Getty Images/iStockphoto
The math is simple. The more money you make, the more taxes you pay.
For the nation's highest-income earners – those making more than $220,000 annually – the amount going to the tax man is significant.
"Some are left with less than 50 cents on the dollar of what they earn, depending on where they live in Canada," says Evelyn Jacks, author of several books on tax management, including Essential Tax Facts.
That said, Ms. Jacks adds that "it is the right of Canadians of all income levels to arrange their affairs – within the framework of the law – to take advantage of all the tax strategies available."
These tax strategies can provide the most tax-savings bang for incoming bucks, especially for those of high net worth.
Make a loan to your spouse
To reduce the impact of tax on passive income from investments, couples can spread the wealth around using a loan, whereby a high-income spouse lends money to the low-income spouse for investment purposes.
It is pretty straightforward, says Vickie Campbell, a certified financial planner with Ryan Lamontagne Inc. in Ottawa. "The borrowing spouse invests the money and pays interest back to the spouse who lent the money."
Both have to declare the interest, but the lower-income spouse can deduct the interest cost against income because it's being used to invest, providing the money is in a non-registered, taxable account producing income, such as dividends.
At the same time, the income generated from the invested money is taxed at a lower rate than it would be in the hands of the higher-earning spouse. Ms. Campbell adds that higher-earning spouses have to declare the interest earnings. But given that the Canada Revenue Agency's prescribed rate for loans of this nature is 1 per cent, the impact should be less than the taxes that would be owing if high-income-earning spouses were to invest the money themselves.
More income sources are better than one
Diversification is the hallmark of good investing. It's also a key strategy for managing income tax efficiently. As well, just like investing, an early start is a good start.
"The sooner you start to diversify your income sources and think about how you're going to use current tax preferences to reduce the taxes you pay when you are wealthy, the better a position you will be in in the future because your money will be in the right buckets," Ms. Jacks says.
The main thrust here is that not all earnings are taxed at the same rate. Dividends and capital gains, earned outside of a registered account, are taxed more favourably than income from interest, employment, pensions and disbursements from RRSPs and registered retirement income funds (RRIFs).
Over the long term, individuals can build substantial, taxable-investment accounts generating dividends and capital-gains income that can be layered on top of fully taxable income from pensions and RRSPs. This not only reduces the tax burden, it also helps reduce the impact of clawbacks to Old Age Security, Ms. Jacks says.
Another possible source of income is life insurance. The strategy here is individuals can purchase a whole life insurance policy to create a tax-free wealth source for their estate. The premiums can be high, but the benefits can be used to cover taxes on other assets.
Go corporate
For business owners, incorporating offers tax efficiencies, including a lifetime capital-gains exemption when selling the shares of the corporation, or qualified farm or fishing property.
"For professional and other entrepreneurs with high incomes, incorporating is definitely a good strategy, but some aspects are a wait-and-see game with the pending rule changes," Ms. Campbell says.
Among the manoeuvres under review is "income sprinkling," whereby earnings from the corporation are split among the business owner, a spouse and adult children to reduce the overall tax burden.
One advantage that will remain in place, however, is the Individual Pension Plan (IPP). "Contributions are deductible by the operating company, and income accumulates tax-free in the plan until benefits are paid to the owner as pension income," says Cynthia Kett, an accountant and financial advisor with Stewart & Kett Financial Advisors in Toronto. Also, its income is eligible for income splitting.
Use basic tax shelters
While it's tempting to imagine the wealthy hiding their money offshore to shelter it from Canadian taxes, the real – and legal – tax shelters exist in plain sight. Among them are registered retirement savings plans (RRSPs), registered education savings plans (RESPs), registered disability savings plans (RDSPs, for families with loved ones with disabilities) and even tax-free savings accounts (TFSAs). And they're available to all Canadians, wealthy or not.
It's just that high-income earners have more cash available to put in these vehicles. The RRSP is the go-to account, allowing deferral of taxes owing on contributed income today until retirement when, presumably, that money would be withdrawn at a lower tax rate.
The immediate savings are considerable. For 2017, the maximum annual contribution is more than $26,000.
"So you could be getting more than 50 per cent of your contribution back as a refund, and that's enough to fund two TFSAs," Ms. Jacks says. While the RRSP is the "first line of defence" for reducing taxes, remaining cash can then go toward maximizing contributions to the other tax-preferred investment vehicles.
Earn credit for charitable donations
For wealthy individuals, donations can help reduce taxes, thanks to a credit (applicable only against taxes owing or paid) that becomes more meaningful beyond gifts of $200 a year.
Generally speaking, the credit almost doubles from 15 per cent in tax savings for every dollar donated (up to $200) to 33 cents on the dollar for money donated above that amount. With provincial credits, the tax savings are even higher.
Wealthy individuals and families often donate larger amounts, resulting in significant tax savings, says Ms. Kett.
"Ideally, large donation credits are claimed in high-income years because the annual donation limit is tied to the income for the year of the taxpayer, or the taxpayer's estate for deceased individuals," she says.
As well, donating stocks or other investment property in-kind with large unrealized capital gains can offer double the tax-efficiency punch: Not only does an in-kind donation receive a credit based on the dollar value of the asset, but the individual avoids paying taxes on the capital gain.
Additionally, wealthy families often set up foundations through which they hand over a large lump sum that remains in control of the donor to be invested and given, over time, to charities at the discretion of the foundation.