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September 27, 2017 | Family Planning

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

If you pay too much tax, raise your hand. Wow. That many? Okay, class, we might be able to fix that. At least a little.

And why this week?

Seems like a great time given what politicians on two sides of the border just did. To the south, the Trumpster unveiled a tax-cut plan which will slash the corporate rate by a stunning 43%, end estate taxes, simplify tax brackets and drop the load on the wealthy. In Canada, the finance minister says his new goal is to take ‘dead money’ retained inside small businesses (usually called profits) so the government can spend it on civil servant pensions and such.

The contrast is, well, stunning. Since Mr. Morneau has indicated he doesn’t really care what you think, perhaps you should return the favour. Legal tax avoidance – taking complete advantage of every break the system offers – is critical to everyone’s financial health. For example, don’t keep tens of thousands sitting in a HISA where the dribble you earned is 100% taxed. Instead, move it into a TFSA to create a tax-free dribble (much better in equity ETFs, though). Of course, if you transfer the money into an RRSP, the feds will send you a tax rebate for giving yourself funds you already own. Later on, when you take a year off to pursue hot yoga and find yourself, you can cash it in and perhaps pay next to nothing.

In short, if you’re not making maximum TFSA contributions or shoveling up to 18% of your earned income into an RRSP, you’re gifting money to the government. If that makes you feel socially responsible, lovely. But for the rest of us, this is tense. Taxes are out of control.

Speaking of RRSPs, Derek Holt – the chief economist at Scotiabank – recently delivered this piece of tax warfare in an internal document on housing:

Make a $19.2k RRSP contribution just three months in advance of buying a home…
• …assuming a 30% tax rate, deposit $6k tax refund back into RRSP…
• …then withdraw the allowed $25k maximum under the HomeBuyers’
• …to be repaid to the RRSP in equal installments over 15 years starting 2 years after withdrawal with no interest penalty and the payments are not counted in mortgage serviceability calculations…
• …at, say, a 4% rate of interest, this equals $8k in interest savings over 15yrs…
• …which means the initial $19.2k RRSP deposit has been parlayed into an effective down
payment of about $33k, or an extra 70%+
• No restrictions on the source of the original RRSP deposit (can borrow for it, ‘gift’, etc).
• ie: the zero-down mortgage can still theoretically exist
• If a couple, and both are first time homebuyers, double all of the math above (ie: turn $38k from liberally allowed sources into a $65k down payment)

If a major bank’s showing clients how to take $38,000 and game it into $65,000 through exploiting the system, it might indicate we’ve all hit a tax wall. And this is even before T2 Hoovers out the savings of small business operators, vets, docs and the local John Deere dealership.

Well, here are ten of my fav ways to reduce your tax bill thanks to two simple words – income-splitting (as opposed to sprinking).

  • If you make more money than your spouse (in a higher tax bracket) take your piteous crumbs and use them to pay the household expenses. Have your spouse devote all of his/her take-home income to investing. Because your squeeze has a lower marginal rate, your family will keep more of the investment gains.
  • Open a spousal retirement plan for a less-taxed partner. The full deduction comes off your bigger income but the other person gets the money. Wait three years, and it can be withdrawn at the lower spousal rate. Can result in big savings.
  • Swap stuff. She gives you her departed mother’s irreplaceable jewelry (for God’s sake, don’t lose it) and you give her a bunch of ETFs. Now the financial assets are still in your family, but taxed in her hands at a lower rate (assuming there’s an income disparity between you).
  • Take the beefy monthly cheque T2 now sends you for having kids and invest it in growth assets in their names. Capital gains made here will not be attributed back to you. If they grow up and become rock stars, you keep it.
  • If you’re a wrinkly, split your CPP or pension with your spouse.
  • Give money to your adult children. No, not for a condo down payment, but instead to maximize their TFSAs – on the understanding they give it all back (with gains) when they turn 50 and leave the basement.
  • Loan your spouse a whack of money to invest. You will need to collect a tiny bit of interest annually on the loan (the rate is just 1%) but all the money the other person makes will not be attributed back to you. So if your partner’s in a lower bracket, it’s a big win. Plus the interest paid is tax-deductible.
  • Max your RRSP, of course. Not so much for retirement, but for tax-shifting between periods of your life. Layoffs, job losses, mat leaves, sabbaticals – there are many times when regular income drops and tapping into money which grew tax-free can save your marriage.
  • Stick the max into an RESP for your kids. No deduction for doing so, but the money will grow without tax and the feds will send a grant worth up to 20% of what you contribute annually. Open a family plan, not singles. And beware the hospital-stalking baby vultures with their crappy offerings. Go self-directed.
  • Hire your spouse or your kids to labour in your small business doing useful things. Yes, this is exactly what Bill Morneau is throwing a hissy-fit over, but you’ll get the immense satisfaction of watching some CRA goon burn up hours of time only to conclude that, yes, your wife is actually a productive, contributing human being worth being paid. Plus, she’s deductible. What a turn on.

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September 27th, 2017

Posted In: The Greater Fool

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