An individual generates wealth by investing salary and business income in stocks, mutual funds, real estate, and other asset classes. However, if not managed properly, the Canada Revenue Agency (CRA) can take a big tax bite out of your wealth. Hence, it is important to look at every income, investment, and retirement withdrawal from a tax perspective and protect your assets from the CRA’s claws. An integrated tax and wealth approach helps you make smarter decisions through your wealth lifecycle, from when you earn it to the day you transfer it to the next generation.

How to Integrate Tax Planning with Wealth Generation

Registered accounts are lucrative investment instruments that help generate wealth in a tax-efficient manner. They give you tax benefits on your income, investment, or withdrawals. Each of these accounts allows your investments to grow tax-free.

Registered Retirement Savings Plan (RRSP) and First Home Savings Account (FHSA) generate immediate deductions on taxable income. However, their withdrawals are taxable. FHSA withdrawals are not taxable if used for the down payment on a first home. But if withdrawn for other purposes, it is taxable. These accounts defer tax liability to a future date when your income will be low.

On the contrary, a Tax-Free Savings Account (TFSA) provides no immediate tax benefit but allows tax-free withdrawals.

You can plan your investments across these registered accounts and evenly distribute your tax liability by keeping income from all sources in the lower income bracket.

Managing Income for Tax Efficiency

One can earn income through salary, investments, and dividends. RRSP contribution is 18% of your taxable income up to a maximum threshold set by the CRA. Salaried employees can use an RRSP to reduce their current tax liability.

Business owners can withdraw their business income by paying themselves a salary and splitting the remainder with low-income family members by hiring them and paying them a reasonable salary for the work done. However, be careful with the Tax on Split Income (TOSI) rules. Avoid paying excess salary to family members and ensure their attendance and payroll data are properly maintained.

Another way business owners can withdraw money is by paying dividends to shareholders. Dividends can be paid without triggering TOSI.

You can plan your annual income for several years, divide it into taxable and non-taxable components, and develop an income ladder. In any year, if your income is below the threshold, you can give yourself hefty dividends withheld in the company’s account and invest them in a TFSA. If your income is way above the threshold, you can use RRSP and FHSA contributions to reduce your tax liability.

Registered accounts defer your tax and do not end it. A professional tax consultant can help you balance tax benefits in the present and the future by evenly distributing your income.

Determining a Mix of Salary and Dividends

Business owners should determine a favourable mix of salary and dividends to maximize income and minimize taxes. Remember, salary creates Canada Pension Plan (CPP) contribution and RRSP contribution room, which are tax-deductible today and generate taxable retirement income in the future. Dividend income generates neither. Hence, it makes tax sense to withdraw salary from your business.

Many business owners retain dividends and invest them in stocks and other instruments, thereby generating passive income. While investment grows at a lower corporate tax rate, the money is exposed to business creditors.

Moreover, retained passive earnings in the business can gradually claw back the small business deduction. The CRA offers small business owners a reduced tax rate on the first $500,000 of revenue. However, if passive investment income exceeds $50,000 in a year, the deduction begins to phase out.

The CRA also discourages the passive investing practice in estate planning by making it a requirement for the lifetime capital gains exemption (LCGE). Under the LCGE, the CRA exempts small business owners from paying tax on capital gains ($1,275,000 in 2026) on the sale of their business. However, the business must meet certain conditions, one of which is to have more than 50% of its business assets in active business in Canada for 24 months before the sale.

A professional tax consultant can identify the right mix of dividend and salary so that you can avail yourself of all the tax benefits the CRA offers in the short and long term.

Tax Efficient Investment Planning

While you time your income as per tax obligations, also balance your investments across registered accounts to make the most of the tax benefits. TFSA allows your investment to grow tax-free and make tax-free withdrawals, making it ideal for high-growth stocks.

Interest is taxed at a higher rate than dividends and capital gains, making interest-earning instruments ideal for a TFSA. Also, tax-free growth makes a TFSA ideal for rebalancing a portfolio, as you can sell shares at a capital gain and reinvest in other stocks without triggering a taxable event.

Even RRSPs allow tax-free investment growth but make withdrawals taxable. Even the entire RRSP balance is taxable after the account owner’s death unless the balance is transferred to the surviving spouse or dependent children under certain conditions.

A tax advisor can help you allocate investments between TFSA and RRSP accounts, considering future tax implications.

Tax-Efficient Retirement and Estate Planning

Tax planning goes hand in hand with income and investment. It also works alongside retirement and estate planning. When forecasting your retirement income, also consider the taxable CPP and Old Age Security (OAS) Pension, as the CRA determines the payout. It can claw back your OAS if your taxable income crosses a certain threshold. Hence, your other taxable retirement income, such as RRSP withdrawals and private pension, should be adjusted to the government payouts.

TFSA withdrawals are not added to taxable income and do not impact OAS payout, making them ideal for retirement income.

A professional tax advisor will forecast future tax brackets and allocate your funds across different accounts so you can maximize government benefits while paying the minimum tax. They will also suggest and implement specific tax strategies, such as using a life insurance policy to cover estate taxes, setting up trusts, and gifting certain assets during your lifetime to reduce the burden of capital gains tax and probate fees on your estate.

Contact Glenn Graydon Wright LLP in Oakville to Help You with Tax-Efficient Wealth Generation

The more wealth you have, the higher the tax implications. Talk to a professional tax advisor as you build your wealth so you can give your money a tax-efficient environment to grow. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and taxation services, contact us today at 905-845-6633 or connect with us online to schedule an initial consultation.