What comes to your mind
if I ask about the best tax efficiency account to invest your savings?
Maybe you will say RRSP or TFSA
But What if there is another tax shelter account
that is even better than RRSP and TFSA
Hi Everyone, This is Thomas here!
Better Mindset | Better Life!
we will continue discovering
15 secrets the Taxman doesn’t want you to know
In this video,
You will learn the difference taxes on your investment.
What you don’t know about Tax free Saving Account
And going to introduce the BEST Tax Shelter account
that you have never heard before.
Yes, even better than RRSP and TFSA
so make sure you stay until the end!
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Let’s jump into it
Investment tax in Canada is the perfect example of double tax system
You first pay income tax, then wisely invest the remaining money
but at the end, you still have to pay tax on what your investments earn.
So in order to lower taxes, we have to understand the tax system on your investment
There are 3 types of taxes on investment
Interest, dividend And capital gain
Interest is the money paid to you as you loan the money to banks
in a saving account or government
in the forms of Term deposit, Treasury Bills, Bonds etc.
All interest earned is 100% taxable in a non registered account
even if it is just a few dollars per year.
If you earned less than $50 in interest from any account,
you may not receive a T5 but you are still required to report the interest to the CRA
Dividend is where the company makes profit and pay out a portion of the profit to the shareholders
There are 2 types: eligible and non eligible
Think eligible is provided by the public traded blue chip company. Like the Big Banks
Non eligible dividend is like your own cooperation
they have different tax rate, but for today’s video I just group them together
As the company already pay a heavy tax bill at the beginning.
Compare to interest income, dividend has a slight edge and roughly 2/3 will be taxed.
Again, this is not the actual math, I ignore the tax credit part to give you a general idea
Lastly is the capital gain tax.
If you decide to sell off an item
such as stock, property, antique,
any asset that creates profit
50% of the growth will be taxed
Your principle residence and your small business are the 2 exceptions.
CRA permits you to receive any gain TAX FREE
when you sell your principle place
but you can only do that once a year.
And if you decide to sell your small business,
the first $866,000 is tax exempt from CRA
To give you a better perspective
Tom has 3 non reg account, and invest $10,000 each
and he is at the top 50% tax bracket
The first account he invested into Term Deposit,
which can yield 10% interest rate per year
Therefore, the interest he gets is $1,000
100% goes to tax, so the government pockets $500
The 2nd account he invested in a company’s share that yield dividend.
He also gets $1,000 for his dividend,
30 % goes to tax, So government gets $300
Tom sold the stock in third account and get back $11,000
He gained $1,000 so 50 % which is $500 will be taxed at 50% tax rate.
Government gets $250.
Now depending on your tax bracket,
capital gains can be taxed at a lower rate than interest and dividends.
But In general, as tax wise,
interest income is generally not the best way to invest your money
and if you can move interest Investments to ones that pays dividends
you can significantly lower your tax bill.
If you are conservative,
instead of putting money into saving accounts
or term deposits collecting interest,
you can consider purchasing the actual Bank’s share.
The return is less guaranteed but still very consistent.
More important, you pay less to CRA compare to interest income.
But of course,
the smarter way to save money on tax
is to shoved money into tax shelter vehicle like RRSP or TFSA
Tax Free Saving Account was first introduced in 2009,
every dollar you put in there is tax free upon withdraw.
And the unused room can carry forward.
You can check out my previous video on how TFSA works.
It’s a great solution,
but a lot of people are not using to its full potential
Here are the common mistakes:
A lot of people got fool by its name:
The more accurate name for The T F S A
should be Tax Free Investment Account.
As all profit generated are tax free,
the government encourage people to invest into the market
rather than put it in a saving account.
According to the survey conducted by Royal Bank Canada,
more than 50% of people are putting their money into a saving account
or term deposit in the TFSA.
Even after 10 years of TFSA was introduced,
4 out 10 account holders STILL believe
TFSAs are for savings and not for growing money.
When you combine the growth potential
of these investments with the tax-free feature of the TFSA
then you are maximizing the true value of your account.
The other one is the contribution amount
In the year 2020,
people can shelter money tax free up to $69,500 into the TFSA
However, that only applies to the people
who are already 18 years old and resides in Canada since 2009
If you just turn 18 this year,
you have $6,000 room to start. Not 70,000
However, a lot of people forgot that part and over contribute it.
