Okay, there will likely never be a ‘happy’ tax season, unless you’re eligible for a whopping tax return! But there are legal ways to ensure that we contribute our fair share to the tax pool, while keeping the majority of our hard earned money.
We all pay goods and services taxes, but our income taxes vary widely depending on our income tax bracket, the types of investments we hold, and any tax deductible expenses or losses we may incur. We all know that entrepreneurs can write off expenses that are directly related to their costs of doing business.
What many of us may not be aware of is that tax repercussions differ for various types of investments and insurance vehicles.
For example, we all probably know by now that the investment contained within vehicles such as RRSPs, LIRAs, RESPs and TFSAs grow free of all taxes while the investments stay inside the shelters. A fair number of us do not realize that you can also create a similar tax shelter within a permanent life policy with cash values too. This can be very beneficial for those of us looking to broaden their scope of investment choices for the more guaranteed or ‘lower risk’ profile portion of their portfolio. The same life insurance policy can also add value in the estate and succession plans.
Our entrepreneur client, William, did decrease his tax payouts by writing off his business expenses, but he was not aware that he could also save money in taxes by investing wisely. With the help of his advisor, a tax plan was created to help William improve his financial situation by ensuring that he pays his fair share, but does not overpay in taxes.
William decided to utilize investments that offered better tax benefits, although his ultimate tax plan complements his financial plan; it is not the sole deciding factor.
When it comes to the different types of investments, the first step is to determine which vehicle the funds will be placed into. For all registered accounts, such as RRSPs and TFSAs, as a general rule of thumb when considering a self-directed account, most investments can be held within these. That includes growth equities, dividend paying equities and interest paying securities such as bonds and GICs. If the accounts are none registered, then a more tax efficient choice of investments is prudent since they will not enjoy the shelter of a registered account. Non-registered or Cash/margin accounts should generally hold mostly securities and investments that are subject to lower taxable income in the category of capital gains and dividend paying investments. For the fixed interest portion of the non-registered holdings, consider investing into a permanent whole life policy such as a participating whole life or universal life insurance policy. This type of policy usually also satisfies other parts of the life plan such as Estate, Succession as well as Financial Plans.
With these tax advantaged financial vehicles in now in place, William is getting closer to completing the objectives in his Life Plan!
By Gino Scialdone, Black Spruce Financial
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