It may be possible in certain circumstances for a corporate vendor to convert dividends into a capital gain, ultimately taxable at a lower tax rate.
• It may be possible to have a tax saving by converting selling price of shares for corporation who are at the highest tax into an accrued bonus.
• It may be possible to save taxes on all types of investment income by investing through a trust resident in the province of Alberta, where tax rates are substantially lower than here in Ontario.
• The use of an investment corporation may allow for income splitting through the payment of reasonable salaries and director fees, plus the payment of dividends to adult children or other low income tax payers.
• Taxpayers who expect to realize a large capital gain may be able to reduce or substantially eliminate the gain (with some complex tax planning).
• The income tax provisions relating to Labor - Sponsored Venture Capital Corporations (LSVCC) are generous. LSVCC are mutual funds that invest in small and start up businesses. The federal government and the provincial government provide tax credits for individuals who purchase units in LSVCCs. The federal tax credit is 15% of up to $5,000 of LSVCC units purchased in the year or within 60 days after the end of the year, for a maximum federal credit of $750. In Ontario, a 20% credit of up to $5,000 of units is allowed if LSVCC is a "Research Oriented Investment Fund". Therefore for $5,000 purchase of LSVCC the total tax credit may equal $1,500. You will generally have to hold onto the units for at least 8 years; otherwise you will be required to repay the credit by way of a penalty tax. In addition to the tax credit if you purchase the LSVCC inside your RRSP, the purchase of the units will be eligible for the regular RRSP deduction.
• Interest paid on borrowed money used for the purpose of earning income from a business or property is deductible. However, interest on personal borrowings is not deductible. Therefore, to the extent possible, you should make sure that any borrowings are used for business and investment purposes. For example you currently own $50,000 worth of shares and you also have $50,000 of debt on your line of credit that has been used for personal purposes. The interest on the line of credit is not deductible. You might consider selling the shares, using the proceeds to pay off your line of credit and then re-borrowing the $50,000 on the line of credit and repurchasing the shares. After the "switch" the interest owing on the $50,000 line of credit will be tax deductible. You should take into account the transaction costs and tax on capital gains if the shares have increased in value. Since interest on personal loans is not deductible, it almost always makes sense to pay down your personal loans.
• Upon the sale of the shares of a corporation, the vendor may receive a non-competition payment from the purchaser as consideration for the vendor’s agreement not to compete with the corporation’s business. Now these non- competition payments taxable so that they will be treated as ordinary income for income tax purposes. However in the case of an arm’s length sale of shares the non-competition payments are treated as part of the proceeds of disposition, which will be eligible for the capital gains treatment to the extent that the vendor’s agreement not to compete increases the fair market value of the shares. Only the portion of the non-competition payment in excess of this amount will be taxable as ordinary income.
• The deduction of RRSP contributions remains one of the best tax shelters available. The limit for 2007 is generally the lower of 18% of your 2006 earned income or $19,000. For the years 2008, 2009 and 2010 the limited are $20,000, $21,000 and $22,000. respectively. The RRSP contribution deadline is 60 days after the end of the relevant taxation year. Therefore the deadline for the 2007 taxation year is February 29, 2008 (leap year). In addition to contributing to your own RRSP, you are allowed to contribute to your spouse’s RRSP and claim the deduction from your income. This is particularly beneficial, if the spouse will be in a lower tax bracket than you when the funds are ultimately withdrawn. If you are turning 71 this year, make your RRSP contributions before transferring your RRSP to a RRIF. In addition, a one time over contribution made in December may save you taxes next year, if you have earned income in 2007. Homeowners with a mortgage often wonder whether it is better to pay down their mortgage or contribute to their RRSP. If you expect the rate of return on your RRSP to exceed your mortgage interest rates, you should contribute to your RRSP. In contrast if you expect your mortgage interest rates to exceed your RRSP rate of return, you should pay down your mortgage. If you cannot predict, use half the cash to pay down the mortgage and the other half toward your RRSP, or better still contribute all the cash to your RRSP and use the tax refund to pay down the mortgage.
• A donation to a charity can save a significant amount of tax. The total saving is usually 40 - 50%. If you donate property to a charity, the fair market value of the property is used as the amount of donation for the purposes of the credit. If the property has an accrued capital gain at the time of the donation, the transfer will be deemed to take place at fair market value. Normally one half of the capital gains are included in your income as taxable capital gains, so that you can still benefit taxwise from making a donation of a property with an accrued capital gain as the tax credit should exceed the tax payable on the capital gain. Furthermore, a special rule applies for capital gains purposes if you donate publicly traded securities to charity. In this case there is now zero inclusion rate for capital gains purposes. Therefore, if you are going to donate to charity and you own these types of securities which you were planning to sell, consider donating them instead of your cash savings.
  
  
  
  

SMALL BUSINESS OWNERS:

The following opportunities are available:

• Professionals are now entitled to incorporate to take advantage of low corporate tax rates on retained income. Incorporation also makes particular sense where the owner expects to sell now or in the near future, since the shares may qualify for the $750,000 enhanced capital gains exemption for small business. In addition, professionals who have previously had tax deductions from tax shelter investments will want to incorporate, in order to take income in the form of dividends. This will help eliminate their cumulative net investment loss account which could otherwise block access to the $750,000 exemption.
• Consideration should be given to setting up an Individual Pension Plan ("IPP"). This would allow for greater contribution than available in an RRSP. This makes most sense where a one-time large past service contribution can be made, since the costs of setting-up and administering these plans often makes them somewhat impractical.
• Small business owners who have previously crystallized the $500,000 small business capital gains exemption may be able extract monies from their company without taxation, with some restructuring. This could result in an ultimate tax saving of about $75,000.
• Small business owners, who expect to leave Canada permanently at some point in the future, should consider the use of a retirement compensation arrangement ("RCA"). This vehicle could allow for an ultimate reduction in tax rates on salary from 46.41% down to 25%.
• Small business owners should be protecting assets through creditor proofing, now while business is good. This includes separating business from investment assets such as real estate, removing large equity balances from operating business by using holding companies, and securing existing shareholder loans. Special assets such as operating equipment or valuable licenses should also be protected. It is often very difficult if not impossible to protect assets once creditor issues arise.
• Small business owners who expect to sell their shares in the future should take steps now to allow for the multiplication of $750,000 small business capital gains exemption on the ultimate share sale. A tax saving of approximately $72,000 can be realized for every person who can take advantage of the exemption. This could include one’s spouse, children of any age, and other related persons.
• Small business owners with more than one operating entity should attempt to "disassociate" the entities so that each entity is entitled to a separate low tax rate. This could save about $112,000 per annum.