Canada Tax saving opportunities

[ourkid8]

Hi all,  I need some advice.  I have a number of US companies (I am sitting on very large gains on them) in my Cash account which pay dividends and I am being hit with a withholding tax + the dividends count towards my income and I am in the high income tax.  I also have a large number of Canadian corporations in my TFSA/RRSP which I do not pay any taxes against the dividends.  I remember in the past there was a switch feature in which you can switch an equal amount from your RRSP account to your Cash account however that loophole was closed by the CRA.  Can anyone provide me any advice?  I appreciate it...

[KCLarkin]

I don't think there is any legal way to get those US stocks into your RRSP without triggering capital gains tax.

[Aberhound]

Hi all,  I need some advice.  I have a number of US companies (I am sitting on very large gains on them) in my Cash account which pay dividends and I am being hit with a withholding tax + the dividends count towards my income and I am in the high income tax.  I also have a large number of Canadian corporations in my TFSA/RRSP which I do not pay any taxes against the dividends.  I remember in the past there was a switch feature in which you can switch an equal amount from your RRSP account to your Cash account however that loophole was closed by the CRA.  Can anyone provide me any advice?  I appreciate it...

 

Have you investigated the idea of seeing if there is a rollover into another type of retirement structure like an RCA? I have't checked. If there there is withholding on US dividends for now in the RCA but it would allow you to sell out of the RCA after you become non-resident and then the capital gains tax would be much less depending on the tax treaty. The strategy would also reduce the tax rate on RRSP withdrawals from top marginal rate to as low as 15% after you reach the forced withdrawal age.

[ourkid8]

What is an RCA?

 

Hi all,  I need some advice.  I have a number of US companies (I am sitting on very large gains on them) in my Cash account which pay dividends and I am being hit with a withholding tax + the dividends count towards my income and I am in the high income tax.  I also have a large number of Canadian corporations in my TFSA/RRSP which I do not pay any taxes against the dividends.  I remember in the past there was a switch feature in which you can switch an equal amount from your RRSP account to your Cash account however that loophole was closed by the CRA.  Can anyone provide me any advice?  I appreciate it...

 

Have you investigated the idea of seeing if there is a rollover into another type of retirement structure like an RCA? I have't checked. If there there is withholding on US dividends for now in the RCA but it would allow you to sell out of the RCA after you become non-resident and then the capital gains tax would be much less depending on the tax treaty. The strategy would also reduce the tax rate on RRSP withdrawals from top marginal rate to as low as 15% after you reach the forced withdrawal age.

[wondering]

Retirement Compensation Arrangement

 

http://retirehappy.ca/retirement-compensation-arrangements/

 

A few of our clients have this.  As with everything in life, there are advantages and disadvantages.

[rb]

I don't really see how an RCA can help him here since the money has to be deposited in the RCA by his employer.

 

Also moving the shares anywhere from the cash account will be considered a deemed disposition and will trigger capital gains taxes.

 

I don't think you should worry about withholding taxes. Based on what you describe you should be able to get all the withholding tax back when you file your taxes. In order to lower the income tax on the dividends you could increase your contribution to the RRSPs. Another way would be to take a margin loan against the cash account and invest that loan in a tax free way - obviously this would be quite risky so handle it with care.

 

Regarding living abroad when making withdrawals from your RRSP. The government will withhold 25% of the withdrawal upfront. Depending where you are and what tax treaties are in place you may lower that rate but u will also have to pay tax in your country of residence. In addition depending on your particular situation, CRA may deem you a tax resident of Canada even if you're not a physical resident. Then you pay taxes how you normally would.

 

Lastly a word of caution about using RRSPs too heavily. If you make good returns and grow very large RRSPs you could end up paying more tax because capital gains will be taxed fully. Hope this helps.

[scorpioncapital]

Some ideas off the top of my head...

 

- Borrow money so that the dividend income is offset by margin interest.

- Do a section 85 rollover of your securities into a CCPC than dividend out profits as eligible dividends and capital dividends. If you have RRSP room, you can offset this further with a contribution in the year you do this.

- Use other instruments like single stock futures that are not dividend protected, you would essentially convert dividends into capital gains - and there's no withholding taxes.

 

[rb]

Some ideas off the top of my head...

 

- Borrow money so that the dividend income is offset by margin interest.

- Do a section 85 rollover of your securities into a CCPC than dividend out profits as eligible dividends and capital dividends. If you have RRSP room, you can offset this further with a contribution in the year you do this.

- Use other instruments like single stock futures that are not dividend protected, you would essentially convert dividends into capital gains - and there's no withholding taxes.

A section 85 rollover would be a really bad idea if you don't have a real business lying around. The corporation would be deemed an Investment Holding Corporation and will be taxed at the highest personal tax bracket in your jurisdiction.

[Uccmal]

ourkid, There is nothing you can really do at this point. 

 

I have slowly converted everything, over 3 years or more so that:

 

1) There are no US dividend stocks in my TFSA.

2) Lots of US dividend payers in my two RSP accounts.

3) Dividend payers in my taxable US account.  I should get a portion of the 15% back due to positioning myself in a lower tax bracket. 

 

The suggestion to borrow money is not a bad one, provided with the usual caveats.

 

The RESP for my kids is a sticking point.  I get some US dividends there with no recourse on the 15%.  Toward the future I lean toward Canadian based companies to reduce this affect but will always lose some here. 

 

On the positive side, the dividends right now are being converted from US to CDN in the RESP which more than offsets the 15% at the moment.

[SharperDingaan]

The reality is that the $ are not coming out of the cash account without being taxed.

 

Not for everyone, but you may wish to consider incorporating & doing your investing within the corp. Assuming the sums involved aren't massive, dividends & net realized gains will be taxed at the small business rate. Probably less than you are paying now, & it avoids the forced RRSP liquidation starting at age 72. When you need money, the corp. can pay you a tax free return of capital dividend up to your original contribution.

 

Common practice amongst owner managed business partnerships. Each partner opens & funds their own corp. Each corp. invests in the partnership up to the agreed % ownership. Thereafter, each partners accumulation over time accretes in their own corp., & they pay themselves from that corp. only as/when they need the funds.

 

SD

[rb]

The reality is that the $ are not coming out of the cash account without being taxed.

 

Not for everyone, but you may wish to consider incorporating & doing your investing within the corp. Assuming the sums involved aren't massive, dividends & net realized gains will be taxed at the small business rate. Probably less than you are paying now, & it avoids the forced RRSP liquidation starting at age 72. When you need money, the corp. can pay you a tax free return of capital dividend up to your original contribution.

 

Common practice amongst owner managed business partnerships. Each partner opens & funds their own corp. Each corp. invests in the partnership up to the agreed % ownership. Thereafter, each partners accumulation over time accretes in their own corp., & they pay themselves from that corp. only as/when they need the funds.

 

SD

In Canada investing in through a corporate structure is very tax inefficient. A business that is engaged in investing activities will be classed an investment holding company and will be taxed at the highest marginal tax rate. There is a threshold I think more than 50% of the company's assets must be used to generate non-financial business income to avoid being an investment holding company. Don't quote me on that figure though.

[mcliu]

rb is right. You can't claim the small business deduction if your corporation is solely set up to hold investments.

 

That said, it's actually not that bad to invest through an IHC due to tax integration. As long as you dividend out your gains to the individual, the tax rates are about the same whether you invest through a corporation or as an individual. However, if you plan on retaining those dividends in the corporation, they will be taxed at the highest marginal tax rate.