Q: My wife is retired already and I am planning to retire in the next two years. What can we do to save taxes either now or after I retire?

A: The number one expense for nearly every Canadian is … taxes. However, it is very possible to legitimately save on taxes now and in the future with the right tax plan. Good tax planning is all about perspective. Too often – and especially with tax deadlines looming – people fixate on the short term. Their perspective narrows to getting that tax return submitted on time, obsessing about tax credits, or desperately trying to come up with as much money as possible to maximize that Registered Retirement Savings Plan (RRSP) contribution room.
What most don’t realize is that the most effective way to reduce your taxes comes from tax planning, which can’t be done effectively when it’s at the last minute and you’re just about to file your tax return. Whether you’re retired or not, consider these simple tax planning strategies to maximize your tax savings.

  • Contribute to a Tax-Free Savings Account (TFSA). The contribution isn’t tax deductible but money and growth earned on investments held within your TFSA are tax-free and so are withdrawals made at any time for any purpose.
  • Interest generated by your non-registered investments is fully taxable. Reduce those taxes by selecting non-registered investments that benefit from lower tax rates – for example, investments that generate capital gains or dividends or Corporate Class investments.
  • Make sure your portfolios are structured in a tax efficient manner. You can reduce taxes by holding fully-taxable, interest-generating investments inside a tax-sheltered RRSP, RRIF or TFSA and keeping eligible investment assets that generate capital gains or Canadian dividends and are taxed less outside your registered plans.
  • When the spouse with a higher marginal tax rate makes a loan to another family member with a lower marginal tax rate (at an interest rate higher than the prescribed interest rate, set each quarter by the federal government) the overall family tax bill may be reduced. This is because some of the family’s investment income is now taxable to the lower-income spouse.

For Canadians who are already retired, consider some of these simple tax planning ideas.

Aim at reducing your family’s total tax liability by allocating up to 50 per cent of your eligible pension income (monthly pension payments and, when you reach age 65, RRIF income) to the lower income spouse/partner for tax purposes.

Be sure to take full advantage of the tax-sheltering benefits of your RRSP by making your maximum contribution up to the end of the year you turn 71. After you reach 71, consider putting any extra money into a TFSA where the funds can continue to grow tax-free and/or contributing to a spousal RRSP eligible investments until your spouse turns 71.

Consider a Monthly Income Portfolio. This investment option is more flexible and tax-advantaged than other non-registered options like a GIC. A monthly income portfolio is designed to provide maximum investment returns and payout a monthly income. A portion of the income stream is treated as return on capital – a tax-deferral strategy that can increase your after-tax monthly income.

These are only some of the basic tax planning options. Remember, there is no one-size-fits-all solution. While your accountant is responsible for the tax “preparation” of your financial situation, be sure to consult your financial advisor for the tax “planning” component of your financial plan. There are a multitude of variables that must be taken into consideration, especially your unique circumstances and your short and long-term objectives. Your professional advisor can help you discover what’s best for you.

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