Other Tax Planning Strategies

6.4 Other Tax Planning Strategies

So, you’ve probably heard a ton about income splitting and tax shelters, right? But let’s be honest—there’s a lot more to Canadian tax planning than just that. In this section, we’ll talk about other strategies that can help clients minimize their tax burden, manage their cash flow, and, ultimately, reach their financial goals. I still remember the first time I advised a client on timing the sale of a losing stock position, and how amazed they were when they realized they could effectively offset their capital gains. It was a great reminder that a little tax planning goes a long way. Let’s dig right into these concepts.

While the content here can be quite comprehensive, stay relaxed—think of this as a friendly conversation between two people who love to make taxes as easy to understand as possible. If at any point you feel overwhelmed, just take a breath, let the information sink in, and feel free to revisit any section later. The CRA isn’t going anywhere, after all.

Capital Gains/Loss Planning

Capital gains and losses might sound fancy, but they’re essentially the profit or loss realized by selling capital property, like shares, mutual funds, or real estate. In Canada, only 50% of a capital gain is included in income for tax purposes, which is pretty sweet compared to paying tax on the full gain. However, that also means capital losses can only be used to offset capital gains (not other forms of income, with some exceptions).

One cool planning trick is timing your sale of securities to manage these gains and losses strategically. If you’re heading into December and you have quite a few realized gains that year, you might consider selling off some of your loss positions to reduce the net taxable gain. Be careful, though: the CRA has rules around superficial losses—where you sell a security and then reacquire it (or a “substantially identical property”) within 30 days. Those losses might be disallowed if you’re too quick to hop back in.

It’s also essential to keep track of carry-forward rules. If you have net capital losses this year and no capital gains to offset, you’re generally allowed to carry those losses backward up to three years or forward indefinitely to offset future capital gains.

For more specific details, refer to: • CRA Guidance on Capital Gains:
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-income-tax-return/line-12700-capital-gains.html

Example: End-of-Year Loss Selling

Imagine you realized $10,000 in capital gains by selling growth stocks in October. Later, you notice you have another security with a $5,000 unrealized loss. You decide to sell it in December to generate a $5,000 capital loss. This loss reduces your net gain for the year from $10,000 to $5,000. Only 50% of that $5,000 (i.e., $2,500) gets included in your income, potentially saving you a fair amount in taxes.

Dividend Income Planning

The Canadian tax system offers preferential treatment for dividends—especially “eligible dividends” from Canadian corporations. This courtesy, known as the dividend tax credit, basically evens out (to a certain extent) the mismatch between corporate taxes and personal taxes, so you’re not doubly penalized.

If your client holds shares in a Canadian-controlled private corporation (CCPC) that meets the requirements for eligible dividends, those dividends receive an enhanced dividend tax credit. But remember, the rate depends on federal and provincial rules—these can change over time. So, yes, you might need to stay on your toes and watch federal/provincial budgets.

Personally, I find many new investors get excited by the concept of living off dividends. While it’s an awesome idea, you need to plan carefully for your overall income level. Earning significant dividends could push you into a higher tax bracket, or reduce certain credits, if you’re not planning properly.

• Dividend Tax Credit Calculator (TaxTips.ca):
https://www.taxtips.ca/dtc/DividendTaxCredit.htm

Quick Anecdote

Let’s say you have a CCPC. If you pay out $30,000 in eligible dividends instead of salary, you might discover that your personal tax situation is more favorable. At the same time, though, your CPP contributions might be lower, so this choice can have a potential impact on your retirement benefits. Always weigh the trade-offs!

Charitable Donations

Charitable donations are not just a way to give back; they can be a smart tax strategy too. In Canada, you get federal and provincial non-refundable tax credits on donations. The combined credit is typically higher for the portion of donations over $200.

To make things even more interesting, when you donate publicly traded securities “in-kind” (meaning you transfer them directly to a charity instead of selling for cash first), the capital gains on those shares are generally not subject to tax. This can lead to a double benefit: (1) you escape capital gains tax, and (2) you still receive a receipt at the fair market value for your donation credit.

One strategy that some philanthropic-minded folks use is to bunch multiple years of charitable giving into a single calendar year. By combining contributions, they can maximize the higher-rate credit while also creating a greater immediate impact for the charities.

