Using tax shelters to build wealth

By using some of the tax shelters available in Canada, you can improve your personal wealth dramatically.

There are very few tax breaks available for employees. But if you make use of some of the tax shelters available under our laws, you can add tens or even hundreds of thousands of dollars to your personal wealth over time.
Let’s consider a hypothetical taxpayer, Annie, a single professional earning $75,000 employment income in Manitoba. How might she use tax shelters to improve her wealth.

Let’s consider the potential savings from investing in a:

  • Registered Retirement Savings Plan (RRSP)
  • Labour Sponsored Venture Capital Corporation  (LSVCC)
  • Registered Education Savings Plan (RESP).

Registered retirement plan (RRSP):
If Annie invests the maximum possible into her RRSP each year (lesser of $13,500 or 18 per cent times $75,000), she would:

  • Accumulate a sizable retirement savings plan of over $446,000
  • Accumulate over $225,000 in tax savings (including interest  earned on
    those savings, reduced by taxes paid on the interest).

&t;trong>Labour sponsored fund (LSVCC): 
If Annie invested $5,000 each year in a Labour Sponsored Venture Capital Corporation, she would be:

  • Eligible for a federal tax credit of $1,500 ($750  plus a provincial tax credit of $750, for a total of $1,500. 
    The provincial credit amount depends on her province of residence.

Again, assuming the worst tax situation, that is, that all of the income from the investment is taxable each year as interest income, she would have:

  • Invested $100,000 into the LSVCC 
  • Accumulated over $180,000 by the time she retires. 

Combine strategies
If she could not afford both, Annie could combine these two strategies and invest in Labour Sponsored Venture Capital Corporation shares within a self-directed RRSP and benefit from both the tax deduction and the tax credits.
Resgistered education plan (RESP): 
One of Annie’s goals is to start an education fund for her niece. If she contributed $2,000 per year to an RESP for her niece, the Canada Education Saving Grant of $400 would be added to the fund by the federal government each year until her niece turns 18.  

  • Assuming moderate growth of 5 per cent per year in the plan, it would have grown to over $82,000 over the twenty years. 
  • Assuming that her niece uses the funds to further her education, there will likely be no income tax applied to erode the value of the fund.

Savings potential for tax shelters over 20 years:
(rounded figures used)

Shelter Type. Amount. Tax Savings. Total Accumulated. Earnings @ 5%/Yr. Ann. Total Compound Return After 20 yrs.
RRSP $13,500 $5,872 $19,372 $969 $20,341 $671,590
LSVCC $5,000 $1,500 $6,500 $325 $6,825 $225,680
RESP $2,00 $400 $2,400 $120 $2,520 $82,354
TOTAL $20,500 $8,522 $29,022 $1,452 $30,474 $979,624

Total after taxes:   

  • RRSP:     $671,590
  • LSVCC:  $180,160
  • RESP:     $82,354
  • TOTAL:  $934,104

Investing Outside of Tax Shelters:
If Annie has maximized her tax sheltered savings and minimized her non-deductible debt, she is in a position to invest in other investment vehicles in the marketplace. 

The wise tax planner will provide her with a menu of tax-efficient  options to consider, based on her risk tolerance level.
Excerpted from the May issue of TaxBiz, the quarterly newsletter published by The Jacks Institute.