As a starting point, I like to look at the big picture to see where you are headed. This involves modelling all your current and future financial resources, including your cash flow and the activity in your holding company. This provides a clear picture of what you have today and gives you a general sense of your asset growth or decline over time, future annual and final taxes, and estate values. With that backdrop you can experiment to see which options are available to you and which ones you want to act on, in terms of spending, lifestyle, gifting, and leaving a bequest.
With that background, which I refer to as lifestyle planning, financial planning begins, and this is the nature of your question. From the tax side it is about understanding what tax credits and deductions are available to you, and how to take advantage of them in a way that aligns with your personal values, beliefs, and lifestyle.
You will also need to understand how your individual investments are taxed in your non-registered and registered accounts and your holding company. You also need to be aware of the three different dividend options you have when drawing from your holdco, and the impact that investment tax and dividends have on tax credits and benefits. Old Age Security (OAS) is a good example of a benefit that begins to be clawed back once your income exceeds about $93,500.
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Some lesser-known tax-saving strategies for retirees
I suspect through experience you are aware of the things I have discussed so far and some of the planning solutions you can use to reduce the tax owing such as pension splitting, donating shares to charity, and tax-free savings account (TFSA) contributions. Rather than rehash those strategies, I will briefly touch on a few others you may not be so familiar with, such as a donor-advised fund, immediate flow-through shares, insurance and investment selection.
You are already donating to charity, but have you ever thought of setting up a donor-advised fund (DAF)? You can add as much money as you like to the fund, in your case maybe $200,000 of your non-registered money. Once it is there, you can manage the money your way and the investment will grow tax-free, so you are not paying tax on the distributions. When you make the deposit, you can claim the charitable tax credit all at once or defer it over five years. It is also at your discretion when you give money to the charities of your choice from the DAF. One catch is you can’t change your mind and take the money back once it is in the DAF.
Have you heard of flow-through shares with an immediate liquidity provider? You buy the shares and then immediately sell them to a waiting buyer for less than what you paid. It is the tax credit that makes this work. Ottawa-based planning firm WCPD provides the following simple explanation of how this can work both personally, making a charitable contribution, or a combination for a person with a marginal tax rate of 50%.
You pay $1.50 for a flow-through share and immediately sell it for $1. The flow-through tax credit and deduction will save you $0.75 in tax which, when combined with the $1 you sold the share for, puts you up $0.25. If you want to make a charitable contribution, you could donate the $1 you sold the share for and get a tax savings of $0.50. With the combined tax savings of $1.25 ($0.75 + $0.50), your charitable contribution will only cost you $0.25, rather than $0.50 if you didn’t purchase a flow-through share. WCPD also provides a strategy where you go two parts personal and one part charity, resulting in a zero-cost way to donate to charity.
As mentioned, this is a very simplified example, and you will want to talk to a professional before doing this on your own.
Insurance and investing strategies for retirees
A second-to-die permanent life insurance policy held in your holding company is another tax-saving strategy. Money invested within the policy grows virtually tax-free, and when it pays out, a capital dividend account (CDA) is created equal to or almost equal to the full value of the death benefit. You are then able to pay a tax-free dividend equal to the CDA out of the holdco. While you own the policy, there may be other ways to use the policy, such as borrowing for tax-free income or investing. Have you had a discussion with your accountant about the wind-up of your holdco on your deaths, i.e, the tax, time, and fees? Insurance may ease some of those issues.
Finally, and probably more familiar, have you thought about how your investment approach is affecting your annual tax? I have the impression you are a successful DIY dividend investor. You are receiving taxable dividends each quarter and possibly buying and selling stocks, subjecting you to capital gains and higher corporate accounting fees. For your non-registered and corporate accounts, consider a long-term, buy-and-hold portfolio made up of simple low-cost index ETFs that will be more tax-efficient.
Mike, there is probably a lot you can do to make things more tax-efficient. It is something you should look at on an annual basis as your spending and income will likely change from year to year.
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