Example: In-Kind Donation of Shares

Imagine you bought shares for $2,000 a few years back, and they’re now worth $5,000. If you donate these shares directly to an eligible charity, you get a tax receipt of $5,000 and generally pay no capital gains on the $3,000 appreciation. If you sold them and then donated the proceeds, you’d pay tax on 50% of that $3,000 gain first. This approach can save you not only some headaches but possibly thousands in taxes.

Registered Plan Contributions

RRSPs (Registered Retirement Savings Plans), TFSAs (Tax-Free Savings Accounts), and other registered accounts are crucial for anyone’s tax planning. Contributing to an RRSP gives you a deduction in the year of contribution, and growth is tax-deferred until withdrawal. With TFSAs, contributions are not deductible, but any growth or withdrawal is tax-free. Trust me, TFSAs are wonderful for emergency funds, short-term goals, or even a separate investment stash for retirement.

It’s important, though, not to overcontribute. RRSP overcontributions can result in penalties of 1% per month on the excess if it exceeds $2,000. Ouch. For TFSAs, any overcontribution can also get you penalized at 1% per month.

Clients often ask about the interplay between RRSPs, TFSAs, and paying down debt. Choosing where to allocate funds can come down to your marginal tax rate, your future income projections, and the type of debt you carry. If you have high-interest credit card debt, for example, you might want to tackle that before aggressively maxing out your RRSP.

• TFSA Rules and Limits:
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account.html

Incorporating a Small Business

Professionals—like doctors, lawyers, accountants—and other small-business owners often consider incorporation. Why? Because certain Canadian-controlled private corporations qualify for the small business deduction (SBD), which applies a reduced corporate tax rate on active business income up to a preset limit. The net result is that a CCPC can reinvest more after-tax earnings back into the business.

But watch out: simply incorporating for the sake of paying less tax won’t always be beneficial if the income is immediately withdrawn as salary or dividends. You need a plan. For example, retaining income within the corporation can help you save on personal taxes in the short run, but at some point, you’ll have to withdraw the money. You also must keep up with changing rules around passive investments in a CCPC and the potential for losing part of your small business deduction if your passive income surpasses certain thresholds.

For official guidance on the small business deduction and self-employed business tax topics: • Small Business Deduction Details:
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4002/guide-self-employed-businesses-professional-farming-fishing.html

Succession and Estate Planning

Estate taxes in Canada aren’t quite what you see in some other countries, but we do have “deemed disposition” rules. These rules treat you as if you sold most of your assets at fair market value on the date of death, which could trigger capital gains.

Strategies like “estate freezes” can be super handy: a business owner can freeze the value of the shares at today’s level and pass on future growth to family members or trusts. This can help lock in current tax liabilities while shifting future growth out of the owner’s estate. Another piece to consider is philanthropic giving—some folks use “gifts at death,” charitable remainder trusts, or donor-advised funds to reduce taxes on their estate.

Don’t forget that probate fees (called probate taxes in some provinces) can also reduce the net estate. While these aren’t typically huge, they can still represent a good chunk of money depending on the province and size of the estate. Steps to minimize probate often include naming direct beneficiaries on RRSPs, TFSAs, life insurance, and possibly using dual wills (where applicable).

For deeper insight, see the following resources: • “Executor’s Handbook” by the Canadian Bar Association
• “Estate Planning Toolkit” by CPA Canada

And always remember that references to the defunct MFDA or IIROC entities should be viewed in the historical sense only. In 2023, those organizations merged into the Canadian Investment Regulatory Organization (CIRO), which now oversees investment dealers, mutual fund dealers, and market integrity for debt and equity marketplaces. For official updates or changes that could affect your estate plans, see CIRO’s resources at https://www.ciro.ca and consult up-to-date provincial rules.

Best Practices and Key Considerations

• Keep an eye on legislative updates: Federal and provincial budgets can alter tax brackets, deduction and credit rates, and corporate tax rules—so stay informed.
• Watch out for overcontributions: As mentioned, both RRSPs and TFSAs can produce nasty penalties for exceeding your limits.
• Coordinate strategies: Sometimes taking advantage of a capital loss might conflict with your approach to charitable giving or your risk tolerance. Evaluate trade-offs thoroughly.
• Seek professional advice: Specialized strategies—like estate freezes or structuring dividends—often require legal and tax expertise, so working with a qualified advisor ensures everything is legit and optimized.

