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360 Private Wealth Management The Natural Wealth® Process: Tax and Estate Thumbnail

360 Private Wealth Management The Natural Wealth® Process: Tax and Estate

 Don’t Put Your Tax Returns Away Yet!

 The annual income tax filing season is now over in Canada, with the filing deadline for most individuals having passed at midnight on April 30th. Most tax preparers are taking a few well-deserved days off. Households will turn their focus to other matters until next year. Some tax advisors and households consider the implications of income tax and all the other taxes we pay as part of their ongoing spending and wealth accumulation planning. Unfortunately, though, many households give taxes little consideration, thinking they are what they are, with no options to reduce them along the way. However, many individuals and families can minimize the overall tax they pay with some careful planning throughout the entire year.

Let me be clear at the outset; taxes are a necessary fact of life for people living in an advanced society.  The various taxes governments collect pay for a host of things we often take for granted as Canadian citizens. Taxes help pay for our mostly-free healthcare system, our roads, and bridges, our primary and secondary education systems, a chunk of our post-secondary education system, police and fire services, our military, and many other less-visible services, all of which make our society a pretty good place to live and raise families. This said, no household is expected to pay more tax than they should. Careful planning can lower the amount of tax any household may end up paying overtime. Tax minimization is permitted. Tax avoidance strategies are restricted. Tax evasion, on the other hand, is not allowed. In fact, it’s illegal! It’s good to understand the difference and work with tax advisors who avoid planning strategies that run too close to the line.

The Natural Wealth® Process considers tax and estate planning as a significant element of a household’s overall wealth creation, management, and distribution activities. We ask households whom we work with to learn the impact of various tax earning, spending, saving, and investing choices. Beyond income taxes, we must consider various consumption and excise taxes like the federal Goods and Services Tax (GST), provincial, retail, or harmonized sales taxes (PST/RST/HST), fuel taxes, and excise taxes. These types of taxes can add thousands of dollars to the spending and purchasing choices of the average family. These consumption and excise taxes are payable AFTER we have paid taxes on income earned, creating a situation where households in many provinces pay combined taxes on income earned, which can be well above the amount of the income tax they pay when they file their income tax returns.

The Natural Wealth® Process separates taxation along the same lines we use in the other elements in the process, breaking tax down into Person Taxes, Portfolio Taxes, and Possession Taxes. Person Taxes are the taxes we pay on our employment and self-employment income or defined benefit pensions and Old Age Security (OAS) and Canada Pension Plan (CPP) benefits. Portfolio Taxes are the taxes we pay on income earned from investments, including rental real estate and, where applicable, from a family-owned business (if the family-owned business is incorporated, it will have its own taxes to pay). Possession taxes are the taxes payable on any income earned from possessions (i.e. renting out the family cottage) as well as and property and consumption taxes payable on the purchase of and upkeep on all our various possessions (i.e. homes, cottages and camps, vehicles, boats, and other recreational vehicles, etc., etc.). 

To Save Tax… Consider the three “D’s”

When it comes to income taxation, many tax advisors talk about the three “D’s” of tax minimization; Divide, Deduct and Defer. Dividing income is available in situations where people are married or in bona fide common-law relationships. A couple receiving employer-sponsored pension income can split up to half of this income with their spouse or common-law partner where it makes sense to do so (the higher income spouse can direct up to half their pension income to the lower-income spouse where it would allow for that income to be taxed at a lower income tax rate). Other forms of income splitting (from investment assets and family businesses) between household partners are available but are subject to stringent rules. We highly recommend consulting with a tax advisor or tax-savvy financial advisor before attempting any income division strategies. Ignorance of the rules is not a permissible defense in tax court.

Deductions available to taxpayers depend on their employment situation (employee, self-employed or in an unincorporated business), if they are post-secondary education students (or, in some cases, past post-secondary students) or, if they are investors. Over the last 25 years or so, many former deductions have been turned into “tax credits.” Depending on the tax bracket you find yourself in, tax credits may have less tax minimization impact. Tax credits are calculated as a % of the amount in question, based on the tax rate applicable to the lowest tax brackets. Tax credits are deducted from the actual computed tax owing. If your income is higher than the highest amount of income to which the lowest tax bracket applies, you will still only get the credit based on the lowest tax bracket. A deduction on the other hand is taken off (deducted from) your gross income before any tax is calculated, no matter the amount or bracket the income would put you.

Deferring tax payable on income is a strategy based on the idea that an individual or household is making more income while working than will be the case when they retire. Deferring income and paying a lower rate of tax may provide more after-tax, spendable income down the road. An example of this strategy is the Registered Retirement Savings Plan (RRSP), which allows you to take the income you have earned now (subject to limits) and effectively send it forward (deducting it from current income. You can then draw it out as taxable income later when your taxable income is anticipated to be lower. The RRSP adds an additional benefit because any growth on the money invested in the RRSP is tax-sheltered until drawn, allowing for a more substantial growth element to the investment, all else being equal.

