In the next few days the typical island family will start working for themselves and stop paying the government.
According to the Fraser Institute’s research, the average family in BC gives about five months’ worth of income to pay for all the federal, provincial and municipal taxes levied every year. Looked at another way, it’s the equivalent of handing every paycheque from January to early June over to the government.
Finding ways for Canadian families to accomplish their financial goals can be challenging, especially when taxes take such a significant bite out of their annual income. While taxes are unavoidable, there are five simple investment strategies I share with my Island Savings clients to help them reduce how much of their hard-earned income goes to the government:
- If your marginal tax bracket is higher now than it will be in retirement, it may be more beneficial to concentrate the bulk of your investing in RSPs. By doing this you’ll recognize the tax savings now and instead pay when you withdraw the money—ideally when you’re retired and in a lower tax bracket.
- Beyond just investing in your RSP, you can also manage the type of income your RSP investments are generating to reduce the impact of capital gains in non-registered investment vehicles. When people invest, they often put their mutual funds and stocks in their RSP and hold their GICs and terms deposits outside their RSPs—but that’s exactly the opposite of what you should do. You should instead hold your term deposits and GICs inside your RSP because they are taxed at a much higher rate than mutual funds and stocks.
- A major savings can also come by using a fee-based advisor because you can write off their fees on your non-registered investments (such as stocks or mutual funds). At the end of the year, you’ll receive a statement on how much you paid in fees on your non-registered investments, which you can then deduct from your income when preparing your tax return.
- While the Family Tax Credit was eliminated this year, you can still use an income splitting tactic in your investments. It works something like this: you invest in a spousal RSP—for the lower-earning spouse—for several consecutive years and then you stop contributing for three years. Once that period is done, you can withdraw that money because it’s taxed at the lower-earning spouse’s tax rate.
- After you retire, you can also save on tax by drawing down on your RSP before you start collecting your various pensions. If you wait to draw on your RSP until you are age 72, the amount you are taking out is much larger and will be taxed at a higher rate—but the earlier you start withdrawing from your RSP reduces the amount you will take out over time effectively reducing the tax you pay, he explains.
Regardless of what stage of life you’re in, your advisor should review your notice of assessment annually to identify ways to reduce your tax costs and work with your accountant to ensure that the tax strategies make sense between all the expert-advisor relationships you have.