Brace for the 2% wealth surtax

Your wealthy clients will soon care even more about tax planning.

By Stella Gasparro | October 15, 2012 | Last updated on September 15, 2023
2 min read

  • Generating deductions:

    Consider flow-through shares if an Ontario resident’s taxable income will temporarily be over the $500,000 mark. In that high-income year, she can buy the investment to generate a deduction, and then sell it in a year when her income is lower. Not only will this move her to a lower bracket, the income will be taxed at capital-gains rates.

  • Manage income from active corporations:

    If clients have incorporated businesses or professional corporations, suggest they hold off on withdrawing profits until they’re needed for living expenses. This defers the tax hit.

  • Receiving dividends:

    A common strategy is to pay dividends from personal companies to trigger refundable tax (at a rate of 33.33%). If the personal tax rate on the dividends received will be higher than the refund (as will be the case in Ontario for non-eligible dividends in 2012, and all dividends in 2013), it’s more tax-efficient to leave the money in the company.

    Read: Business owners should use dividends

  • Investment-holding corporations:

    Ontario residents who don’t need cash from their investments can move them into holding corporations. This will provide a tax deferral and potential savings when distributed. It can also save probate tax in Ontario, when paired with proper wills. Just be mindful that it costs money to set up and run a corporation, and tax laws and rates can change.

    • Stella Gasparro, CA, partner in MNP’s Toronto office

    Stella Gasparro

    • Income splitting with family members:

      With the interest rate for spousal loans at 1%, moving income to a low-income spouse has never been less expensive. Ensure clients properly record the loan with a promissory note that outlines the amount and terms.

      The higher-income spouse reports the interest income earned on the loan, while the other uses the money to make investments and reports any associated income.

      If all goes as planned, the income on the investments is higher than the interest paid on the loan. Creditors must pay their lenders interest within 30 days of the calendar year’s end. Clients can also use family trusts to transfer investment income to lower-income family members, including children and grandchildren. Assuming they have no other income, their interest earnings will be tax-free up to $10,500; eligible dividends up to $50,000. Just beware the kiddie tax rules.

      Read: Beware the kiddie tax

    • Generating deductions:

      Consider flow-through shares if an Ontario resident’s taxable income will temporarily be over the $500,000 mark. In that high-income year, she can buy the investment to generate a deduction, and then sell it in a year when her income is lower. Not only will this move her to a lower bracket, the income will be taxed at capital-gains rates.

    • Manage income from active corporations:

      If clients have incorporated businesses or professional corporations, suggest they hold off on withdrawing profits until they’re needed for living expenses. This defers the tax hit.

    • Receiving dividends:

      A common strategy is to pay dividends from personal companies to trigger refundable tax (at a rate of 33.33%). If the personal tax rate on the dividends received will be higher than the refund (as will be the case in Ontario for non-eligible dividends in 2012, and all dividends in 2013), it’s more tax-efficient to leave the money in the company.

      Read: Business owners should use dividends

    • Investment-holding corporations:

      Ontario residents who don’t need cash from their investments can move them into holding corporations. This will provide a tax deferral and potential savings when distributed. It can also save probate tax in Ontario, when paired with proper wills. Just be mindful that it costs money to set up and run a corporation, and tax laws and rates can change.

    Stella Gasparro, CA, partner in MNP’s Toronto office