Utilizing investments is one of the most overlooked ways to minimize your tax burden. By structuring your investments to take advantage of tax laws, you can pay less tax, keep more of your returns, and achieve more financial growth.
Below are five ways that you can invest to effectively reduce your tax burden as you prepare for the upcoming tax season.
Contribute to an RRSP
A Registered Retirement Savings Plan (RRSP) is a savings account, registered with the Canadian federal government, that you can contribute to for retirement purposes. Depositing money into this account is also a great way to defer taxes on your investment income and lower your overall taxable income.
RRSP contributions are tax-deductible, meaning that they’re exempt from being taxed in the year you make the contribution. This reduces the total amount of taxes you’ll pay during tax season. Your last year’s Notice of Assessment (NOA) will tell you exactly how much RRSP room you have for the current year based on annual RRSP contribution limits and any previously unused contribution space.
Redistribute Investments for Tax Deductions
If you’re currently holding investments in a non-registered account and have available contribution room in your RRSP for the year, you may want to consider transferring them. You can also sell some of your existing investments and use the procured value to contribute to your RRSP. Both options will create a deduction against the current year’s taxable income.
It’s important to note that current tax rules don’t allow the triggering of a capital loss when you transfer those funds to an RRSP. So, if you have a capital loss for the year, consider selling first and then moving the funds to your RRSP. This way, you get the deduction against your taxable income and can use the capital loss to offset capital gains.
Utilize Your TFSA
Contributions to your TFSA (Tax-Free Savings Account) don’t just have to sit in the account. They can also be invested in a variety of different ways, including stocks, mutual funds, and exchange traded funds (ETFs). As the name of the account suggests, there are no taxes paid on the income earned from investments held in a TFSA. This includes if the income comes in the form of dividends, interest, or capital gains.
By investing in a TFSA, you have the opportunity to create a non-taxable income stream. They are an ideal vehicle for securing investments that have significant growth potential. However, it’s important to be aware that capital losses from investments held in TFSAs cannot be used to offset capital gains.
Review Your Investment Income and Accounts
Many people don’t realize that investment income can be taxed differently depending on the type of income being generated and the account that it’s being placed in.
For example, fully taxable investments, such as GICs, bonds, foreign dividend-paying stocks are better placed in registered accounts where income can be tax-deferred. On the other hand, investments with capital gain or loss potential are better placed in non-registered accounts where you can better take advantage of their preferential tax treatment.
Assess your investment income and make sure it’s being allocated to the right account. This can significantly offset your tax burden while also ensuring optimal investment growth.
Harvest Capital Losses
A capital gain occurs when you sell an asset or investment for more than what you originally paid for it. These gains are subject to taxation come the end of the year. In contrast, capital loss occurs when you sell an asset for less than its original value.
If your capital losses are greater than your taxable gains in a year, the remaining loss can be used to reduce previously reported net capital gains. This can be done on the last three years of reported income, allowing you to recover previously paid tax. Or, if you don’t want to do that, you can carry the difference forward to use against future capital gains.
If you’re looking to minimize your tax burden, review your investments and gauge whether any accrued losses could offset current annual gains.
Need Help Maximizing Your Tax Return? We Can Help!
There are dozens of niche ways to reduce your tax burden come the end of the year that often go unused. At Isaac Achal Professional Corporation (IAPC), our team of Chartered Professional Accountants will assist you in getting the most from your tax return.
Contact us today for more information, to schedule an appointment, or to utilize our complimentary second-look service.
