Tax planning and retirement planning go hand in hand. There are three things any individual should have in their retirement planning arsenal- tax-free opportunities, tax-deferred opportunities and investment income that is preferentially taxed. The objective is to minimize the tax and leave more money in your hands.
Tax-Free savings Accounts or TFSAs make sense for individuals as well as small business owners and their families. This is a $5000.00 a year opportunity which allows any savings and income earned there on to be withdrawn tax free. Corporation owners can build up wealth within the company and take advantage of the $750,000.00 capital gains exemption when they decide to sell up. Corporations may also build an investment portfolio within the company which can take advantage of lower tax rates and preferential tax treatments not available to the individual.
Employed individuals may wish to take advantage of Corporate Stock options offered by their employers. If the option price is equal to the current Fair Market Value for publically traded stock and the excise period is 6 months or more in length the option benefit does not occur until the date on which you exercise the option, for privately controlled Corporations the stock option benefit does not occur until the stocks are sold. There are various tax elections and forms of forgiveness which may make this an attractive option. Other forms of tax deferral resources available to everyone include RRSPs, RESPs and RDSPs, all of which have their own pros and cons.
Income splitting is another way to build wealth while reducing tax. Small business owners may want to consider registering their spouses as co-owners thereby effectively cutting their individual net taxable income while maintaining the total family wealth. Corporations can establish different classes of non-voting dividend paying shares for family members. Every dollar of ordinary income over $127,000 that an individual earns in Ontario is taxed at 46.41%. If that money is earned in the form of dividend income, the tax rate drops to 26.57%. Income derived from the buying and selling of stock outside of an RRSP is subject to capital gains, which carry a tax rate of 23.2%. Both provide a substantial reduction in tax and therefore more money in your pocket.
Discuss your options with your Accountant and build a wealthier retirement.