If you feel like you’re getting crushed by taxes, you’re not alone. Canada has some of the highest income tax rates in the world. But what if you could legally cut your tax bill without shady offshore accounts or risky schemes? Today, I’m breaking down 3 completely legal loopholes that can save you big on taxes, starting with…
Loophole #1: Using a Prescribed Rate Loan to Split Income
The prescribed rate loan is one of the last legal income-splitting loopholes in Canada.
Income splitting is one of the best ways for families to reduce their overall tax bill, but the CRA has strict attribution rules to prevent high-income earners from simply gifting money to a lower-income spouse or child to invest.
Normally, if you gift to say your spouse $50,000 to invest, any income gets taxed at your higher rate—so that strategy doesn’t work. But with this loophole, you can legally lend them the money at the CRA’s prescribed rate (currently 4%), shifting investment income into their lower tax bracket. Originally designed for corporate planning, this still works for families—if you follow the rules.
How It Works
- The high-income spouse lends money to the low-income spouse at the CRA’s prescribed interest rate.
- The low-income spouse invests that money in stocks, ETFs, or other income-generating assets.
- Investment income is taxed at the lower-income spouse’s rate, reducing the overall family tax bill.
- The low-income spouse must pay interest on the loan annually by January 30th, or the strategy fails.
Example Scenario
Let’s look at a scenario where this strategy really pays off.
Jim is in a 50% tax bracket, while Pam is in a 20% tax bracket. Jim lends Pam $100,000 at the CRA’s prescribed rate of 4%, and she earns a 30% return ($30,000 in capital gains). At year-end, she sells the investment, triggering taxes.
How the Taxes Play Out:
🔹 Pam pays Jim $4,000 in interest, leaving $26,000 in gains.
🔹 Only 50% of capital gains are taxable—so Pam is taxed on $15,000 at 20%, paying $3,000.
🔹 Jim pays $2,000 tax on the $4,000 interest he received.
Now, Compare to Jim Investing Himself:
🔹 Jim’s $30,000 gain → $15,000 taxable, taxed at 50% = $7,500 tax.
Total Tax Savings with This Strategy:
✅ Tax if Jim Invested Himself: $7,500
✅ Tax Paid Using the Strategy: $5,000
💡 Savings: $2,500
By shifting the investment gains to Pam’s lower tax bracket, they save $2,500 in taxes—money staying in their pockets instead of going to the CRA! 🚀
Now, you might be thinking, “A 30% return sounds way too high!” And you’re right—sustaining that over the long term is highly unlikely. However, achieving it in a single year is entirely possible. For instance, in 2024, the popular Vanguard VFV S&P 500 ETF delivered a 35.4% return. This example illustrates the best-case scenario for this income-splitting strategy.
Risks & Downsides
🚨 Investment Risk – If Pam’s investments underperform, the tax savings won’t make up for the losses.
If the market is booming—like when she earned a 30% return—the strategy works great. But what if it crashes?
If Pam only earns 2% or even loses money, she still owes $4,000 in interest to Jim. That means she might have to dip into savings or sell investments at a loss just to make the payments. Meanwhile, Jim still reports the $4,000 as taxable income, even if Pam didn’t profit.
🚨 The Prescribed Rate Can Change – If the CRA raises the rate (it was 1% in 2020, now 4%), the strategy becomes less effective since the loaned money needs to earn more than that to be worthwhile.
🚨 Strict Payment Rules – Pam must pay the interest on time every year. If she misses even one payment, the CRA cancels the entire strategy, and all the investment income gets taxed back to Jim.
This strategy works best in a low-interest-rate environment, and with rates starting to drop in Canada, it could become even more attractive in the future.
If this tax strategy piques your interest, check out my free guide on 7 powerful income-splitting strategies to legally reduce your tax bill, the link is here:
https://blueprintfinancial.ca/income-splitting-strategies-download/
Loophole #2: Extracting Tax-Free Money from a Corporation (CDA)
This is a loophole I personally used when I sold my previous website and Youtube channel, Wealth Awesome last year.
If you haven’t seen my video about the wild ride of selling my former business and why I started this new Blueprint Financial business, go check it out.
But basically, I was able to pull out tax-free money from my corporation using something called the Capital Dividend Account (CDA)—a strategy many business owners don’t even realize exists.
The CDA is a special corporate account that tracks the non-taxable portion of capital gains and allows business owners to withdraw that amount as a tax-free dividend. Normally, if you take money out of your corporation, you pay personal tax on dividends or a salary with payroll deductions. But with the CDA, certain withdrawals are completely tax-free—which is why this is such a powerful loophole.
How It Works
1️⃣ Your Corporation Sells an Asset – This could be a business, stocks, real estate, or any other capital asset.
2️⃣ Only 50% of the Capital Gain Is Taxable – In Canada, only half of capital gains are taxed, while the other 50% remains non-taxable. (There is 66.67% proposed, but it might not be in place anymore)
3️⃣ The Non-Taxable Portion Goes Into the CDA – That tax-free 50% is credited to the Capital Dividend Account.
