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Pillars of planning

Forward thinkers will look to these five Ds now to reap tax rewards later, writes TIM CESTNICK

While Canadians scramble to pull together last-minute tax savings, the savviest are already looking ahead to ensure that, this time next year, they will reap the rewards of forward thinking.

How to be one of those forward thinkers? Consider strategies that fall under what might be called the five pillars of tax planning:


The first pillar is deducting to save tax. This means claiming deductions and credits to reduce your taxes owing.

Swap your debt. In 2003, create an interest deduction by converting non-deductible interest into a deductible cost.

How? Liquidate some investments (count the tax cost first) to pay down your non-deductible debt. Then borrow to replace those investments.

Alternatively, as you pay down your mortgage this year, consider borrowing against the new equity in your home to invest those dollars. Both ideas will create a tax deduction for the interest costs since you'll be borrowing to invest.

Work from home. Create a tax deduction for home costs you're already paying. How? By negotiating with your employer the requirement to work from home.

Provided your home office is your primary place of work, or where you have a designated area of your home set aside for regularly meeting clients or customers, you may be entitled to deduct a number of costs.

Trigger some losses. Consider selling some investments that have dropped in value at a loss if you have reported capital gains in the last three years (2000, 2001, or 2002) or where you will have capital gains this year.


The second pillar of tax planning is dividing to save tax. This is nothing more than moving income to another family member who will pay tax at a lower rate.

Lend to your spouse. Consider lending money to a lower-income spouse and charging our tax law's prescribed rate of interest (3 per cent until March 31) on that loan.

While you'll have to report the interest from your spouse as income, your spouse will be entitled to a deduction for that payment (which must be made by Jan. 30 each year for the prior year charge), and your spouse will report all the income earned on those loaned funds (resulting in tax at a lower rate).

Split CPP benefits. Once you and your spouse have reached age 60, you'll be able to report up to one-half of your CPP benefits in the hands of the lower-income spouse. The deal is reciprocal so that you'll have to report that same percentage of your spouse's benefits. Where you are in different tax brackets, you'll save tax as a couple. Call Human Resources Development Canada to arrange for this splitting of benefits.

Give growth assets to kids. When you give assets to your minor kids, you'll pay the tax on any income earned on those assets, with the exception of capital gains, which will be taxed in the hands of the minor child. Consider setting up in-trust accounts for your minor children to pass on the taxation of future capital gains.


Saving tax this way involves pushing a tax bill to a future year. The time value of money alone suggests that this is worthwhile.

Use registered plans. Simply contributing to a registered retirement savings plan -- including a spousal plan -- or a registered education savings plan will allow the assets in the plan to grow on a tax-deferred basis. With an RRSP, you also gain the benefit of a tax deduction today, effectively deferring tax on the full contribution.

Consider a leave or sabbatical. It's possible for your employer to establish a deferred salary leave plan which will allow you to contribute up to one-third of your salary each year to this plan, for up to six years. You won't pay any tax on that deferred salary until you take your leave or sabbatical, which must begin no later than six years after the deferral begins.

Keep turnover low. The more often you sell investments and reinvest, the higher the turnover of your portfolio, and the more often you'll trigger taxable capital gains over time. You should minimize the turnover of your investments at a profit to defer tax.


This involves disguising one type of income which is highly taxed, or converting into another type taxed at lower rates.

Swap assets with your plan. You'll want to hold your interest-bearing investments inside a registered plan and equity investments outside the plan where possible, to the extent that you hold investments both inside and outside the plan. You'll pay less tax this way.

You can accomplish a reallocation of your investments by swapping assets with your RRSP or registered retirement income fund if necessary. As long as the amount going into your plan is exactly equal to the amount coming out, the swap does not have to be considered a contribution to the plan, or a taxable withdrawal.

Consider an annuity strategy. If you rely on GICs or similar interest-bearing investments for income, you're paying a lot of tax on that interest income. So consider this: Use the cash invested in the GIC to buy a life annuity, which can provide you with more after-tax income than the GIC.

Part of the reason for this is that you'll be receiving a return of your capital over the life of the annuity, and that capital is not taxable. Then, to replace that capital so that there is something left for your heirs, use some of the additional cash flow you'll be taking home to buy a life insurance policy for the amount of that capital you used to purchase the annuity.

In most cases, you'll still be left with more in your hands after taxes than the GIC could provide.

Rebalance your portfolio. What type of income do you earn? To the extent that you hold investments outside a registered plan, you should ensure they are tax-efficient. Avoid interest income to the extent possible. So, consider rebalancing those investments outside your registered plan to focus on capital gains, or Canadian dividends where you need cash flow from your investments.


Dodging to save tax is simply structuring your affairs so that amounts which might otherwise have to be reported on your tax return do not have to be.

Negotiate non-taxable benefits. There are a number of benefits your employer can pay for which may be tax-free to you, including personal counselling, death benefits up to $10,000, discounts on merchandise, club membership fees and education costs. Replacing salary with benefits you planned to pay for anyway will save you taxes since they will not show up on your tax return.

Consider exempt life insurance. A universal life insurance policy can allow you to accumulate investments inside the policy on a tax-sheltered basis. This idea can make sense for those who would otherwise invest that money in interest-bearing investments outside the policy or a registered plan. It's generally best for those who are a little older -- say, 60 years of age and up. Of course, it's reason enough to buy a policy if you have a need for insurance for other non-investment reasons.

Change property ownership. Each family unit is entitled to its own principal residence exemption, allowing you to fully shelter from tax the gains on one principal residence. Once a child is 18 years of age or married, he or she is considered to be a separate family unit. By purchasing a second property in the name of an adult child, or transferring ownership of an existing property to an adult child, you may be able to save tax as a family by multiplying the number of principal residence exemptions used.

Tim Cestnick, author of The Tax Freedom Zone and Winning the Tax Game 2003, is managing director, Tax Smart Services, at AIC Ltd.

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