Make 2021 Less Taxing
Markus Muhs - May 11, 2021
Now that the 2020 tax season is behind us, it's time to look at some basic things that could make 2021 a bit less taxing on you.
Achieving your investment goals should involve more than just investment performance. Minimizing the impact of taxation can play a significant role in building wealth. Even small reductions in taxes over time can make a large impact to your overall returns. What did you do to reduce your tax bill last year? As we enter a new decade, perhaps there are opportunities to improve your tax position. Here are a handful of suggestions to start your thinking:
1. Contribute to your RRSP
The 2020 deadline for Registered Retirement Savings Plan (RRSP) contributions was fairly recently, on March 1st, but this doesn't mean you can't already start contributing for the 2021 tax year. Don’t overlook the value of tax-deferred growth over time.
Automate your RRSP savings by way of a monthly contribution plan to your RRSP. Just set it and forget it and in January it'll be the first tax receipt you receive. If you received a tax refund for 2020, consider making a lump sum RRSP contribution right away, based on your new limit on your notice of assessment (find your NOA and RRSP/TFSA limits on the CRA's My Account for Individuals).
If you have a spouse, consider the opportunity to contribute to a spousal RRSP. If one spouse has the prospect of earning a high level of income in retirement while the other will have little or no income, a spousal RRSP may be an effective income-splitting opportunity. A key thing to be aware of is that it's the lower-income spouse who opens the SRSP, to which the higher-income spouse contributes to using their own contribution limit (the lower-income spouse's contribution limit doesn't factor).
2. Maximize your TFSA
The annual Tax-Free Savings Account (TFSA) dollar limit for 2021 is $6,000. This brings the lifetime contribution amount to $75,500 for eligible individuals since the TFSA’s inception in 2009. If you have not maximized contributions to your tax-advantaged accounts, consider setting up a monthly contribution plan.
3. Split income, save tax
Review your family’s potential tax bill to determine if there are income-splitting opportunities. While the federal government has eliminated many opportunities over the years, there are still various strategies to consider. This may include paying reasonable salaries to spouses/children for services provided to a self-employed business/private company, splitting eligible pension income with a spouse on a tax return, or setting up a loan at the prescribed interest rate where proceeds are used for investment purposes by a spouse.
A simple and straightforward strategy that all families with unequal incomes should employ is to have each spouse's paycheque deposit into a different checking account and have all household expenses flow out of the higher-income spouse's account, leaving the lower-income earner's income available to be saved/invested. Doing this, you can avoid having that money, once invested, attributed back to the higher-income earning spouse.
4. Review your investment location
If you hold multiple types of accounts (i.e., non-registered, RRSP, TFSA), consider that the same investment may be taxed differently depending on the type of account in which it is held. This can have an impact on your resulting after-tax dollars.
As one example, it may be beneficial to hold foreign (non-U.S.) dividend-paying equities outside of an RRSP. This is because foreign dividends are usually subject to a foreign withholding tax. In non-registered accounts, there is a federal (and sometimes provincial) foreign tax credit available to partially or fully recover this tax. However, when these stocks are held in registered accounts, this credit is not available. Meanwhile, U.S. equities are best held in an RRSP, where a tax treaty exempts their dividends from withholding tax (if held directly, or as a U.S.-situ ETF), while Canadian equities are generally the most efficient asset held in taxable accounts.
5. Plan for your retirement accounts
If you are close to or currently in retirement, a review of your accounts may help to minimize tax or make the most of available tax credits. By understanding your sources of retirement income (such as pension plans, RRSPs/RRIFs, income from investments, etc.), you may be able to prioritize their withdrawal to maximize tax efficiency.
For instance, there may be benefits to withdrawing funds from non-registered investments earlier, while deferring the withdrawal of your TFSA assets as long as possible. Whether or not to defer converting your RRSP to a RRIF, or to do so earlier, also hinges on your particular financial situation.
A comprehensive retirement plan may be needed in order to minimize taxation and preserve government income-tested benefits. We can help you identify opportunities that relate to your specific situation.
6. Get organized for next tax season
While personal income tax returns will not be top of mind again for another 10 months or so, why not organize your records before the crunch season approaches? This may prevent medical expenses, donations, business charges and other receipts from being missed or overlooked. Consider starting a new tax folder to begin the 2021 tax year on great footing.
7. Plan for your business
If you are a small business owner, speak to an accountant or tax planner to review the options for the year ahead. The tax rules affecting small businesses continue to change. Have you accounted for the passive income rules that came into effect in 2019? A variety of strategies may help to navigate these new rules, such as establishing a registered pension plan (i.e., an Individual Pension Plan) or purchasing a corporately-owned, exempt permanent life insurance policy to extract funds from the business.
We Can Help
Tax planning continues to be an important part of investing as it can play a significant role in improving longer-term returns. If you need assistance with any of these ideas, get in touch with Markus and Jeff. Also consider seeking advice from professional tax advisors regarding your particular situation.
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The above is for general information only, not intended to provide tax, legal or financial advice, and under no circumstances should be interpreted as a solicitation to act as a securities broker or dealer in any jurisdiction. All views are intended for general circulation only and do not have any regard to the specific investment objectives, financial situation or general needs of any particular person, organization or institution. All investors should consult with a qualified investment advisor or tax professional before making any investment decisions.
Tax & Estate advice offered through Canaccord Genuity Wealth and Estate Planning Services.