4️⃣ You Pay Out a Tax-Free Dividend – The business owner can withdraw the full CDA balance tax-free.
Example Scenario
Let’s say Alex sold a digital asset within their corporation and made a $200,000 gain (for confidentiality reasons, these numbers are just an example).
- Normally, if Alex wanted to take that money out as a regular dividend, they’d be taxed on the full amount.
- However, because only 50% of capital gains are taxable, the other $100,000 goes into the Capital Dividend Account (CDA).
- This means Alex could pay themselves a $100,000 tax-free dividend, keeping the full amount with zero personal tax owed.
Without the CDA, they would have had to pay personal tax when withdrawing those funds, significantly reducing the final amount kept.
This is why proper corporate tax planning is crucial for business owners when selling a major asset—it can mean the difference between keeping more of your hard-earned money or losing a chunk to taxes.
Key Considerations & Risks
🚨 Must Be Properly Tracked – The CDA balance must be properly recorded and reported to the CRA. If done incorrectly, withdrawals could be taxed as regular dividends.
🚨 Only Applies to Certain Income – The CDA only applies to the non-taxable portion of capital gains, life insurance proceeds, and certain capital transactions. Regular business income does not qualify.
🚨 Requires Careful Corporate Tax Planning – If you’re planning to sell a business or an asset inside a corporation, you should probably be working with a tax professional to maximize your tax-free withdrawals and to setup the CDA correctly.
If you’re a business owner looking to optimize your tax strategy, we help clients with this all the time. Check out our business services on our website to see how we can help you maximize your tax savings and structure your corporation the right way!
Loophole #3: Turning Your Mortgage Into a Tax-Deductible Loan
In Canada, mortgage interest isn’t tax-deductible like it is in the U.S., but there’s a strategy to convert it into a deductible investment loan over time. By reborrowing against home equity and investing in income-generating assets, homeowners can legally deduct the interest.
This works because the CRA allows interest deductions on loans used for investments, but not on mortgages. By recycling mortgage payments into an investment loan, homeowners take advantage of a legal gap in the tax system—making this a powerful, yet unintended, tax loophole.
How It Works
1️⃣ Make Your Regular Mortgage Payment – Each month, a portion of your mortgage payment reduces the principal.
2️⃣ Reborrow That Same Amount Through a HELOC – If you have a re-advanceable mortgage, the amount you’ve paid toward the principal becomes available in a home equity line of credit (HELOC).
3️⃣ Invest That Borrowed Money – The funds from the HELOC are used to buy income-generating investments like dividend stocks, ETFs, or rental properties.
4️⃣ Claim a Tax Deduction on the HELOC Interest – Since the borrowed money is used for investments, the interest on the HELOC is tax-deductible, reducing taxable income.
5️⃣ Repeat This Process Monthly – Over time, your mortgage is completely converted into a tax-deductible investment loan, while your investment portfolio grows.
Example Scenario
Let’s say David has a $500,000 mortgage and makes a $2,000 monthly payment. Out of that, $800 goes toward principal.
- That $800 is now available in his HELOC.
- He borrows that $800 from the HELOC and invests it in dividend stocks.
- Over time, David keeps reborrowing every month and gradually converts his entire mortgage into an investment loan.
- The interest on the HELOC is now tax-deductible, .
David is now simultaneously investing and reducing taxes.
Risks & Downsides
🚨 Interest Rate Risk – HELOCs have variable interest rates, meaning if rates rise, borrowing costs increase. If HELOC rates jump higher, this strategy could become much less attractive.
🚨 Market Volatility – If investments underperform or lose money, you still have to pay interest on the HELOC. Even if your portfolio drops, you’re still on the hook for the loan payments.
Example:
If David’s investment portfolio earns 10% one year, he benefits from both investment growth and tax savings. But if the market crashes and his portfolio loses 20%, he still owes interest on the HELOC—which could put him in a dangerous financial position.
🚨 Discipline Required – If you don’t reinvest the HELOC money every single time, or if you use it for personal expenses instead of investing, you lose the tax deduction and could get into serious financial trouble.
🚨 CRA Scrutiny – The CRA requires that borrowed money must be used for income-generating investments. If the investments don’t generate income (like a growth stock with no dividends), the tax deduction could be denied.
This strategy is most effective in a low-interest-rate environment, when the cost of borrowing is low compared to potential investment returns. With interest rates starting to come down, this could become more attractive in the future. However, it’s certainly not for everyone—you need to be comfortable with leverage, investment risk, and strict discipline to make it work.
These are legal tax loopholes, but tax laws change over time. What works today might not work tomorrow, so before making any big financial moves, always check the latest CRA rules.
Better yet, let a professional handle it for you—that’s exactly what we can assist you with here at Blueprint Financial. See our services to see how we can help you pay less tax and keep more of your money.
