Ways to Reduce Taxes for High Income Earners in Canada
Continue reading to learn more about taxes, including ways to lower them in Canada.
Who Is a High Income Earner in Canada?
The 2022 federal income tax brackets are as follows:
15% on the first $50,197 of taxable income, plus
20.5% on the next $50,195 of taxable income (on the portion of taxable income over 50,197 up to $100,392), plus
26% on the next $55,233 of taxable income (on the portion of taxable income over $100,392 up to $155,625), plus
29% on the next $66,083 of taxable income (on the portion of taxable income over 155,625 up to $221,708), plus
33% of taxable income over $221,708
You’re likely looking for ways to lower your taxable income if you’re a high income earner. You can potentially lower his amount with some tips and tricks. Speak to your financial advisor about the following ways to reduce your taxes:
Spousal RRSP contributions
Tax-exempt life insurance
Tax-free savings account
Prescribed rate loans
Spousal RRSP Contributions
A registered retirement savings plan (RRSP) is a way for Canadians to plan for retirement. Pre-tax money enters the RRSP and grows tax-free until you remove it. This plan allows you to deduct contributions against your income.
A spousal RRSP allows you to contribute to an RRSP in your spouse’s name, helping lower income tax for both of you. The higher-income spouse can use their unused RRSP contributions in a tax year to deposit money in their partner’s name. They can then deduct that amount from their taxable income.
The spouse holding this account must pay income tax on these contributions when they start withdrawing money from their RRSP in retirement.
Tax-Exempt Life Insurance
Tax-exempt life insurance helps you obtain tax-deferred growth, the potential for tax-free income during retirement, and tax-free distribution to your beneficiaries when you pass.
Tax-exempt life insurance helps you invest for growth within your life insurance policy (think of something similar to your pension). It grows over the policy's duration. There are 2 ways to manage your life insurance policy, participating whole life (PAR) and universal life (UL):
PAR: PAR life insurance provides lifetime coverage, provided you pay your policy premiums. You can build a larger estate as cash value grows in your policy tax-free.
UL: UL insurance also offers a lifetime of protection & allows you to invest. You pay a premium for your coverage & additional funds go into the investment part of the policy, going towards your choice of investments.
Flow-through shares are an incentive from the Canadian government for individual investment into businesses. You become a shareholder, providing you with an emotional investment in the chosen organization.
According to the Government of Canada, junior resource companies in the mining, oil and gas, and renewable energy sectors can struggle to raise money for their development projects. Flow-through shares help these companies to complete their development projects with the help of these new shareholders.
Flow-through shares offer tax incentives if you’re an investor, including:
Deductions for resources expenses renounced by eligible corporations
Investment tax credits for individuals on resource expenses in the mining sector that qualify as flow-through mining expenditures
The Canadian Revenue Agency (CRA) reviews and monitors all flow-through share deals.
Tax Free Savings Account
A tax free savings account (TFSA) helps people over 18 with an official social insurance number to set aside portions of their income for years. Any contributions to this account aren’t deductible for income tax purposes, and any money earned in the account is generally tax-free (including when it’s withdrawn).
Many Canadians use their TFSA as a regular savings account, allowing them to contribute up to $6000 every year. Another way to use this account is for investment purposes, including stocks, mutual funds, and bonds. The profits you get from these investments will continue to grow tax free.
Prescribed Rate Loan
A prescribed rate loan is a way to split your income between partners—the high-earning partner loans money to their spouse, child, or a legal entity for investments. The person receiving these funds can then earn money from investments.
While this is a great concept, there are several key criteria someone needs to meet with prescribed loan rates. The lending family member must provide their loan at a rate set by the CRA and declare the interest income they earn from the loan on their yearly tax return. Additionally, they must pay any interest on this loan yearly by January 30th for the previous year.