As the saying goes: “ it’s not what you earn, it’s what you keep.” If you want to keep more of what you earn as an investor, after tax, consider the following tips.
1. Maximize the benefits of your tax-advantaged accounts
Despite the potential benefits, most Canadians leave countless dollars on the table by failing to maximize their Registered Retirement Savings Plans (RRSP's) and Tax-Free Savings Accounts (TFSA's). Your RRSP offers two well-known tax advantages: tax-deductible contributions to reduce your taxes and tax-deferred growth to potentially grow your investments faster than they would outside your RRSP. If you haven’t maximized your RRSP's, consider catching up on unused contribution room as soon as possible, as the compounding effect of tax-deferred growth is greater over time. Your TFSA offers two key tax advantages: tax-free growth and tax-free withdrawals. Starting in 2009, any Canadian resident aged 18+ began automatically accumulating TFSA contribution room. If you haven’t contributed to your TFSA yet, you could contribute up to $63,500 to grow tax-free.
2. Pay attention to how investment income is taxed
The type of investment income you generate – interest, dividends or capital gains – matters a lot when it comes to taxes. Interest income is generally taxed at the same rate as employment income – at your marginal (or highest) rate. Canadian dividend income is generally very tax-efficient in the lower tax brackets – and virtually always more tax-efficient than interest. Capital gains are taxed higher than dividends in the lower brackets, but as your income rises, each province has a different income threshold where capital gains become more tax-efficient than dividends.
3. Hold your investments in the right accounts
The type of investment, the type of income it generates, and the type of account in which it’s held can all have a significant effect on your after-tax return. Consider holding more of your interest-bearing investments, such as bonds, in your registered accounts. That’s because interest income, when earned outside of your registered accounts, is fully taxable. Then, consider holding more tax-efficient investments, such as Canadian dividend-paying stocks, in your regular, taxable accounts.
4. Offset taxes on capital gains
Tax-loss harvesting – selling investments at a loss to generate capital losses, which can offset taxes on capital gains – can be an effective tool to bring your tax rate down. After selling an investment at a loss, you’ll need to wait 30 days before buying it back or the capital loss cannot be claimed. While selling at a loss may seem counter-intuitive, the tax benefits can be significant if you have realized capital gains on other investments. And, ideally, the investments you sell at a loss for tax purposes are replaced by investments that have stronger long-term growth potential.
5. Look beyond your holdings – planning strategies
Spousal RRSP's, spousal loans, pension splitting or having your business pay a reasonable salary to your spouse or children can all effectively redistribute income from higher to lower taxed family members to help save on tax. Additionally, tax-deferred solutions, insurance strategies and other estate planning opportunities can all play a role in managing your portfolio tax-efficiently. While everyone’s tax situation is different, everyone can benefit from tax-efficiency.
Contact me today at 604 981 2306 for more information.