Tax Planning
Tax Planning tests whether you can compute after-tax outcomes across account types and income sources, and apply the attribution and loss rules that trip up real plans.
Framework
- Federal brackets run 15%, 20.5%, 26%, 29% and 33%, stacked with provincial rates; the marginal rate applies to the next dollar, the average rate to total income.
- Distinguish total, net and taxable income - RRSP deductions reduce net income, which is why they also protect OAS, GIS and the Canada Child Benefit.
- Deductions save tax at your marginal rate; non-refundable credits (e.g., the $2,000 pension income credit, the basic personal amount) save tax at the lowest rate, 15% federally.
Investment income
- Interest is fully taxable.
- Eligible dividends: 38% gross-up, federal dividend tax credit of 15.0198% of the grossed-up amount. Non-eligible dividends: 15% gross-up, 9.0301% credit.
- Capital gains: 50% inclusion; capital losses are only deductible against capital gains, carried back three years or forward indefinitely. The superficial loss rule denies the loss if you or an affiliated person buys the same security within 30 days.
- Principal residence exemption uses the formula (years designated + 1) / years owned.
Splitting and attribution
- Spousal loans must carry the prescribed rate and interest must be paid by January 30 each year, or attribution applies.
- Pension income splitting allows up to 50% transfer of eligible pension income; RRIF income qualifies at age 65+.
Worked example
Client at a 33% marginal federal rate receives a $10,000 eligible dividend.
Grossed-up: $10,000 × 1.38 = $13,800. Federal tax at 33% = $4,554. Federal credit = $13,800 × 15.0198% = $2,072.72. Net federal tax = $2,481. Effective on $10,000 ≈ 24.8% federally, before provincial credits.
Same $10,000 as interest: $3,300 federal. The dividend is favoured because the credit is applied at 15% against income taxed at 33%. If the client were in the lowest bracket, the math reverses.
Traps
- Applying the dividend tax credit at the marginal rate instead of 15%.
- Forgetting provincial dividend tax credits, which materially change the comparison.
- Missing the superficial loss rule on a repurchase inside 30 days.
- Attributing income incorrectly when funds are gifted to a spouse or adult child.
- Applying the capital gains inclusion to the full proceeds rather than to proceeds minus ACB and costs.