Putting It All Together: A Quick Rose Family Example

As an illustration, consider a fictional character, Alexis, who loves to support wildlife charities and invests in Canadian stocks. Alexis realizes a $10,000 capital gain in August after selling some high-flying technology shares. Then, near year-end, Alexis donates some other shares (with an unrealized gain of $4,000) in-kind to a recognized charity. By doing so, Alexis escapes capital gains tax on those donated shares entirely, receives a charitable donation receipt of $4,000, and reduces her overall tax burden.

Meanwhile, Alexis also holds a $3,000 capital loss position in an underperforming security. By strategically selling it in December, she further offsets part of that $10,000 gain realized earlier. Finally, Alexis invests a portion of her business income—she’s a self-employed consultant—in her TFSA. She’s aware that if she maxes out her TFSA contributions and still wants to invest more for retirement, she can allocate additional funds to her RRSP. This layered approach helps Alexis stay flexible and reduce her tax liabilities in a variety of ways.

Mermaid Diagram: Overview of Tax Planning Strategies

Below is a simple flowchart illustrating how these various strategies can connect in a continuous cycle of reflection, planning, and adjustment:

    flowchart LR
	    A["Start <br/>Tax Strategy"] --> B["Capital Gains <br/>and Losses"]
	    B --> C["Charitable <br/>Donations"]
	    C --> D["Dividend <br/>Planning"]
	    D --> E["Registered <br/>Plan Contributions"]
	    E --> F["Incorporating <br/>a Small Business"]
	    F --> G["Succession <br/>and Estate Planning"]
	    G --> A

Think of each node as a step you can evaluate periodically—sometimes you’ll switch up your approach, sometimes you’ll dig deeper, but the goal is always to optimize for your current and future tax situation.

Glossary

• Capital Gain/Loss: Profit or loss from selling a capital property, like stocks, bonds, or real estate. Only 50% of net gains are taxable, and capital losses can offset capital gains (subject to certain conditions).
• Dividend Tax Credit: A federal and provincial credit that reduces the tax payable on eligible Canadian dividends, recognizing that corporate income has already been taxed at the corporate level.
• In-Kind Donation: Gifting assets, such as publicly traded shares, directly to a charity without liquidating them first. This can eliminate capital gains tax on the donated shares.
• TFSA (Tax-Free Savings Account): A registered account in Canada where investment growth and withdrawals are tax-free (though contributions are not tax-deductible).
• Small Business Deduction (SBD): A corporate tax benefit for certain CCPCs on qualifying active business income, applying lower rates up to a certain threshold.
• Estate Freeze: A strategy to “freeze” the value of a current business interest at today’s fair market value, transferring future growth to others (e.g., family or trusts), potentially lowering estate taxes.

References and Further Reading

• CRA Guidance on Capital Gains:
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-income-tax-return/line-12700-capital-gains.html

• Dividend Tax Credit Calculator (TaxTips.ca):
https://www.taxtips.ca/dtc/DividendTaxCredit.htm

• TFSA Rules and Limits:
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account.html

• Small Business Deduction Details (CRA):
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4002/guide-self-employed-businesses-professional-farming-fishing.html

• Estate Planning References:
– “Executor’s Handbook” by Canadian Bar Association
– “Estate Planning Toolkit” by CPA Canada

• Recommended Course for deeper tax insights:
“Taxation for Canadians” by the Canadian Institute of Financial Planning (covers foundational & advanced tax strategies).

• For official regulatory updates or references on investment dealers and market integrity, visit the Canadian Investment Regulatory Organization (CIRO):
https://www.ciro.ca

Conclusion

And so we come to the end of this whirlwind tour of other tax planning strategies, picking up bits of knowledge about capital gains, losses, dividends, charitable giving, and more along the way. The main takeaway? Tax planning isn’t just about checks and balances on a form—it’s about being proactive, creative, and staying informed. Even the simplest of these strategies can make a big difference in your final tax bill. So, whether you’re an industry pro or just a curious mind, keep your eyes open for new opportunities to position your finances to your maximum benefit.

Stay curious, stay aware of the rules, and don’t be afraid to experiment with different approaches (with professional guidance where necessary). Tax rules change, and so do personal circumstances. With good planning, you’ll be well on your way to achieving those dreams—tax-efficiently, of course.

Test Your Knowledge: Other Tax Planning Strategies in Canada