The over contribution will be taxed 1% every month,
that’s 12% per year as penalty
The best way (to check) is to login to the CRA portal after you file your tax return
Lastly, Tax free saving account is considered tax free in Canada.
If you decide to move somewhere,
other countries such as the state will not recognize TFSA as tax free
They will only see it as a foreign income trust.
And therefore, more tax and paperwork need to be filed
So what can you do if you have to move to the state
because of job opportunity
but you not sure you want to come back to Canada in the future.
Or what if you receive an unexpected inheritance,
and you max out you RRSP and TFSA already.
What else can you do?
Moving on to the biggest secret that the taxman doesn’t want you to know
Secret # 7 LITS Plan
LITS is short for Life Insurance Tax Shelter Plan
In his book, the author said the best tax shelter vehicle is using Life Insurance.
Many people feel insurance as a necessary evil
But what if we could show you
that not only Insurance is a good thing to have in case of your death
but it could also provide you with a way to grow and use the money tax free
Previously, I talked about how RRSP and TFSA can shelter your money
and let it grow within the plan.
And by the time you withdraw from RRSP,
you will be in a lower tax bracket and
therefore pay the tax at a lower rate
The life insurance tax shelter plan
not only permits you to grow money tax shelter like RRSP,
But also permit you to take out the money without tax implication
like TFSA if constructed probably
so instead of just tax deferral,
you can have tax free money too!
First, let’s understand how Life Insurance Tax Shelter Plan set up:
Each insurance company has their own unique name,
but the plan basically operates like this:
You participate in a permeant insurance plan
that also allows you to deposit extra money into the plan.
That extra portion deposited can be very flexible
and can adjusted anytime over the years.
The younger you are,
the cost of insurance is lower and therefore
you can deposit more money into the investment with the same premium.
Under the Insurance Act,
the money invested in a life insurance plan is tax exempted
as long as they meet the criteria described in the tax act
and every year they need to pass the tax exemption test.
Why is this important?
this illustration may help
although the numbers will not be the same for you,
it should give you a good idea of the benefits of such a plan
suppose Henry invest $10,000 at 10% rate of return for next 20 years,
the money will grow from $200,000 to $630,000.
If it is invested in a non reg account,
@ a tax bracket of 40%,
he needs to give $172,000 in total as tax to CRA.
If he invested in RRSP, TFSA or in Life Insurance,
then he gets to keep the full amount.
probably you're saying this is good but if I want to take money out,
don’t I encounter the same problem as RRSP.
Not exactly,
if you decide to withdraw the fund,
you can withdraw the adjust cost base (ACB) of the plan
minus the cost of insurance without any tax problem.
In short, Henry in this case can withdraw under $200,000 tax free.
Next with the balance remaining,
there are two withdraw options.
The first option is straight forward
and structured in the same way as withdrawal from RRSP
The second option is what makes the Life Insurance Shelter Plan
the Greatest Tax Shelter plan in Canada.
Instead of withdrawing the money,
you can go back to the insurance company or the bank
and borrow the money you need using the insurance plan as security.
Compare to the traditional loan,
this kind of loan is usually in lower interest,
the underwriting is little or even close to no paperwork
and there is no commitment to repay until you pass away.
Upon your death, because the plan is a life insurance plan.
The death benefits which is original life insurance coverage
plus the fund you save will be paid to beneficiaries tax free.
The loan will be paid in full
and guaranteed there will be left over flow to your family
Again, TAX FREE.
The lending company will feel comfortable with this arrangement.
Because they know their loan is well secured
by the balance of fund plus the life insurance
So they know they get paid back no matter how.
So every one is happy
For LITS plan, the limit of the tax shelter room depends on the life insurance coverage.
Unlike TFSA, you control the size of the tax shelter room,
not by the government.
And this money is flowing into your hands Tax Free,
and in addition, in the event that you do not survive as long as the money does
because it is an insurance policy the balance remaining
plus the insurance benefits goes to your beneficiaries also Tax Free.
Now You see why the author say this is
The BEST TAX SHLETER!
Overall, the best tax and investment strategy is still Time.
Let time dissolve the tax burden and grow your money.
Which tax strategy is new to you so far?
tell me in the comment below
I will put all the links down below in the description box
including where you can buy this book
and don’t forget to download
My 5 tips to boost your financial Immune System
My 5 tips to BOOST your Financial IMMUNE System
This is Thomas!
If you want to learn how money works
and how you want to work with money,
then I will see you in the next video!