Strategic tax planning for investors

When you’ve invested time, money and effort to build your investments, the last thing you want is to pay more tax than you have to. Following are several tax-smart strategies to save and grow your wealth.

The Registered Retirement Savings Plan (RRSP)

If you are already familiar with the tax savings and tax-deferred growth that an RRSP offers, there are several other strategies that make the most of your RRSP, including:

  • Contributing to a spousal RRSP. If your spouse earns less than you do and pays tax at a lower marginal tax rate, you can "split” your income with them so your two smaller retirement incomes are taxed at a lower combined rate, instead of your larger retirement income being taxed at a higher rate. You can do this by contributing to a spousal RRSP on behalf of your lower-income spouse, who will then receive income from the spousal RRSP during retirement.

  • Sheltering interest-bearing investments in your RRSP. In a regular non-registered account, interest income, say from GICs and bonds, is fully taxable at your marginal rate. Consider allocating more of these interest-bearing investments to your RRSP, where you can maximize tax-deferred growth. Then your more tax-efficient investments (like Canadian dividend-paying stocks) can be placed in your non-registered account.

  • Delaying conversion to a RRIF. If you can, delay converting your RRSP into a RRIF until the end of the year in which you turn 71 – so you can continue to benefit from tax-deferred growth. For an income stream, draw from other sources that are not tax-advantaged such as GICs from a taxable non-registered account.

The Tax-Free Savings Account (TFSA)

Although the maximum contribution is currently $5,500 annually, when compounded tax-free over thelong term, such as on a 20-year timeframe, the growth power of a TFSA can be nothing less than surprising.

Contact Cory to set up a TFSA or learn more about the TFSA here

Insured annuities

An insured annuity is an insurance-based strategy in which you invest a lump sum in a life insurance policy and receive a guaranteed stream of income for life. The payments comprise taxable interest income and a tax-free return of your original capital (which is greater after tax compared to conventional GICs), plus a portion of each payment funds the policy. It’s important to note that you’re required to commit and lock-in your capital at a fixed rate, which means you don’t have access to it after the fact. So this strategy may be best for some of your assets – but not all.

The Insured Retirement Plan (IRP)

If you are at least 10 to 15 years away from retirement, are maximizing your annual RRSP contributions and you are looking for additional tax-deferral strategies, an IRP may be appropriate for you. With an IRP, you lock in assets that would otherwise be exposed to your high tax rate in a tax-exempt insurance policy. While the funds are permanently locked-in, you can take out tax-free bank loans for retirement income, using the policy as collateral. When your estate is settled, the proceeds of the policy are used to pay back the loans, and the balance goes tax-free to your beneficiaries.

There are several ways you can use insurance and other strategies as part of tax-efficient investing, financial and estate planning. Learn more here or contact Cory to arrange a discussion.