The taxman cometh for Canadians

The federal taxman is back! However, columnist Mark Halpern tells tax-paying Canadians not to fret. He has some professional tax-smart investing strategies for the seasoned investor as well as basic tax-planning tips for you and your family which could save a good chunk of your money. Mark can be reached at

Tax_Smart_InvestingThe federal government has publicly committed to collecting more taxes from hard-working Canadians. Despite the pushback from a wide range of taxpayers, including small business owners, farmers, doctors, and estate planning professionals, you can bank on the certainty of changes ahead designed to make it more difficult to keep the money you have earned.

Every year, like clockwork, tax time rolls around and a not-so-silent partner (the Canada Revenue Agency) takes a huge chunk of your hard-earned money.

Depending on where you live, more than half of your earnings are lost to income taxes, whether earned personally or in your corporation.

Adding insult to injury, the after-tax income you do get to keep is further eroded by many additional taxes and fees (harmonized sales tax, business tax, consumption taxes, realty taxes, etc.). You find yourself in the ‘Tax Grind’.

The current situation is that Canadians who earn more than $220,000 a year are losing up to 53.53 per cent in taxes (in Ontario; rates vary by province) and are subject to taxes again on capital gains and investments like GICs, bonds and real estate income. You are allowed to keep less than half of your income, and that’s just on the personal side.

On the corporate side, once you take money out of the company, you are required to pay a taxable dividend: if it’s an “eligible” tax dividend, you will be taxed at 38.33 per cent and if it’s an “ineligible” tax dividend, you will pay the government 45.3 per cent.

Over the years, the cumulative tax loss to an estate that occurs with fixed-income investments, like GICs or personal savings accounts, could mean a major loss to your estate.

The ‘Tax Grind’ in action

Here’s an example of the ‘Tax Grind’ in action. A 65-year-old couple with money in a holding company (holdco) decides to invest in a safe GIC at the bank earning interest at four per cent.

If they deposit $100,000 annually into the GIC for exactly 10 years, and then leave their funds to grow on their own for the next 15 years (with no further deposits), the total after-tax amount available to their family and heirs is $990,000.

After 25 years and investing a million dollars, they emerge with less than the base amount they deposited. The interest earned over 25 years (all passive income) was taxed annually at the rate of 50.17 per cent. Then, an additional tax of 45.3 per cent gets levied when the money leaves the holding company and gets distributed among the family.

Our couple could buy a tax-exempt life insurance policy instead, and the holdco could deposit exactly the same $100,000 annually, again for 10 years only, in a joint and last-to-die tax-exempt life insurance policy.  

With time-lines and deposit amounts exactly as above, after 25 years, their beneficiaries receive net after-tax proceeds of about $2.8 million, compared to the $990,000 with the bank GIC, adding up to a difference of more than $1.53 million.

Their equivalent rate of return is approximately 13 per cent, and the only difference was the financial instrument they used.

So, instead of obediently sending more than half of your income to Ottawa every year, you could use some of that income to pay the premiums for a new life insurance policy that will ultimately meet all of your financial aspirations for family and charities – and all tax-free.

Exhaust all of your remedies

Many additional remedies are available to pay less tax. On the personal side, maximize your RRSPs and TFSAs as soon as possible. Consider giving a gift to an adult child, tax-free, or using prescribed rate loans for income splitting with family members.

Critical illness (CI) insurance has been around for many years, and is still one of the industry’s best-kept secrets. The vast majority of insurance advisors have never sold a policy.

Not only does it provide a tax-free lump sum of up to $2 million in the event of an illness (many policies cover more than two dozen conditions like cancer, heart attacks, stroke and bypass surgery), you can also get back all your premiums if you don’t make a claim within a specified time, usually 15 years, with an optional return of premium (ROP) rider for a small extra cost.

CI protection can also be used tax-effectively in your business to ensure continuity of the business and protect it against the financial consequences of a critical illness. Using CI insurance with a shared ownership strategy, the company pays the premiums for the insured individual, such as the owner, a shareholder or another key person, and the insured person pays the nominal ROP premium.

At the end of 15 years, if no claim is made, all the premiums paid, including what the company contributed, are returned to the insured individual.

This makes it an attractive investment opportunity, allowing shareholders to withdraw funds from their corporation in a tax-effective manner. With the help of an experienced advisor, the rates of return on the ROP can be very high, often more than 30 per cent, before tax.

A private health services plan (PHSP) can help you convert medical and dental expenses into a business expense, whether you are a business owner or self-employed. There’s a huge list of allowable expenses (which you can view at that you can claim toward the medical expense tax credit, such as dental services, cosmetic surgery, dentures, chiropractic, glasses and US health-care premiums.

The CRA will credit 15 per cent of a taxpayer’s expenses back beyond the lesser of $1,925 or three per cent of the taxpayer’s net income for the previous year.

There are many other savings self-employed individuals can claim through a PHSP compared to the same expenses being claimed on their income taxes.

Other ideas to reduce your taxes:

Get a second opinion on your current tax planning and savings strategies. Make sure you have the right types of insurance to meet your current and specific needs. This includes income replacement, estate preservation, estate equalization and legacy building. Many former smokers continue to pay high insurance premiums that should have been cut in half when they butted out. No one told them to contact the insurer.

If you are charitably inclined, consider making tax-efficient donations when you die, by establishing charitable remainder trusts, private donations and donor-advised funds – or include charitable gifts of securities in your estate plan.

For tax planning your business, ensure that insurance for key figures is in place to implement a contingency plan. Give some thought to an estate freeze to minimize your tax liability. With this strategy, the amount of corporate capital gain subject to tax in a business owner’s estate is frozen. Future growth of the company’s value will not accrue to the principal shareholder but to the successors or to a discretionary fund.

Ensure that children and grandchildren, especially those with disabilities, are properly looked after. At the same time, consider providing financial security for any other dependents, including aging and financially dependent parents, through your tax-free life insurance.

Two wills may avoid probate fees

Probate fees add up quickly and are just another way the government takes more taxes. Ask your financial advisor, accountant or lawyer whether there are ways to save probate and other estate costs on assets that don’t require probate – private company shares, for example.

In Ontario, you can have two wills to counter some of the costly probate fees. The first $50,000 of estate assets is taxed in this province at 0.5 per cent and anything above that is subject to 1.5 per cent. Some assets must go through probate, but others, like private company shares, don’t and should be contained in a secondary will.

And, while this may sound simplistic, ensure that you have made the appropriate beneficiary designations for registered plans and insurance policies. The last thing you want is the wrong people becoming beneficiaries of your hard-earned money.

There are many ways that governments at all levels eat away at your earnings, investments and estate values. Don’t fight back alone. Get professional help to navigate your own path to tax minimization.

Many available strategies require professional knowledge and experience. You owe it to yourself to preserve your hard-earned money for your family and the causes you care about.

Invest your time by investigating available options now; the benefits will last for many years to come. Get the financial peace of mind that you deserve, beginning with advice from an impartial and experience planning professional.

Contact us for help. Our advisors are available to help you across the country.

Mark Halpern is a Certified Financial Planner (CFP), Trust and Estate Practitioner (TEP) and one of Canada’s top life insurance advisors. He is CEO of® and®, with special expertise for business owners, entrepreneurs, medical professionals and high-net worth individuals and their families. He can be reached at 416-364-2929, toll-free at 1-866-566-2001 or

This is an edited version of an article that was originally published for subscribers in the December 22, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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