

Monday, March 5, 2012

Is Personal Income Tax Planning a Fallacy for most Canadians?

As a tax accountant, I could make your head spin with all the income tax planning machinations I can undertake for corporate income tax clients in the correct circumstances.

But what about personal income tax planning? In my opinion, for the average middle class Canadian, personal income tax planning is almost a fallacy. Surprisingly, probably to most, personal income tax planning for higher income earning Canadians is also somewhat restricted. However, there are greater planning opportunities available that I discuss below.

I understand the "middle class" has stratified over the years and is not easily definable; but for purposes of this post, I will define middle class as a family, with either one or both spouses earning T4 employment income with a family income between $70,000 to $100,000, with no self-employment income (self-employment provides for some tax planning opportunities).

To be clear, I don’t consider the maximization of personal and family credits, medical expenses credits or charitable tax credits, etc. as tax planning. Although there can be some planning involved, the reality is that in most cases if you purchase an income tax software program, these credits will be maximized automatically for you.

Why do I say income tax planning is a fallacy for the average person? Because other than purchasing a RRSP, for all intents and purposes, there are no significant planning opportunities. Really, think about it. I am sure you have already read several income tax planning tip columns in your favourite newspaper this year; what was the best tip you read? That you can claim your safety deposit box fee? For those who incur employment expenses, maybe you can claim some employee expenses such as your car on your return. 

Even as I review a tax tips column I wrote for Jim Yih’s Retire Happy Blog last year, I am struck by how limited income tax planning is for the average person.

For all you socialists out there, I will tell you that as usual, higher income and higher net worth people do have some personal income tax planning opportunities. But, compared to the planning possibilities my corporate clients have, they are still very limited in nature.

Some personal income tax planning opportunities available to higher income Canadians (and in some cases middle income earners) include:

Income Splitting- For example, the use of a prescribed loan.

Capital loss utilization- See the 3rd paragraph from the bottom of this blog post on transferring capital losses to a spouse.           

Rental Properties – For those with enough disposable income to purchase a rental property, I discuss the income tax implications of purchasing a rental property in this blog post.  

Flow Through Shares- Higher income Canadians often purchase Flow Through Shares to reduce their income tax liability. I discuss this opportunity in this blog post.

Interest deductibility- In this blog post I briefly discuss how to mitigate your income tax exposure when claiming investment interest.

This post is not like an April fool’s joke where you reach the bottom and I provide you with ten great personal income tax planning tips. Unfortunately, all I can tell you is that for most Canadians, the personal tax planning joke is on you.



  1. Your post is correct of course, but I think it takes too dim a view on things: it's simply a truism that the fewer moving parts, the fewer ways there are to organize them. (smaller company, smaller salary = fewer opportunities) It's not a sad joke, just life.

    One thing not mentioned which I think is worthwhile: RESP programs (because of the credits).

    Also worth planning: is an RRSP worth it at all, when a principal residence can be sold tax free. Perhaps it's worth it to pay down the mortgage ASAP instead.

    Finally, an analysis of how much money would be saved by moving to a lower taxed province might be worthwhile to some people.

  2. Anon- Thx for you comment. You raise several valid points. There are obviously some additional planning points as you note, the point I was making is that I experience much exasperation and frustration from clients as to the limited personal tax planning oppourtunitites they have.

  3. In a previous life, I was headed down the road of becoming a CA, and I remember a lot of tax seasons. I remember feeling the same way, and we used to call it the 90-10 split; i.e. 90% of the people had 90% of their income on their T-Slips, with only 10% not recorded that way (not sure if this is an accurate statistic). This group has, as you point out, almost no tax planning ability, whatsoever.

    Many of my clients tried to work around that by getting into MLM schemes and attempting to write off everything from motivational tapes to tickets. I always advised against it, but I understand why people attempted it. Unfortunately, they often went to more unscrupulous tax preparers, and I would hear back about many an audit horror story.

    On the other hand, my richer clients often got out of any income tax at all as they had trusts that paid the tax, and they only received the after-tax disbursements. Just going to show that you need to choose your parents wisely.

    1. Hi Don, thanks for your comment. I am with you on the first two paragraphs, but not totally on the third. I will address that issue in the next comment. I would suggest that things have changed a bit since your "previous life" in that although those with money still have a greater ability to plan, many of the "loopholes" they had years ago have been closed (offshore rules, changes to expectation of profit, tax shelter rules etc).

  4. "they had trusts that paid the tax, and they only received the after-tax disbursements."

    That is such a strange statement. If a trust is paying tax out of a disbursement that you're entitled to, then it's the same as you paying the tax! It's just like your employer withholding taxes on your paycheck.

    Having your parents save enough money to give an inheritance (trust) is of course very nice, but don't say that the money is tax free just because it was paid (withheld) one step earlier.

    1. Hi Anon- You and Don are both sort of right in different ways, but I feel a need to clarify for both of you, as in most cases it is not the trust paying any tax, but the corporation and then the ultimate individuals to some or no extent.

      I have written on family trusts in a couple blogs already, see the trust tab to your right for the most popular blog, Introducing a Family Trust as a shareholder and have two future blogs I will post on the topic.

      Anyways, in most cases a family trust is used to own shares in a private company. In Ontario, the corporation will then pay 15% tax on the first $500k of income, leaving $425k after tax (I could also use an example of more than $500k, but the corporate tax rate is higher).

      So usually it is the corporation paying the first level of corporate tax and then the corporation distributing the after-tax proceeds, $425k in this case to the family trust. As most trusts are subject to the highest marginal rate of tax, they are really flow through entities and almost never pay tax. They receive the $425k and then distribute it to the beneficiaries. Some trusts we set up have a Holding company beneficiary that defers the tax, but that is beyond this discussion.

      So, typically the trust will then distrubute the after-tax corporate monies as a dividend to the individual family members and the trust pays no tax itself. Where a child is a beneficiary and 18 and over and has no other significant income, you can distribute almost $40k in dividends tax-free. That is where a tax free notion is correct. In other cases, dividends can be paid to other beneficiaries over 18 and spouses who have a lower marginal tax rate than 46%, reducing the family tax rate, but not receiving the income tax free from the trust (keeping in mind, tax was already paid at the corporate level).

      I hope that clarifies a bit.

  5. Corporations do indeed have an edge when it comes to taxes. Do know of any Canadian companies able to achieve what General Electric does on their taxes (

  6. Tom, thx for the link. I must say even as someone whose job it is to minimize or eliminate taxes, I find it appalling that GE pays no US income tax, due in large part to its lobbying power. IMHO Canadians probably pay too much tax and Americans too little; but these income tax philosophies have a permeating affect on the two societies on everything from welfare, to schooling to health care.

  7. Personal income tax planning may be a fallacy. However, incorporation has become an option more accessible to Canadians. For example, I could not have incorporated in 1977, but I can now. But I would not be surprised if corporate tax planning becomes similar to personal tax planning in the future.

  8. I'm glad to see that the tax loopholes are closing - I still recall the times of income averaging and tax deductions vice credits. I saw too many people dodge taxes by taking paper losses on films - i.e. they put up a nominal amount, say 10% and were to pay the rest by the box office receipts. When the film lost money, they claimed a loss.

    1. Don, you are dating yourself :) Those movie shelters and other similar limited partnership tax shelers are all but dead. Many investors were reassessed significant tax on those deals in the last 10 years or so.