With the economic recession ravaging financial markets, low interest rates on your savings and high taxes, Canadians increasingly are looking for ways to make and preserve their wealth.
Anthony Maiorino, vice-president of high net worth strategies and services with RBC Wealth Management, says that more and more Canadians are using tax strategies such as family trusts, spousal loans and independent pension plans (IPPs) to generate and save their wealth in troubled economic times.
“Individuals today are looking for ways to make and save more of their money,” said Maiorino. “Taxes are the single largest expense that people pay, and we are seeing an increase in the number of people using these strategies.”
More and more Canadian entrepreneurs and small business owner are using IPPs to catch up on and supplement their retirement savings.
An IPP is a defined benefit registered pension plan that is established for the benefit of a single employee. The primary candidates for IPPs are small business owners, company executives and incorporated professionals who are over 40 and have annual incomes over $100,000.
The most significant benefit of an IPP is the allowable contribution limit, which generally is higher than limits available under registered retirement savings plans (RRSPs), and allows the plan beneficiary to accumulate a larger pool of capital for retirement.
The allowable contribution limit depends on the individual’s age, income and length of service with the company. At age 65, the current allowable maximum contribution is more than $35,000.
A spousal loan is another wealth strategy that is particularly effective in a low-interest-rate environment and where one spouse is a high-income earner and the other a low-income earner.
In this situation, the higher-income-earning spouse lends money to the lower-income spouse, who is able to earn income on these funds and pay taxes at a lower marginal tax rate.
Under a written loan agreement, the lower-income spouse agrees to pay interest at the Canada Revenue Agency’s prescribed loan rate back to the higher-income earner, who must report these payments as income. The prescribed loan rate is set each quarter and remains in effect for the lifetime of the loan. The rate was set at one per cent in April.
Spousal loans present an excellent opportunity to maximize financial benefits when the prescribed rate is low because it is in effect for the lifetime of the loan. Even though the higher-income spouse must report the interest payments as income, the overall tax savings should more than compensate the added income of the higher-income spouse as long as the lower-income spouse earns income on the borrowed money at a rate higher than the CRA prescribed rate.
The third strategy is a family trust. It allows a family to minimize overall taxes because capital gains earned in the trust can be taxed to the children or grandchildren, who can earn about $18,000 of capital gains tax-free every year, depending on which province you live in.
Maiorino said family trusts can be started with as little as $50,000.
“What you should do depends on what comes out of it,” said Maiorino. “Understand what it means to the family, speak to a financial professional and realize what has to be done. There are a surprising number of people who are doing it.”
“There’s a lot of money out there on the sidelines that is looking for tax relief,” said Maiorino. “These are some strategies people can use.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. Contact boggsyourmoney@rogers.com.