Tax Saving Strategies for High Income Earners in Canada

Video Script

In this video, I’m going to go over how high-income earners in Canada can stop overpaying their taxes with the right tax strategies. If you do your tax planning correctly, you can ensure that you’re paying what you owe and nothing more.

A critical part of building wealth is saving and investing. So the more you can save on your tax bill, the faster you can achieve your financial goals.

I’ll cover the 5 different ways you can minimize your tax in Canada if you’re a high-income earner.

Stay to the end to find out how to deal with one of the most confusing areas of tax planning: monitoring your cost base.

I’m John Woodfield, a portfolio manager and financial advisor for over thirty years. I speak to clients every day, and concerns about taxation and capital gains come up frequently.

So let’s get into it!

First, it goes without saying, but I’ll say it anyway: the more you make, the more important it is to work with a team of financial professionals who are helping you to protect your wealth. This video isn’t a substitute for working with a tax planning accountant or a financial advisor.

There are four quick and easy ways to keep more of your hard-earned money in your pocket:

The first way to minimize taxes is the Canadian dividend tax credit.

Let’s say you invest your money in Canadian companies which pay dividends each year. Dividends are like a slice of a company’s profits. They can be paid out as cash or as additional shares.

The Canadian corporations you’ve invested in have already paid taxes on their earnings. Since you, as a shareholder, own part of the company, it means you’ve already paid taxes on the earnings as well.

That’s why you receive a tax credit for any dividends you receive from Canadian companies.

This Canadian dividend tax credit is the taxman’s way of not making you pay for the same thing twice.

For high-income earners, Canadian dividend-paying companies may be a good investment due to the aforementioned tax credit their ability in some instances lower an individual’s effective tax rate.

The next way you may be able to reduce taxes is to deduct interest on investment loans.

Here's the idea: If you've taken a loan to buy stock that earns investment income, the interest you're paying on that loan can generally be subtracted from your taxes. The key is when you borrow money to earn income.

The next way you may be able to minimize your taxes is to deduct investment management costs.

Next, let’s say you’re working with a wealth management firm that manages your money.

This firm charges 1% to manage your money. They create and manage your portfolio as well as provide you with other services like estate planning, tax planning, and financial planning. That 1% fee that you’re paying to your wealth management team is generally tax deductible for taxable investment accounts.

So let’s say you have $4,000,000 in non-registered investments, and the value of your portfolio goes up by 6%. At the end of the year, your portfolio is worth $4,200,000.

You’ve paid $40,000 to your wealth management team. Those $40,000 in fees are tax deductible. You get the benefit of having your money managed, and certain costs that are tax deductible.

Unfortunately, this doesn’t work if your money is in mutual funds, ETFs, or retirement plans like RRSPs or IRAs.

One of the benefits of working with a portfolio manager is that they can invest your money and create a balanced portfolio without using mutual funds and ETFs. This way, the management fee on the non-registered investment accounts can be tax deductible.

On the other hand, if you are holding a mutual fund with a 2% management fee, that cost is not tax deductible.

This is why we recommend that high-net-worth individuals work with a portfolio manager if possible. Doing so will give them a tax benefit as well as the overall benefit of working with a fiduciary.

The next way you can minimize your taxes is by monitoring your cost base.

First, what is your cost base?

Imagine you bought shares in a company. You might think the cost of those shares is just what you paid at first. But that’s not the whole picture.

Every year, as you get dividends and if you reinvest them, they are added to your cost base, also known as book value.

Think of book value as an ever-growing tax-deductible treasure chest – it’s what you first paid for the shares, plus the reinvested dividends, plus any realized capital gains you have put back in.

Now, here’s the magic part. When you sell your shares, you only pay taxes on the difference between what you sold them for i.e. market value and your treasure chest size i.e. book value.

Let’s say you have $1,000,000 invested in a portfolio of stocks.

The book value shows $1,150,000 after a few years with no additional funds invested. The market value of the investments is $1,500,000.

So if you sell the investments, your capital gains will be the market value minus the book value.

In this case, that’s $350,000. In Canada, you’re only taxed on 50% of your capital gains, so your taxable income in this case would be $175,000.

But be warned that book value can be confusing, so unless you’re really into tracking your cost base, you should work with your accountant and investment firm to get these numbers right.

If you find this information helpful and want to read more, go to our website and read more about tax planning, estate planning and wealth management on our blog.

Now, let’s go over one more way to minimize tax in Canada.

Maximizing your use of TFSAs and RRSPs is a must.

TFSA stands for Tax-Free Savings Account, and it is an important part of your tax planning strategy.

A TFSA is just a registered account and can be opened at a bank or with your investment advisory firm. You can invest the money within the TFSA in cash, GICs, stocks, bonds or whichever you like. When that money grows, gains are realized, or interest is earned it is tax-free. Losses on the other hand within a TFSA are not deductible.

Let’s say you put $50,000 into a TFSA and it grew over time to $75,000. You don’t pay tax on this growth now or when you take the money out. So although you don’t get a tax break when you put the money in, it grows tax free which saves you money.

Whether you are a high-income earner or not, it is generally wise to max out your TFSA because there are no penalties to take money out and you don't pay tax on the growth.

RRSPs, on the other hand, are used to reduce tax in the present because you get a deduction when you contribute to an RRSP. Then when you take money out of your RRSP in the future, that income IS taxable.

You need to work with your accountant and financial advisor to create a plan for how you’re going to pull income from your RRSPs and TFSAs.

We’ve made another video on RRSP withdrawal rules, so check that one out for more information about how to use your RRSP to fund your retirement.

Finally, if you’re planning on moving from the US to Canada and have assets you want to protect, or you’re already living in Canada and need a wealth manager, I recommend you schedule a call with a SWAN Wealth advisor.