Here are 6 simple tips you can use to reduce the amount of tax you pay on your investments.
- Invest Inside Your RRSP. Investments inside your RRSP will grow tax-deferred as long as they are inside your RRSP. By maximizing your RRSP contribution annually, you can reduce your current income tax and then invest the contribution on a tax-deferred basis until the funds are withdrawn.
- Maximize the TFSA. If you expect to be in a lower tax bracket in retirement, you should first maximize your RRSP and the maximize your TFSA. While you cannot make a deduction for the TFSA contribution, your investments will grow tax-free inside the account and withdrawals will not be subject to tax.
- Invest in stocks outside of your non-registered accounts. Dividends and capital gains receive better tax treatment than interest income. If you are in the top tax bracket, you should consider investing in stocks that do not pay dividends and hold them outside your registered accounts and hold the dividend paying stocks inside registered accounts.
- Hold interest earning investments inside registered accounts. When you have a sufficiently large enough portfolio, placing the income investments in registered accounts eliminated or defers the tax on these investments.
- Hold US stocks inside your RRSP but not in your TFSA. Under the Canada-US Tax Treaty there is no withholding tax on US stocks held inside your RRSP or RRIF. Withholding tax will still apply to US stocks in your TFSA and cannot be claimed as a tax credit.
- Avoid turning over your investments unnecessarily. Selling investments when you don’t need to can trigger gains and income tax consequences.