Tax Planning in London, Ontario

Why Tax Planning Matters More Than Tax Preparation

Most people think about taxes once a year, when they hand their slips to an accountant and wait for the return. But by the time you are filing, the year is over. The decisions that determine how much tax you pay have already been made, or worse, they were never made at all because nobody was thinking about them proactively.

Tax planning is fundamentally different from tax preparation. It is forward-looking. It is about making strategic decisions throughout the year and across multiple years to legally minimize the total amount of tax you pay over your lifetime. Your accountant is essential for accurate filing. But the real savings happen before tax season, not during it.

As a financial planner in London, Ontario, I build tax planning into every financial decision. Whether it is choosing between an RRSP and TFSA contribution, deciding when to trigger a capital gain, figuring out the optimal salary-dividend mix for a business owner, or structuring retirement income to avoid OAS clawbacks, every choice has a tax consequence. My job is to make sure those consequences work in your favour.

Understanding Ontario Tax Brackets

Ontario has a progressive tax system, meaning different portions of your income are taxed at different rates. Understanding where you sit in the bracket structure is the first step in effective tax planning. Here are the combined federal and Ontario marginal tax rates for 2024 at key income levels:

• Up to approximately $55,867 — Combined marginal rate of about 20.05 percent on ordinary income.
• $55,867 to $111,733 — Combined rate rises to approximately 29.65 percent.
• $111,733 to $150,000 — Combined rate of approximately 31.48 percent.
• $150,000 to $220,000 — Combined rate of approximately 33.89 percent.
• Over $220,000 — Combined rate exceeds 53 percent at the top bracket.

Ontario also levies a surtax on provincial tax payable above certain thresholds, and the Ontario Health Premium adds an additional layer for incomes above $20,000. When you factor in the OAS clawback zone for retirees, effective marginal rates can exceed 65 percent on certain income ranges. This is why strategic planning is so important. Moving even a small amount of income from a high bracket to a lower one can save you thousands of dollars.

Income Splitting Strategies

Income splitting is one of the most effective ways to reduce a household's total tax burden in Ontario. The concept is simple: if one spouse earns significantly more than the other, shifting income from the higher-bracket spouse to the lower-bracket spouse results in less total tax for the family. The government has tightened the rules over the years, but several legitimate strategies remain.

Pension Income Splitting

After age 65, you can allocate up to 50 percent of eligible pension income to your spouse on your tax returns. Eligible income includes RRIF withdrawals, annuity payments from registered pension plans, and certain other sources. This is one of the simplest and most powerful tax-saving tools for retired couples in London, Ontario. A couple where one partner has $100,000 of pension income and the other has $30,000 can save several thousand dollars per year by splitting.

Spousal RRSPs

The higher-earning spouse contributes to a spousal RRSP and receives the tax deduction. After the three-year attribution period, the lower-earning spouse withdraws from the spousal RRSP at their lower tax rate. This is particularly effective for couples planning early retirement where one partner will have significantly less income. I coordinate spousal RRSP strategies with your overall retirement plan.

Prescribed-Rate Loans

When the CRA prescribed interest rate is low, the higher-income spouse can lend funds to the lower-income spouse for investment purposes. The lower-income spouse reports the investment income and pays interest on the loan at the prescribed rate. As long as the investment income exceeds the interest cost, the family comes out ahead because the income is taxed at the lower spouse's rate. The interest on the loan is deductible to the lower-income spouse, and the higher-income spouse includes the interest received.

RRSP and TFSA Optimization

The decision of whether to contribute to an RRSP or TFSA, and how much to allocate to each, is fundamentally a tax planning decision. Get it right and you save thousands over your lifetime. Get it wrong and you leave money on the table.

The key question is: will your tax rate be higher today or in retirement? If you are in a high Ontario bracket now and expect a lower bracket in retirement, RRSPs provide more benefit. The tax deduction today at 43+ percent is worth more than the tax you will pay on withdrawals at a lower rate. If your income is lower or you expect similar rates in retirement, TFSAs may be more advantageous because withdrawals are completely tax-free and do not affect income-tested benefits.

For many people in London, Ontario, a combination of both is optimal. I analyze your specific tax situation each year to determine the ideal allocation. This is not a set-it-and-forget-it decision. As your income changes, as you approach retirement, and as tax rules evolve, the right mix between RRSP and TFSA shifts. I make sure you are always contributing to the right account at the right time.

Capital Gains Strategies

Capital gains receive preferential tax treatment in Canada. Only 50 percent of capital gains are included in your taxable income for gains up to $250,000, and 66.67 percent for gains above that threshold (effective for dispositions after June 25, 2024). Even with this inclusion rate, strategic planning around when and how you realize capital gains can produce significant tax savings.

