Whether or not you want to believe it, taxes in Canada are going to go up and you should start planning for that inevitable now. There is no way our government can do anything but raise taxes with the massive spending that they’ve undertaken the past few years. Even the parliamentary budget office called tax hikes “unavoidable”. Before the global pandemic, the spending was already far more than we could afford. But now, with a projected deficit of $340 billion (which will likely increase) for 2020, it’s gotten completely out of control. So, what steps should you consider doing today to prepare for these increased taxes?
1) Trigger Capital Gains – Currently only 50 per cent of capital gains are taxable but it is very likely that the government will increase this “inclusion rate” to 75 per cent next year. With that in mind, anyone who may be selling an asset that would realize capital gains may want to do so before Dec 31, so the lower tax rate is used.
2) Hold on to Capital Losses – If you are carrying forward capital losses and planned to use them to offset capital gains this year, you may be better off to hold on to them and use them once the capital gains rate increases for larger savings if you expect to have capital gains next year or beyond.
3) Carry Forward RRSP Contributions – Much like the capital loss idea above, if you have past RRSP contributions that you’re carrying forward and/or are making RRSP contributions this year, consider holding off using these deductions until the tax rates go up for bigger savings.
4) Use an Estate Freeze – An estate freeze is the process of taking assets that you own today (most commonly a business) and freezing them at their current value so that you’d pay taxes based on today’s value at death. The tax on the future growth of those assets can be passed down to multiple children to defer it and possibly spread it out.
5) Prescribed Rate Loans – For families with taxable investment income, splitting income with a spouse via a prescribed rate loan can save taxes. To do so, you would loan your spouse money to invest and charge the prescribed interest rate (only one percent as of July 1) on that loan. The investment income would then be taxable in your spouse’s hands instead of your own.
6) Leave Canada… While I hope that we don’t see a large exodus of high-income earners and business owners, some will inevitably choose to leave if we keep on this path. The latest proposed “wealth tax” outlined in the throne speech will make the wealthy consider just that. If you do choose to leave, you’d want to do so before the increased taxes take effect since Canada is one of the few countries that charges a “departure tax” and that figure will likely significantly rise soon.
If any of the above strategies might work for you, make sure to allow ample time to put them into effect before the end of this year. Doing so could save you a lot of extra taxes down the road. Remember that everyone’s situation is unique so speak to your Certified Financial Planner to help you make the best choice for you!
This column is brought to you by Michelle Weisheit CFP, IG Wealth Management and presents general information only and is not a solicitation to buy or sell any investments. Please contact your own advisor for specific advice about your situation.