Plucking the tax feathers

Feb 15, 2016

In the news lately there has been a lot of talk regarding how much money the wealthy make, how much taxes they pay (or don’t pay in some cases), and overall a feeling of “us against them”.  The Financial Post issued a great article that had an interesting perspective that we don’t hear a lot. This snippet of the article, sums it up nicely:

“As a society we should be looking at ways to boost the economy so that more people can earn more and pay more. If we spend too much angst and policy dumping on the “greedy” one per cent, the net result is that there will be less tax dollars to put into all of the programs that benefit the broader society.”

There is also this unsaid myth that the wealthy have access to all the best financial experts who in turn grant them access to all the secrets to paying less taxes. As Jean-Baptiste Colbert, Louis XIV’s finance minister, is said to have remarked “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

We are here to tell you that no matter which income bracket you reside in, there are ways that everyone can pluck a few feathers.

'Fake' a loss

There's an easy—and perfectly legal—way to get around Canada Revenue Agency’s dreaded “superficial loss” rule. You can't sell a losing stock to claim a capital gain then buy it right back. But you can sell an poor performing exchange traded fund, claim a capital loss and buy a similar, not identical, ETF.

Here’s an easy—and perfectly legal—way to get around Canada Revenue Agency’s dreaded “superficial loss” rule. This rule was created to prevent you from selling a stock or other asset that’s temporarily doing poorly so you can realize a capital loss, then buy the investment right back. For instance, say you had stock in Royal Bank that you intended to keep for years, but it happened to be having a bad quarter. You might be tempted to sell it off, use the capital loss to pay less tax on capital gains elsewhere, then buy your Royal Bank stock right back. The CRA won’t allow you to do that (so don’t even try), but there’s nothing preventing you from repurchasing a similar­—but not identical—property that would allow you to realize a capital loss. For example, you could sell a Canadian equity ETF when it’s showing a loss and then buy another Canadian equity ETF that tracks a similar but not identical index. Got you, tax man! Tax savings: Can be large, but make sure you play by the rules.

Lower income spouse should invest

Want your capital gains to be taxed at the lowest rate possible? Have your lower income earning spouse do all the investing. A lot of couple’s pool resources to pay for household expenses as it seems like the right thing for committed partners to do. But if one of you is the breadwinner and the other earns much less income, it doesn’t make sense from a tax perspective. Instead, the higher-earning spouse should cover all the day-to-day family expenses, like buying groceries and paying the heating bill, so the lower-income spouse can make the investments. That way, all of the interest and capital gains from those investments will be taxed at the lower tax rate of the lower-income earner.

The higher-earning spouse can also lend money to the lower-earning spouse to buy investments, but the Canada Revenue Agency’s prescribed interest rate of 1% must be charged.

Share your income

Many government benefits are income tested so transferring income to a lower-income spouse may help the higher-income spouse reduce taxes and get more. For instance, if both of you are 60 or older and receiving CPP payments, the higher-income spouse can elect to attribute up to 50% of his or her CPP income to the lower-earning spouse.

Retired? Keep using TFSAs

Unlike RRSPs, you can keep contributing to TFSAs well past 71. And unlike RRIFs, there are no forced annual withdrawals. Each member of a senior couple can invest $5,500 into his or her TFSA annually, meaning the two of you can convert $11,000 worth of RRIF withdrawals and non-registered savings into TFSAs each year. Sure, you’ve got to pay taxes when you cash out a RRIF, but once you place that income inside your TFSA you can generate dividend or interest income (or capital gains) free of tax. And no matter how large they become, the TFSAs will never trigger the clawback of government income tested programs like OAS or the Guaranteed Income Supplement (GIS).

Purchase an insurance policy

Life insurance has several benefit besides helping at the time of death or to pay the final tax bill it can provide tax benefits along the way. Certain life insurance policies have a tax sheltered savings component.
Using life insurance can be a tax-effective income in retirement. Here’s how it works:

  • You make a series of deposits into the life insurance policy, allocating the minimum required amount of your deposit to the insurance premiums and the rest to your investments
  • Earnings from your investments grow tax free, just like they do in an RRSP
  • At retirement, you borrow money against the policy’s cash savings, receiving tax-free payments to supplement your retirement income
  • Upon your death, the life insurance proceeds are used to repay any outstanding loans. Any remaining value goes to your whomever you choose


By incorporating your company, your business profits will be subject to a very low tax rate of 15.5%(2013). On the other hand, the business profits of unincorporated businesses are included in the owner’s taxable income, which are taxed at 49.53% (the highest income tax bracket).

