Saturday, December 29, 2018

Tax Saving on Steroids: Better than RRSP

Two years ago, I had a great job. I loved it. In fact, I loved my job too much.

I'd wake up at two or three am in the morning a few times a week to get some work done, while it was still relatively quiet and almost nobody else was working. I'd work through the day, and then put in a few more hours right before bed time, usually late at night, after my kids and my husband fell asleep.

I loved the job. It felt like a game. Loved solving puzzles and moving up to the next level. I was addicted. 

I was a conscientious super star at work and a dedicated WORKAHOLIC


Once, I even managed to impress the CEO and the CFO. I doubled an important business metric while holding an interim job for a quarter, in addition to my own regular job. I got a performance bonus! Hooraaah! That felt amazing!

Extremely shocked was I when only half of the bonus got deposited to my checking account. How could that be?

The answer was simple: Taxes.


Blinded by Success


Blinded by Success
That was the first time I actually noticed the impact taxes made on my net pay.

That same year happened to be the year of the highest earnings I ever achieved being a full time employee. I was really proud to be in a high marginal tax bracket.

Taxes didn't hurt. On the contrary, I was certain that it was a good problem to have:

The amount shown in Box 22, Income Tax Deducted, Line 437 of my T4 slip felt as a badge of honor.

I felt successful.

That year I finally saw the benefit of contributing to RRSP. At the very last minute just before RRSP contribution deadline,it occurred to me that for whatever contribution I can make, I'd get almost half of the money back as a tax refund.

For every RRSP dollar that'd be deducted out of my earnings, I would put 50 cents of tax refund back into my pocket


Wow. I got cash advances on several credit cards and took some money out of my TFSA and made my first ever RRSP contribution, which ironically became my last RRSP contribution as well.

Bingo! A couple of months later, taxes were filed and almost half of my contribution came back. I paid back the cash advances. "Wow! I rock," - I thought looking at my RRSP savings.

Unbearable Tax Burden


Stressed. Depressed. Overworked


Some time has gone by. It became obvious that I couldn't keep working 16 hours a day. I was exhausted. Tired. Depressed. Rock bottom was approaching fast.

I remember the day when I gave up.

I was driving to work in the morning. This was the forth 20-hour day in a row. Tears were running down my face.

Why am I even doing it to myself?

Is it worth it?

The recent performance bonus felt like a mean prank now.

I felt like a failure. I knew that this was the end of my career. I didn't make it to the top.

I thought again about my performance bonus slashed in half by tax and many thousands of dollars of tax I paid that year to CRA.

I thought about 50 cents deducted from every dollar. 


50 cents from every dollar that I made during those horrific 20-hour long days and short four hour nights when my dreams were a continuation of the previous day's train of incoming emails, never-ending meetings, and insurmountable workload.

Every minute my brain kept persistently telling me "Why are you doing this to yourself? Stop! It's not worth it"

Finally I heard my own subconscious scream for help. I knew I wouldn't last until retirement at this pace. I'd just collapse. This wouldn't be the first time when I'd have a break down and have to take a stress leave to recuperate.

Enough! I am not going to drive myself into the ground. I gave my notice and quit working.


The Best of The Two Worlds: High Income, Little Tax


The irony is that if I worked smart, rather than hard, I would have had time to learn that there were ways to minimize tax. 

I could have had the best of the two worlds: high paycheque and little tax.


Alas, I missed my chance.  I am sharing my knowledge with you, a successful high income earning employee, who works smart at a fun interesting job and wants to find a way to pay less tax.


The Best of The Two Worlds: High Income, Little Tax


This is all legal. This is all risky. You should do your own research, due diligence, etc. and check with your accountant. 

The steps are simple in this Tax-Optimization Strategy:

  1. Work smart, earn a LOT and get into high (or preferably highest) marginal tax bracket
  2. Invest in a flow-though fund that's eligible for up to 100% tax deduction and get a tax refund, which basically reduces your capital at risk by 50%
  3. Convert your income into more tax favourably taxed capital gains, essentially reducing tax by 50%.

A sample calculator and a detailed example of how flow-through fund works can be found at Maple Leaf Short Duration Flow-Through fund website here

I am a big proponent of tax saving strategies. I was thrilled when I learned about this flow-through tax optimization and investing strategy a few weeks ago. 

Certain alternative energy projects
are qualified to issue flow-through shares

Keep in mind that the window to invest in flow-through shares is very short: late fall to early December.

If you'd like to discuss or learn more about this topic, please send me an email or post below. All questions, feedback, ideas are welcome. 




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