3. ASSET ALLOCATION As you approach retirement, it may be beneficial to put assets taxed at a higher level into tax-sheltered accounts. This might mean allocating bonds primarily to RRSPs and TFSAs, because interest is fully taxable. Those with remaining RRSP or TFSA contribution room after purchasing all their bonds could then consider buying stocks. Just remember to take care when allocating foreign stocks that pay dividends inside a registered account. The ability to claim the withholding tax on foreign payments is lost when held inside an RRSP or TFSA. For this reason, it’s sometimes beneficial to hold foreign stocks that pay dividends in non-registered accounts, allowing you to maintain the ability to claim a foreign tax credit on your Canadian tax returns. As a general rule, it’s a good idea to hold Canadian dividend-paying stocks and investments that generate capital gains in a non-registered account, since these have preferential tax treatment. 4. INCOME SPLITTING For higher-income earners, income splitting — redirecting income within a family unit — can be one of the most powerful tools for families to reduce their tax burden and keep after-tax dollars in their hands (versus more of their income going to the Canada Revenue Agency).
business income
pension income or a lot of money in RRSPs that need to be converted into a registered retirement income fund (RRIF) or annuity, there may not be much they can do to minimize the OAS clawback. Consistently monitoring your taxable income each year helps ensure government benefits aren’t clawed back.
• Consult with a tax expert before committing to any of these or other options.
5. RETURN OF CAPITAL PROTECTION In the non-registered investment environment, you may want to consider using annuities and segregated fund contracts with guaranteed income (for return of capital features and protection for longevity risk). Along with being tax efficient, they can offer insurance protection.
LESS TAX CAN MEAN MORE RETIREMENT MONEY
Today you need more income-producing assets in retirement than previous generations, especially because we’re living longer. RRSPs are often the first choice because they provide upfront deductions and deferred taxation, but other good options are available. With regard to tax planning, do it regularly (consider at least an annual review). Most government benefits in Canada are income- tested, so if you can plan tax efficiently for retirement, you’ll be more likely to maximize your overall retirement income and send less money to the government.
6. TAX-LOSS SELLING From a tax perspective, if you hold an
investment that’s lost value at the end of the year in a non-sheltered account, it might be a good idea to sell it. The loss can reduce capital gains on other investments. It can also be carried back up to three years, or carried forward indefinitely. Talk with a tax expert to learn more. 7. INCORPORATION If your business can qualify as a small business corporation in Canada, incorporating it can give you the ability to access the small business corporate tax rate. Other advantages of incorporating include: • Limited liability • Tax deferral and control of personal income payments • Income splitting opportunities • Access to the small business deduction • Access to lifetime capital gains exemption 8. OAS CLAWBACK In retirement, a popular tax-minimization goal often becomes avoiding clawbacks of Old Age Security (OAS). Because TFSA withdrawals aren’t considered taxable income, they don’t affect your eligibility for OAS. For example, for 2018, if you are receiving the OAS and have income over $75,910, the government will claw back some of their OAS benefit, and the benefit completely disappears at the $122,843 annual income level. You can use non-registered investments — T-series, annuities, segregated fund products — with return of capital features to help with OAS clawbacks. If you have significant
Contact me to build a plan that will fit your life.
Income splitting opportunities permitted under current legislation include, but aren’t limited to:
• Opening a TFSA for all family members over the age of 18
• Loaning funds at the prescribed rate of interest to a spouse 1
▲ Evan Patkai, B.B.A. Financial Advisor Member of Advocis (Photo: Evan Ceretti Photography)
• Making a gift to an adult family member
• Having the higher income earner pay family expenses
• Using the benefits of a registered education savings plan (RESP) or registered disability savings plan (RDSP)
Patkai & Son Financial Services Inc.
• Investing child tax benefit money in the child’s name
184 Buchanan Drive, Charlottetown 902.894.8513 ext. 222 Cell 902.940.6414 evan.patkai@sunlife.com www.sunlife.ca/evan.patkai
• Pension splitting with a spouse
• Loaning money to a spouse to produce
WINTER 2019 www.pei-living.ca
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