Key capital gains strategies for London, Ontario residents include:

• Tax-loss harvesting — Selling investments at a loss to offset realized gains. The losses can be carried back three years or forward indefinitely. I coordinate this with your investment management strategy.
• Timing of dispositions — Deferring a sale to the following tax year can be beneficial if your income will be lower, or accelerating a sale if you have losses to offset.
• Charitable donations of securities — Donating publicly listed securities directly to a charity eliminates the capital gains tax entirely while providing a full tax credit for the fair market value donated.
• Principal residence exemption planning — For families with more than one property, such as a London, Ontario home and a cottage, designating the right property as your principal residence in each year can minimize the total capital gains tax owing.
• Lifetime Capital Gains Exemption — Business owners selling qualifying small business corporation shares can potentially shelter over $1,000,000 in capital gains from tax. Proper planning to ensure shares qualify is essential.

Tax Planning for Business Owners

If you own an incorporated business in London, Ontario, the tax planning landscape becomes significantly more complex and the potential savings are much larger. You are effectively managing two taxpayers: yourself and your corporation. The decisions about how much to take from the corporation, in what form, and when, have enormous tax consequences.

Salary vs. Dividends Optimization

The classic question for Canadian business owners. Salary is deductible to the corporation, creates RRSP contribution room, and qualifies you for CPP benefits. Eligible dividends do not create RRSP room and do not contribute to CPP, but they benefit from the dividend tax credit which can make them more tax-efficient at certain income levels. Ineligible dividends from small business income have a different integration and may be preferred in certain situations.

The optimal mix depends on your corporate tax rate, personal income level, RRSP room needs, CPP considerations, and how much you need from the corporation versus how much you want to leave inside for growth. I model the scenarios and find the combination that minimizes your total tax burden. This is closely connected to your corporate financial plan.

Managing Passive Investment Income

Since 2019, passive investment income earned inside a corporation above $50,000 reduces access to the small business deduction. For every dollar of passive income above $50,000, five dollars of active business income loses the benefit of the small business tax rate. This means corporate investment portfolios need to be managed with tax efficiency in mind. Strategies include using corporate-owned life insurance (which does not generate passive income), focusing on capital gains which are only partially included, and timing the realization of investment income carefully.

The Capital Dividend Account

The CDA is one of the most valuable tax-planning tools for business owners. It tracks the tax-free portion of capital gains and life insurance proceeds received by the corporation. Amounts in the CDA can be distributed to shareholders as tax-free capital dividends. This is particularly useful for extracting corporate investment gains and insurance proceeds without personal tax. I monitor the CDA as part of every corporate financial plan I build for London, Ontario business owners.

Tax-Efficient Retirement Income

In retirement, tax planning becomes even more important because you have more control over your taxable income than you did while working. The order in which you draw from different accounts, the timing of government benefits, and the use of income-splitting strategies all determine your effective tax rate.

The key strategies for tax-efficient retirement income in Ontario include:

• Drawing from RRSPs before age 72 to reduce future mandatory RRIF withdrawals, as part of an RRSP meltdown strategy
• Pension income splitting with your spouse to equalize taxable income
• Using TFSA withdrawals for income that does not trigger OAS clawbacks
• Timing CPP and OAS to manage clawback thresholds
• Managing capital gains realizations in non-registered accounts to stay within favourable brackets
• Taking advantage of the age amount, pension income amount, and other credits available to Ontarians over 65

The goal is not to pay zero tax. That is not realistic or even desirable. The goal is to pay the least amount of tax legally required over your lifetime. Sometimes that means paying a little more tax this year to save significantly more in future years. I model the long-term impact of every strategy so you can see exactly why each decision makes sense.

Tax Planning for Real Estate

Real estate is a significant part of many Ontarians' wealth, and it comes with its own set of tax considerations. Your principal residence is generally exempt from capital gains tax, but if you own multiple properties, such as a home in London, Ontario and a cottage up north, you can only designate one property as your principal residence for each year you owned it.

Rental properties generate income that is fully taxable and capital gains on sale. If you own rental property, strategies include timing the sale in a year when your other income is lower, using capital cost allowance (CCA) carefully since it must be recaptured on sale, and structuring ownership appropriately from the start. For business owners who hold real estate in their corporation, the tax implications are different and require coordination with your corporate plan.

How I Approach Tax Planning

Tax planning is not a standalone service. It is woven into every aspect of the financial planning I do for London, Ontario clients. Here is what you can expect:

• Full picture analysis — I look at your complete financial situation, including income, investments, registered accounts, corporate interests, real estate, and family circumstances.
• Multi-year projections — I do not just optimize for this year. I model your tax situation across multiple years to find the strategy that minimizes your lifetime tax bill.
• Coordination with your accountant — I provide your accountant with the strategic framework, and they handle the filing. We work together, not in silos.
• Proactive adjustments — As tax rules change, as your income shifts, and as life events occur, I update your tax strategy accordingly. This is not a once-a-year exercise.

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