The top-10 steps to saving tax
by Jamie Golombek
Made any New Year's resolutions for 2006? As you meet with clients over the next two months during the busy RRSP season, it's an ideal time to establish some tax resolutions for 2006. Here's my top-10 list of things that clients could be doing immediately to save tax during the upcoming year.
Resolution #1: Maximize RRSP Contributions
Remind clients that the RRSP limit for 2006 is now the lesser of 18 per cent of 2005 earned income and $18,000. Now would be a good time to encourage clients who are coming to you to make their 2005 contributions to get a head start on 2006, if they have the cash. If not, consider having a client make an RRSP contribution "in kind".
Resolution #2: Maximize Foreign Content
With the elimination of the foreign content limit in Canada in last year's federal budget, clients can now invest their entire RRSP or RRIF globally, without any artificial restrictions. Yet, surprisingly, despite the fact that the budget passed over six months ago, many clients are still hovering around the old 30 per cent foreign content limit. Remind clients of the need to "go global" despite the recent "hot" markets we've experienced in Canada in 2005.
Resolution #3: Set Up A Spousal RRSP
Spousal RRSPs remain one of the last legal methods of income splitting between spouses or common-law partners. The primary benefit of a spousal RRSP is that funds withdrawn from such a plan can be taxed in the hands of the annuitant spouse instead of the contributor spouse, subject to the well-known three-year spousal attribution rule. If the annuitant spouse is in a lower tax bracket than the contributor spouse in the year of withdrawal, there may be an absolute and permanent tax savings.
Resolution #4: Invest Outside Of An RRSP
Tax-efficient investing through non-registered accounts should also be a subject of discussion when meeting with clients who maximize their RRSPs annually. Consider reminding clients of the tremendous tax advantages available when investing through multi-class mutual fund corporations. The biggest advantage is the ability to switch from one class of shares (fund) to another without incurring any immediate capital gains tax. A secondary, but oft-forgotten benefit, is that mutual fund corporations are generally able to minimize the amount of annual capital gains distributions by using capital losses of one class to offset capital gains otherwise distributable of other classes.
Resolution #5: Open Up Resps For (Grand) Kids
It's now been nearly eight years since the federal government reinvigorated the then-struggling registered education savings plans (RESP) by introducing the Canada Education Savings Grant (CESG) program. In fact, this program has proven to be so popular that an October 2005 C.D. Howe Institute study has recommended that it would be cheaper for the government "to make adequate student loans available to all students than to continue with the existing RESP system". Notwithstanding the C.D. Howe's comments, the RESP is still with us and the government hasn't made any moves to change it as of yet. It's a good time, however, to remind clients that if they still haven't set up RESPs for kids or grandkids, there is a huge opportunity to go back and collect prior years' CESGs, retroactive to 1998. For a complete review of how the carryforward CESG rules work, please see my April 2005 FORUM column, "RESP Update".
Resolution #6: Make Your Interest Tax-Deductible
Do you have any clients that still have a mortgage on their homes, yet are also investing with you in non-registered accounts? Remind them of the Singleton Supreme Court of Canada decision whereby they can sell their non-registered investments (subject to any capital gain/loss considerations), pay off the mortgage (again, subject to any early payment penalties) and then get a secured line of credit against their home to repurchase the securities sold and thus make their non-deductible interest tax deductible.
Resolution # 7: Consider Income Splitting
The CRA announced that the prescribed interest rate for the first quarter of 2006 will remain at three per cent. A spousal loan income-splitting strategy whereby the higher income spouse or partner loans funds to the lower income spouse or partner to invest may be ideal given the near all-time record low prescribed rate.
Resolution # 8: Consider a systematic withdrawal plan (SWP)
For clients looking for tax-effective cash flow from their mutual fund or segregated fund account, consider setting up an SWP. I discussed these plans in detail, along with an example, in my October 2001 FORUM column, "Tax & Estate Matters".
Resolution # 9: Plan NOT To Get A Tax Refund
If your clients regularly get a large tax refund each spring, they should consider applying for a reduction of tax at source using CRA Form T1213. Remember that this form needs to be completed each year.
Resolution # 10: Donate "In Kind" To Charity
Finally, remind clients that when planning their charitable giving for the 2006 calendar year, they may wish to consider donating appreciated stock, mutual funds or segregated funds directly to the charities of their choice. Not only will they get a tax receipt for the fair market value of the funds donated, but they will reduce their capital gains inclusion rate to 25 per cent from the normal 50 per cent.