There is one savings and investment tool created for Canadians, which falls outside the traditional Three “D” tax planning framework. The Tax-Free Savings Account (TFSA) is, as the name denotes, a vehicle where an individual, age 18 and over, can invest money (subject to limits) and have that money accumulate tax-free for as long as they live. There are annual limits as to how much one can invest ($6,000 in 2021) but the unused room can be carried forward and used when after-tax cash becomes available. Furthermore, if one takes money out of their TFSA, they can re-invest the amount drawn, in full, in the calendar year immediately following the year of the withdrawal (as early as January 1st of the next year) or at any point in the future when after-tax cash is available. The flexibility and the tax-savings potential on a TFSA’s growth make it uniquely powerful savings and investment vehicle for many households. The tragedy is the number of households where the money is invested in bank savings accounts and GIC’s (low yielding instruments) without any portion being directed to potentially higher-earning investments (investment funds, ETF’s, stocks). I think the name was given to the vehicle, the “Tax-Free Savings Account”, which has created a lot of confusion for consumers. If one has time (age, and time until the money might be needed) there is a case to be made for investing at least a portion of a TFSA more aggressively than a bank savings account.


Death can be Taxing too!

Tax is not just a factor while we are alive. Tax is also a factor when we die. Arranging our affairs so we pay the least amount of tax possible at death involves planning our estate as it will look at the date of death. No one can effectively predict when we might die unless we are right on the cusp of death’s doorway. However, we can arrange our affairs in such a way so as to minimize the tax that might be payable at our death no matter when it might occur. There are a number of strategies and tools available which we can use to minimize tax and other costs at death. The time to take advantage of these strategies and tactics is now when one has the mental capacity and capability to build an estate plan and put structures and tools in place to reduce the ultimate cost of tax paid on our ultimate death. The most important tool in this regard is the Last Will and Testament of the person involved. Without a will, a person dies intestate. Their estate will be divided, not according to any wishes they might have, but rather in accordance with the intestate rules of the province or state where they reside. Having one’s property divided according to intestate rules most often results in the property not being divided the way one would have wished. If you have income and assets… please draft a will. If you have a will, please take it out periodically and read it, in the context of where you are in life. Lots may have changed since the will was drafted. Periodic reviews are sensible and wise.

It is also very important to understand how assets are titled and the impact this might make as far as taxes and fees are concerned at death. Assets can be titled in one name, in joint tenants in common, or joint with rights of survivorship. The most common approach to the joint title is joint with rights of survivorship title on assets and investments (where allowed). Joints with rights of survivorship can defer tax on a taxable asset to as long as the death of the joint owner. That said, it’s important to understand the other impacts associated with owning assets jointly with the right of survivorship, particularly with children. Get the facts before you proceed with titling an asset or you might create a nasty situation between estate beneficiaries if anyone is out of the loop on what has been done.

One more estate planning tool is the correct use of the beneficiary designation on insurance policies and registered investment plans (RRSP’s RRIF’s, TFSA’s, etc.). There are different ways to direct proceeds from plans allowing the appointment of a beneficiary. When we send out pre-meeting packages, we include a page showing the beneficiaries on the various plans held with us and the type of beneficiary designation (beneficiary, successor annuitant or, successor holder), where applicable, in each case. The designations can impact the options as to how the insurance plan or registered account proceeds can be handled by the company holding them. Understand the differences and make sure you are using the correct designation on plans. If you have questions, please ask us.


Save Taxes This Year and in Future Years, Start Tax Planning Now!

Tax planning is a year-round activity and an important part of what we provide in the overall financial life planning process. We actively manage tax implications in as many aspects of our planning investment and insurance work with households.

The best time to review your overall tax picture and plan this tax year’s tax strategies is as early in the year as you can. We like doing this as soon as the tax returns are filed and assessed for the previous tax year.

Each year we ask our clients, individuals, and households, to send us a copy of the tax return AND the income tax Notice of Assessment (NOA’s) they receive from the Canada Revenue Agency (CRA) after their return(s) is/are assessed. The tax return gives a good starting point to see how incomes, deductions, and tax credits impact the individual and/or household and how and where they might make changes to reduce the overall tax bill for the individual or family.

An increasing number of households have already sent copies of their 2020 tax returns and NOA’s to us to review and provide possible tax-saving advice. If you are not one of the households already doing this, and you want to have us review your tax returns and provide advice on tax planning, please send us your 2020 income tax returns return(s) and NOA(‘s).

If sending us your return and NOA, please use our secure TitanFile portal. If you have not yet had reason to set up and use the portal, please call or email our office, and someone will send you a link to your own personal household TitanFile channel.

If you have any questions or need any information or advice on your tax and estate planning, please call or email us at your convenience. We are here to help in any way we can. If we can’t answer your question or provide the advice you need, we have trusted advisors available who can.


David J. Luke, CFP, RFP, CLU, CH.F.C., CIM, RIAC | Financial Advisor

360 Private Wealth Management | Manulife Securities Incorporated 

Unit 1 – 25 Scurfield Boulevard, Winnipeg, MB R3Y 1G4 

Main Office 204.925.5868 | Direct 204.925.2073| Fax 204.925.2263 | Toll Free 844.688.3656  

Email david.luke@manulifesecurities.ca