Tax solutions that work

By John Lorinc | April 7, 2014 | Last updated on April 7, 2014
3 min read

There are plenty of ways to save on taxes but some, like hiding assets in off-shore accounts in far-flung regions with murky banking regulations, are less advisable than others. Avoid questionable tactics and keep Revenue Canada happy while still reducing your taxes.

The key is to follow the rules and keep a meticulous paper trail. Here are four legitimate ways to shelter income:

Allocating income to family members

You can add your spouse and children to the payroll of a family business, provided their salaries are at market rates (Revenue Canada can check, so don’t pay your 16-year-old $50,000 to move boxes).

Bruce Ball, national tax partner at BDO Canada, adds that properly structured corporations can distribute current-year dividends to family members, which means further defraying the tax burden.

A more structured approach to income splitting that’s gained popularity is establishing a family trust to own the company’s shares. But it’s critical to respect the rules and procedures. If your trust declares a dividend and distributes cheques to your family members, for example, the trustees need to record the minutes of the meeting where the decision was made. And the cash must flow from the company, to the trust’s bank account, to the beneficiaries—no skipping steps.

Allocating dividends and capital gains to family members

When it’s time to retire, you have three options: pass the company to your children, sell it to employees, or sell it on the open market. If the business stays with the family, Revenue Canada will make sure the sale adheres to related-party transaction rules, which require your children to pay fair market value.

You’ll be taxed on any capital gain above the lifetime exemption, so there’s temptation to understate the price. Andrew Logan, a partner with Teed Saunders Doyle & Co. in Saint John, N.B., tells clients to obtain a third-party valuation as a means of defending the sale price, and resulting taxes. “It’s like buying insurance,” he says. “If Revenue Canada ever comes looking to review the transaction, you’re untouchable.”

Where a family trust exists, each beneficiary is eligible for the lifetime exemption, meaning the tax savings could be several multiples of the cap. High-net-worth individuals sometimes structure wills to include testamentary trusts, i.e., trusts established for various family members that come into effect after the person dies. These trusts are taxed at more favourable rates.

Jamie Golombek, managing director of tax and estate planning for CIBC Private Wealth Management, adds that distributing dividends through a trust to university-bound children over 18 can also bring extensive tax sheltering. Once tuition, education, and textbook credits are factored in, the recipients typically pay virtually no tax.

Off-shore trusts

Not for the faint of heart, but some tax experts say these structures are still relevant for estate planning and asset preservation. Toronto tax lawyer Jonathan Garbutt cites two very recent federal tax court rulings involving judgments against off-shore trusts that suggest Canadian courts will uphold such entities provided they’re established legally and Canadian taxes have been paid.

“There are non-tax benefits to off-shore trust planning, and if done properly, with real trustees and underlying structures that actually work, there can be tax savings,” says Garbutt.

Strategic charitable giving

You can avoid capital gains taxes while achieving non-financial personal goals through a savvy approach to donations; either to a self-administered family charitable foundation or an established public one (i.e., United Way).

By donating shares in publicly traded corporations that have seen significant appreciation, you’ll not only receive a charitable receipt but also forego the capital gains tax, says Golombek.

John Lorinc is a freelance journalist based in Toronto.

John Lorinc