This is the final installment of a four-part Tax Planning series. In this article we will outline various tax planning techniques frequently overlooked.
This is when the higher income spouse uses some of his or her own contribution room and puts money into the RRSP of the lower income spouse. The higher income spouse will receive the RRSP deduction for making such contribution, and the lower income spouse will be taxed on the withdrawal from the RRSP presumably at a lower rate. This assumes however that a minimum period of about three years passes from the time of the last contribution by the spouse to the time of withdrawal by the lower income spouse.
Pension sharing, also known as “assignment”, is for spouses or common-law partners who are already receiving their Canada Pension Plan retirement pension(s). Assignment does not increase or decrease the overall benefits paid. Each person is responsible for any income tax that may be payable on the pension they receive. By doing so, spouses will be in the same or similar tax bracket and minimize the overall family’s tax bill. Certain pension income splitting between senior spouses may now be possible if both the Federal and Ontario go ahead with the proposed measures.
Filing Tax Returns:
Filing tax returns for your children, spouse and or parents, even if they have no income and owe no taxes, may result in tax refunds. It may also increase their current and future ability to contribute to their RRSP if they have some “earned income”. Post-secondary students can transfer certain tuition/education tax credits to their parents resulting in a lower tax bill for their parents, and any unused tax credits can be carried forward to reduce the students’ future taxes.
You may be entitled to recover part of the GST paid on your business expenses if you provide “zero-rated” services such as crowns, artificial teeth and orthodontic devices. These services are subjected to GST but at the rate of “zero” percent. In general, the extra time required for bookkeeping and invoicing patients outweighs the benefits of GST recovery. However, if you own a piece of equipment such as a CEREC 3D, it is cost beneficial to become a GST registrant as the GST paid on the CEREC 3D is in excess of $10,000, which could be fully refunded. Another exception is where the general practitioner does significant orthodontic or cosmetic work. As an orthodontist owning your own practice, you should definitely consider registering for GST. As a registrant, you can request 100 per cent of the GST paid on supplies and laboratory fees used exclusively in the production of “orthodontic appliances”. GST paid on all other office expenses (e.g., rent, utilities, office supplies and dental supplies) are only eligible for a partial refund.
Life insurance may also be a tax efficient investment instrument. Monies invested in certain life insurance policies can grow tax-free. Upon death, the insurance proceeds could be used to pay off any of your outstanding debts (including income tax). In general, life insurance premiums are not tax-deductible, but the growth in value of the investment component is usually tax-free. However, where an insurance policy is required as collateral on a bank or business loan, the insurance premium is deductible. Universal life insurance policies provide coverage to protect against loss due to the death of a business partner and as a strategy to minimize corporate taxes. You may borrow from a bank using the Universal Life Insurance policy as collateral. Any debts not repaid during your lifetime will be covered by the insurance proceeds. The death benefit as well as the growth in value of the investment portion inside your life insurance can represent a sizable legacy for your loved ones. It is also important to name your spouse or children as beneficiaries, instead of your estate, to preclude creditors of your estate from claiming these proceeds.