3 Lucrative tax strategies used by High Net Worth individuals
These strategies will not cover RRSPs, TFSAs, training credits, FHSA etc. as these are relatively well known or at least there is enough content online about them. The three strategies below are usually used by high-net-worth individuals, usually business owners to plan taxes effectively for the long term. Let's dive in!
3 strategies used by high net worth individuals
Effective tax planning can pay dividends not just for you, but also for the next generation!
1. Corporate owned life insurance
If your corporation owns assets that you want to protect from taxes, tax-exempt insurance is an extremely valuable tool for your beneficiaries. Per the tax law, assets can accumulate within a tax-exempt life insurance free from tax. When you pass away, proceeds of the policy are distributed to your beneficiaries on a tax-free basis.
Here's a simplified Example
Let's say your corporation has a $800,000 whole life insurance policy with $300,000 of cash value. While you’re alive and kicking you can use the cash value of this policy to collateralize a loan for $300,000 and spend it on whatever you like. When you are no more, the corporation will receive a death benefit of $800,000 cash while you still owe $300,000 to the bank. The purpose here is to pass the entire $800,000 cash to your beneficiaries.
They will use that cash to pay back the $300,000 loan to the bank and be left with $500,000. The corporation would then receive a credit in their CDA account for $800,000. This means your beneficiaries would be able to sell assets and withdraw retained earnings up to the credit maximum of $800,000 tax-free. They would then be left holding $1,300,000 of cash, which would help them to minimize the tax burden of liquidating and closing the company.
Note: This is a simplified example and there are nuances to this tax planning strategy and I recommend using a trusted advisor, like our firm, to guide you through this.
2. Flow through shares
A flow-through is a type of investment designed to encourage investing in resource companies. Examples - Exploration and development in the mining, oil and gas, and renewable energy and energy conservation sectors. When structured properly, the resource company will “flows through” the expenses it incurs to you which you can then deduct personally on your tax return!! The maximum amount you can deduct is the amount you paid for the investment. You may apply the deductions against all sources of income, thereby reducing your net income. To state the obvious but sometimes forgotten advice - It is important to consider the quality of the investment, and not just the tax write-off.
3. Tax residency planning
This is used by high-net-worth individuals to plan their taxes. While moving to a lower tax jurisdiction is not for everyone and there are non-tax aspects to consider, it may be beneficial for you to consider this strategy if you have ties (e.g. family or a vacation property) in another province or another country. The provincial tax rates to which you are subject are based on your province of residence on December 31 of the taxation year. When moving to another country, taking advantage of the tax treaty between the countries can lead to big savings.