8 ways to help lower clients’ taxes (and boost their retirement savings)

RRSPs are a sound option, especially for higher-income earners. Ultimately, the pros and cons of a TFSA versus an RRSP contribution may depend on whether a client’s tax bracket in retirement is lower or higher than it was when the client made the initial contribution. Another consideration involves Canadians working past age 65 and even into their 70s, who could be in a higher tax bracket when withdrawing money from an RRSP (not an ideal situation).

As a client approaches retirement, it may be beneficial to put assets taxed at a higher level into tax-sheltered accounts. This might mean allocating bonds primarily to RRSPs and TFSAs, because interest is fully taxable. Clients with remaining RRSP or TFSA contribution room after purchasing all their bonds could then consider buying stocks. Just remember to take care when allocating foreign stocks that pay dividends inside a registered account. The ability to claim the withholding tax on foreign payments is lost when held inside an RRSP or TFSA. For this reason, it’s sometimes beneficial to hold foreign stocks that pay dividends in non-registered accounts, allowing clients to maintain the ability to claim a foreign tax credit on their Canadian tax returns.

As a general rule, it’s a good idea to hold Canadian dividend-paying stocks and investments that generate capital gains in a non-registered account, since these have preferential tax treatment.

For higher-income earners, income splitting — redirecting income within a family unit — can be one of the most powerful tools for families to reduce their tax burden and keep after-tax dollars in their hands (versus more of their income going to the Canada Revenue Agency).

Income splitting opportunities permitted under current legislation include, but aren’t limited to:

• Opening a TFSA for all family members over the age of 18
• Loaning funds at the prescribed rate of interest to a spouse¹
• Making a gift to an adult family member
• Having the higher income earner pay family expenses
• Using the benefits of a registered education savings plan (RESP) or registered disability savings plan (RDSP)
• Investing child tax benefit money in the child’s name
• Pension splitting with a spouse
• Loaning money to a spouse to produce business income

Encourage clients to consult with a tax expert before committing to any of these or other options.

In the non-registered investment environment, clients may want to consider using annuities and segregated fund contracts with guaranteed income (for their return of capital features and protection for longevity risk). Along with being tax efficient, they can offer insurance protection.

In retirement, a popular tax-minimization goal often becomes avoiding clawbacks of Old Age Security (OAS). Because TFSA withdrawals aren’t considered taxable income, they don’t affect clients’ eligibility for OAS. For example, for 2018, if clients receiving the OAS have income over $75,910, the government will claw back some of their OAS benefit, and the benefit completely disappears at the $122,843 annual income level.

Clients can use non-registered investments — T-series, annuities, segregated fund products — with return of capital features to help with OAS clawbacks. If clients have significant pension income or a lot of money in RRSPs that need to be converted into a registered retirement income fund (RRIF) or annuity, there may not be much they can do to minimize the OAS clawback.

Consistently monitoring clients’ taxable income each year helps ensure government benefits aren’t clawed back.