For high-net-worth individuals, tax planning is essential. We all know taxes are unavoidable, but it is still possible to strategize your taxes in a way that minimizes your liability as much as possible. High-net-worth tax planning is also a central part of creating intergenerational wealth. Momentum Financial can help households and individuals with strategic tax planning approaches, using every available legal deduction or exemption to ensure that you can keep more of your money for you and your family.

What is Tax Strategic Planning?

Strategic tax planning is intended to maximize tax efficiency and minimize tax liability. It should be an essential part of every investment or high-net-worth wealth management plan. Your strategic tax plan should include a thorough analysis of your financial situation and its tax implications. This breakdown must include a projection of your tax liability, the tools that can be used to minimize it, and the projected reduction of your tax bill as a result. A tax planner will help you organize the timing of your income, so as to distribute it across different tax periods, thus reducing the amount of tax you will owe. It can also include plans for the strategic use of retirement funds, savings, or provisions for gain-loss harvesting. Tax gain-loss harvesting involves the strategic planning of the sale of assets in order to reduce capital gains taxes.

The Importance of Tax Planning

The purpose of tax planning is to reduce an individual’s tax liability as far as is legally possible, and allow them to keep more of their money. By taking advantage of any applicable deductions, credits and exemptions, and by timing income and expenses carefully, you can reduce your income tax to a minimum. Tax strategies can be complex and overwhelming, which is why it is important to work with an expert tax planner who can ensure you reap all the tax benefits to which you are entitled.

Reducing Taxes For High-Income Earners

Since Canada has a progressive tax system, high earners and high-net-worth individuals will naturally have a higher percentage of their earnings to the government. That being said, they also have more tax reduction tools at their disposal. These include:

  • Income splitting: This involves a collaborative effort among a high-net-worth family to reduce their overall tax liability at the expense of one or two of them actually paying higher taxes than they otherwise would. You should be aware of the tax on split income rules (TOSI) as they have become more restrictive in recent years.
  • Maximizing Registered Retirement Savings Plan (RRSP) contributions: You can manage your RRSP contributions in such a way that your tax liability is deferred, reduced or both. For example, you may choose to make early contributions. If you were to pay your contributions in January this year, rather than the end of February next year, your savings will enjoy tax-deferred growth for the next 14 months.
  • Tax-efficient investments: These include exchange-traded funds and mutual funds), and the planned use of charitable giving to enable tax deductions.

Effective Tax Planning Strategies

Tax planning is not a once-off thing, and it is not something you think about only when tax season approaches. It is a strategy that you incorporate into your financial planning every day, throughout the year. Most tax planning strategies incorporate the following tactics in various ways:

  • Income reduction: The less you earn, the less you have to pay in taxes. Therefore, one tax reduction method is to reduce your taxable income by investing in tax-free or tax-efficient vehicles, maximizing your retirement contributions, deferring capital gains, and selling assets in installments.
  • Increasing tax deductions: Many people pay more in taxes than they need to, because they are unaware of the available deductions. Your tax advisor will ensure that you don’t miss out on any of the deductions available to you.
  • Maximizing tax credits: It is also likely that you are not claiming all the tax credits that are available to you. A tax plan can include detailed research into tax credits, and outline a strategy to use them to maximum advantage.
  • Income timing: By timing your income carefully, you can move down into a lower bracket and reduce what you owe in taxes.
  • Optimize your investment portfolio for tax efficiency: A wealth advisor will help you distribute your investments into more tax-efficient assets and instruments, which reduces your tax liability overall, while ensuring that you continue to see rewards from your investments.

Let Momentum Financial help you with financial planning for your personal finances or business. Contact us today to begin working with a strategic tax planning advisor.