Tax Planning

The Importance of Tax Planning: Maximizing Your Savings

While paying taxes is an unavoidable part of life, you shouldn't pay more than you have to. With a tax plan, you can reduce your tax liabilities and maximize your tax benefits.

Having a tax plan is a critical component of a holistic financial strategy and is an important part of the financial planning provided by IG Wealth Management. Tax planning with an IG Wealth Management consultant allows individuals and businesses to identify available deductions, credits, and tax-saving strategies, thereby minimizing the amount of tax paid wherever possible.

Deductions & Credits

One of the key components of a solid tax planning strategy involves maximizing deductions and credits to reduce taxable income and lower total tax liability. Deductions, such as those for RRSP contributions, can significantly reduce taxable income. Similarly, tax credits, such as the Canada training credit (CTC), provide direct reductions in tax liability, further enhancing tax savings. Understanding eligibility criteria and leveraging available deductions and credits can help reduce your tax burden while maximizing potential refunds.

Unless you're an accountant (or have an unusual interest in Canadian taxation), keeping track of all the possible tax deductions and credits can be overwhelming. IG Wealth Management can help provide clarity and direction for your unique financial situation during the tax planning process.

Saving for Retirement

There are several special retirement accounts that offer tax advantages to Canadians; the most well known are the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Both of these accounts offer significant tax advantages and can be key components of an efficient tax plan. By strategically allocating funds to these special accounts, tax can either be deferred (RRSP) or savings growth can be tax-free (TFSA). Savings for retirement can be optimized by strategically using both of these accounts, but each person's financial situation will be different, so a tailored approach is recommended. For more information on RRSPs and TFSAs, see our Retirement Planning page.

Saving money is something many Canadians struggle with, so it's important that the money you do put away isn't eroded by unnecessary taxation. By proactively applying tax minimization strategies tailored to your unique financial situation, you can optimize your retirement savings and ensure a more secure financial future.

Business Structure Planning

As a business owner, the structure you choose for your business is a decision that can significantly impact both your business operations and your personal tax situation. Business structure determines how your business is taxed, your personal liability, and the administrative requirements you'll need to comply with.

For example, if you operate as a sole proprietorship or a partnership, your business income is typically taxed as personal income, which means you report it on your personal tax return. This can be advantageous if you want to keep your tax filing simple and have control over decision-making. However, it also means you are personally liable for any debts or legal obligations of the business.

On the other hand, incorporating your business provides limited liability protection, meaning your personal assets are generally shielded from business liabilities. Corporations also offer potential tax advantages, such as the ability to defer taxes by retaining earnings within the company and accessing small business tax deductions. Corporations are also subject to more complex tax rules and compliance requirements.

Understanding the tax implications of different business structures and working with an IG Wealth Management consultant can help you choose the option that best aligns with your business goals and personal financial situation.

Remuneration Strategies

As a shareholder of a corporation, you can make a decision about how you'll receive compensation: through salary or dividends. Each option has its advantages and disadvantages for your personal financial situation, cash flow, and overall tax planning strategy.

Opting for a salary means you'll receive regular income payments, which can provide stability and predictability in your cash flow. Salaries are subject to income tax and mandatory deductions like Canada Pension Plan (CPP), which may reduce your take-home pay. However, salaries also allow you to contribute to government programs like the CPP, which can provide retirement benefits in the future.

Choosing dividends as compensation means you'll receive payments based on the corporation's profits, distributed to shareholders after taxes are paid at the corporate level. Dividends are taxed at a lower rate than salaries, resulting in potential tax savings for shareholders. Dividends also offer flexibility in timing and distribution, allowing you to manage your tax liabilities more effectively. It's important to note that dividends are not subject to CPP contributions, which may affect your eligibility for CPP benefits in retirement.

To determine which compensation strategy is right for you, it's essential to consider factors such as your income needs, tax situation, retirement goals, and long-term financial objectives. Consulting with an IG Wealth Management financial advisor can help you assess the implications of each option and develop a personalized compensation strategy that maximizes your after-tax cash flows while aligning with your financial goals.

Estate Planning

An estate plan serves as a valuable resource upon death, offering an opportunity to mitigate potential tax liabilities and ensure the efficient transfer of wealth to your heirs.

Including an estate plan as a part of your general tax planning strategy can help minimize the tax burden on the estate and preserve more assets for beneficiaries. This includes structuring the estate in a tax-efficient manner, taking advantage of available tax deductions and credits, and leveraging tax-deferral strategies if available. By planning the distribution of assets and considering the tax implications of various estate planning tools, you can minimize your tax bill and maximize the inheritance received by your loved ones.

Incorporating insurance into your estate plan can also provide an additional layer of financial protection and peace of mind. Life insurance can serve as a valuable asset in estate planning, providing a tax-free lump sum payment to beneficiaries upon the policyholder's death. This death benefit can help cover estate taxes, final expenses, outstanding debts, and provide financial support to surviving family members. Insurance products like segregated funds or annuities may offer additional benefits such as creditor protection and probate savings, which can improve your estate and tax planning strategy.

Working with an IG Wealth Management tax planning professional can help you navigate the complexities of estate planning and develop a customized plan that aligns with your specific goals and objectives.