Hire your family

Incorporating your company will also open yourself to more tax saving opportunities through income splitting, which is a major way to save taxes for self employed in Canada.
When a corporation is formed, shareholders are needed. A major benefit to being a shareholder of a company is the payment of dividends. Typically, a corporation will declare dividends on after tax profits once a year. If you were to make your spouse a shareholder in your company then it would be fair to pay them a dividend. This can be advantageous for saving tax when one spouse earns significantly more than the other. The higher income spouse can pay an appropriate dividend to the lower income spouse through the corporation, so that the income will be taxed at a lower marginal rate.

Pay all your family members a reasonable salary. This strategy works if you, as the self employed individual, are earning more than your family members. Those earning less than you will be in a lower tax bracket, thereby allowing you to save tax. In fact, the first $11,038 of employment income is tax free. If your children are not working, you can save taxes in Canada by paying your children $11,038 each. The salary will be tax deductible to you and tax free for your children. It’s important that an employment agreement be prepared that specifies the duties that your family member will be performing, and their hourly wage or annual salary. In addition, a weekly log should be kept to support the time spent working by each family member. The reason for doing such things is to ensure there’s a bona-fide relationship between yourself and your family members, that will help refute any challenges by the Canada Revenue Agency.

Sell your corporation

Want to save $800,000 in capital gains? Well here’s some good news: the government likes to encourage small business, so they’re willing to give you a one-time $800,000 capital gains exemption when you sell. Even better, this lifetime exemption isn’t limited to one family member—a boon for small businesses that will incur more than $800,000 in capital gains when sold. That $800,000 figure can be claimed by any family member with an ownership stake in the business provided they’ve held shares in the company for at least two years. So if a husband, wife and daughter each owned one-third of a family business, they would all be exempt—even if the sale of the business created $2.4 million in capital gains. Before you sell, just make sure you meet Canada Revenue Agency’s definition of a qualified small business, farm or fishing property.

Personal pension plan

For individuals who own your own corporation, you may want to invest in an Personal Pensions Plan (PPP). Simply-put, a PPP is a registered pension plan offered for an incorporated professional. A PPP provides a flexible contribution mechanism that can match the available cash flow of the company while enjoying superior tax deductions unavailable to those saving through RRSPs. You do not have to pay tax on the money inside the PPP as it grows and any investment management fees paid are tax-deductible to the corporation.

At retirement, you have the option to do “terminal funding”, which is a last big investment into the PPP (under certain conditions) that will be tax-deductible in the hands of the corporation. In addition, by removing the cash out of the corporation, there is a secondary benefit of purifying the corporation for purposes of the $800,000 lifetime capital gains exemption, especially where you are preparing the company for sale.

Spread your wealth around

Even though Canadian politicians can’t agree on how to save the middle class, that doesn’t mean middle-class folks can’t save themselves from a huge tax bill on their estates. Once a last surviving spouse dies, for instance, a $500,000 RRSP or RRIF would be taxed as income on the person’s final tax return, meaning more than $200,000 would go to taxes and not to your family. A simple tactic for avoiding this is to:

  • Slowly move money into TFSAs or regular taxable accounts to avoid a massive tax hit on your final return.
  • Set up trusts for your children and grandchildren at potentially lower marginal tax rates.
  • Name your heirs as beneficiaries on accounts
  • Give money to them while you’re alive to avoid probate fees

Regardless of when tax season is, the time to start reducing your taxes is now. Feel free to connect with us to see how these strategies can work in your personal situation at




Pamela Coquet
Financial Strategist at Savanti Wealth

Want some more information? Send us an email or give us a call and we can help you at or (403)968-8443

Savanti is your no-nonsense, get it done, always got your back, tell it to you straight, make you laugh, and there if you need to cry - financial partner.

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