Understanding Tax Risk Tolerance and Strategic Planning for 2025

Tax planning isn’t just about saving money—it’s about understanding your goals, assessing your risk tolerance, and implementing strategies that align with your financial vision.

As we approach 2025, navigating the complexities of tax planning has never been more important. Whether you’re a business owner, investor, or high-income earner, here’s a breakdown of key strategies and insights to help you stay ahead.

1. What Is Tax Risk Tolerance?

Tax risk tolerance refers to how comfortable you are with taking calculated risks in your tax strategies. Much like investment risk, your tax decisions can range from highly conservative (minimizing risks of audits or penalties) to more aggressive approaches that leverage interpretation of tax laws for potential savings.

Understanding your tax risk tolerance opens doors to different planning opportunities. For instance, a risk-tolerant individual may explore income-splitting strategies that push the boundaries of interpretation, while a risk-averse individual might prefer straightforward, low-risk deductions.

2. Proactive vs. Reactive Tax Planning

The biggest mistake many taxpayers make is focusing solely on past tax years. Instead, proactive tax planning looks ahead, preparing for changes in income, investments, or tax laws.

3. Income Splitting: An Underused Opportunity

Income splitting involves redistributing income among family members to reduce overall tax liability. While the Tax on Split Income (TOSI) rules introduced in 2017 limit some of these opportunities, exemptions still exist.

For example:

• Paying dividends to a spouse who works actively in the business could qualify as an exception if they meet criteria such as working an average of 20+ hours a week or being "actively engaged" in a substantial role.
• Spousal RRSP contributions and family RESP accounts also offer tax-efficient ways to distribute income and maximize savings.

Income splitting can significantly reduce taxes, but it requires a clear understanding of rules and risk tolerance.

4. Salary vs. Dividends: How Should Business Owners Pay Themselves?

Business owners often wrestle with whether to pay themselves through salary or dividends. The best approach depends on factors such as income level, retirement goals, and investment strategy.

Salary Benefits:

• Creates RRSP contribution room.
• Contributes to the Canada Pension Plan (CPP), which acts as a form of guaranteed, inflation-adjusted retirement income.
• Provides employment income, which may qualify for certain benefits.

Dividend Benefits:

• May be more tax-efficient for businesses earning significant passive income and take advantage of the refundable taxes like RDTOH balances.
• Avoids CPP contributions, saving both the employer and employee portions of premiums.
• Works well for those with established investment portfolios or minimal reliance on CPP for retirement.

A hybrid approach often makes sense, where a salary covers basic needs and RRSP/CPP contributions, while dividends optimize tax efficiency as wealth grows.

5. Avoiding Common Tax Missteps

Many business owners and individuals miss opportunities or fall into traps that result in higher taxes or penalties. Here are a few common pitfalls:

• Shareholder Loans: Borrowing money from your corporation must follow strict guidelines. Loans must generally be repaid within the second fiscal year-end or risk being taxed as income. Additionally, failing to account for imputed interest on loans can lead to penalties.

• Chasing Small Deductions: Many people focus on minor expenses like Costco memberships or small business purchases while neglecting major opportunities like optimizing their RRSPs, TFSAs, or corporate structures.

6. Behavioral Coaching in Tax Planning

Just as emotions can derail investment decisions, they can also lead to suboptimal tax strategies. For instance, fears of future policy changes may drive hasty actions, like realizing capital gains prematurely. A better approach involves:

• Focusing on the Big Picture: Avoid snap decisions based on speculative changes. Tax policy evolves, but knee-jerk reactions often lead to unnecessary costs.
• Seeking Professional Guidance: A tax professional can help weigh the risks and rewards of various strategies, ensuring your decisions align with long-term goals.

Take the time to assess your tax strategy as we enter 2025. Small tweaks now can lead to significant savings—and greater peace of mind—in the years ahead.

Ep.005: Tax Changes Everyone Needs to Know with CoPilot Tax

In this episode of the Millennial Money Canada podcast, we—hosts Guillaume Girard and Sam Lichtman—sit down with tax expert Mohammed Al-khooly to discuss tax planning strategies for 2025.

Together, we explore Mohammed's journey from working in large accounting firms to starting his own tax advisory firm, highlighting the importance of proactive tax planning.

We dive into various topics, including income splitting, tax risk tolerance, the implications of shareholder loans, and the recent changes in capital gains tax. We also discuss the role of social media in client acquisition and the importance of understanding clients' emotional responses to financial decisions.

Find us on Spotify, Apple or Youtube under the name "Millennial Money Canada Podcast"

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Happy Holidays!

Happy Holidays from all of us at Millennial Wealth! 🎄✨  

As we wrap up an incredible year, we want to take a moment to express our gratitude to our amazing clients and community.

Your trust and support mean the world to us. We wish that your holidays be filled with joy, love, and memorable moments with family and friends.

Guillaume Girard, CFA CFP | Sam Lichtman, CFP

‍Millen Wealth Advisors

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