All-season tax tips

“Generally, these individuals are not as high-income as those in the higher age brackets, and their goals are different,” says Bowen. “The first question they should be asking themselves is how soon do they need funds? They typically don't own a home yet, and they could be entering the new tax year as first-time home buyers. If they are, they should be considering their most liquid options to support the purchase, says Bowen, “both TFSAs and RRSPs can work.”

There is a rule of thumb, however, that affects the choice between a TFSA and an RRSP. “Compare your current marginal tax rate and the possible tax rate in retirement,” says Bowen.

If you’re currently in a higher tax bracket, consider building up that down payment this year in an RRSP. You’ll also have access to the Home Buyer’s Plan (HBP) – now with an increased withdrawal limit – and you’ll be able to reduce your taxable income while you contribute.

If the individual is in a low to moderate tax bracket, leverage that TFSA. “Typically, those in this age bracket still have a lot of room in their TFSAs to contribute,” says Bowen. You’ll also be able to withdraw the down payment from the account without needing to repay it, as in the case with the Home Buyer’s Plan.

Mid-career professionals

“The tax fundamentals for those around this age don’t change [from those in younger age brackets],” says Bowen.

On the RRSP front, the same current vs. future tax rate consideration applies. And those buying homes might want to opt for the RRSP to fund the down payment.

However, their circumstances and goals change from their earlier years, Bowen adds. And with that, tax considerations change. The financial responsibilities of those in this age bracket are higher and at this point, Bowen highly recommends getting a planner involved. They may have families and greater complexities to plan for. Education and disability factors enter the frame and he suggests exploring some key options with your planner.

“RESPs are terrific savings vehicles,” says Bowen.

Registered Education Savings Plans (RESPs) are savings accounts designed to fund a child’s education – although you can open an RESP for yourself or another adult. The contributions are not tax deductible, but you can withdraw from them tax-free at any time. If the child is under 17, The federal government, and sometimes the provincial government, will also contribute to the RESP with a grant or bond. Once the child enrolls in post-secondary education, these contributions can be withdrawn as part of Education Assistance Payments (EAPs), up to $5,000. The investment earnings and government grants are taxed, but the tax will apply to your child, who will not likely need to pay tax given his or her personal income level and tax bracket.

Registered Disability Savings Plans (RDSPs) are another suggestion from Bowen for those in this age bracket.

RDSPs are savings accounts designed for parents and others save for the long-term financial security of someone who is disabled and eligible for the federal disability tax credit (DTC). RDSPs, like RESPs, are not tax deductible, however, contributions – up to $200,000 - can be made without affecting disability benefits, even when withdrawing the funds. Withdrawing contributions also does not affect the individual’s taxable income levels either. The contributions can be made until the individual’s 59th birthday, and the best part is, for every $1 contributed, the federal government will contribute up to $3 through the Canada Disability Savings Grant. The maximum grant for any one year is $3,500 and the lifetime maximum amount is $70,000.

Investors heading into retirement

Those in this age bracket that are still working are likely saving a lot, Bowen says. They will likely be wanting to contribute to both RRSPs and TFSAs as they are prone to max out contributions to both. “There are opportunities in the gap between your income and retirement years to look out for,” says Bowen.

Bowen says to watch out for the treatment of dividends when you max out contributions to these accounts. Income that ends up in non-registered accounts is subject to a 50% capital gains tax. Look for corporate class funds when this happens. Corporate class funds are a great way to efficiently manage dividend tax obligations. Corporate class funds can share income, gains, losses, and expenses to reduce taxable distributions generated by the entire ‘corporation’.

The Adjusted Cost Base (ACB) of the class shares is reduced by the return of capital, and once the capital is returned, the cash flows that follow are treated as capital gains and taxed at a favourable rate since corporate class funds can only distribute Canadian dividends and capital gains dividends.

Estates can play an important part of financial planning for those in this age bracket and it can also serve as a strategic source of income. An individual could consider withdrawals from the estate to reduce the taxable amount when it is passed on, says Bowen.

Bowen adds that another strategic source of income is to give a loan to your lower-income spouse. The loan is provided at a prescribed rate (2% currently). This investment’s income will then be taxable at your spouse’s lower marginal tax rate, which effectively reduces your family’s overall tax bill. Bowen cautions however that this needs to be carefully structured and appropriate for family’s financial situation, and that a planner will help design and determine the suitability of the strategy.