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Dale Jackson

Personal Finance Columnist, Payback Time


Most of us know paying taxes is right up there with death as the two things we can’t avoid. 

But there are ways for average investors to lower their tax bills and keep more of their hard-earned dollars compounding in investments over time.  

As we head into tax season, here are four basic tax tools that can be used individually or, with the help of a qualified professional, as part of a broader tax strategy.

1. Registered Retirement Savings Plan (RRSP)

Most Canadians who managed to make an RRSP contribution before the February 29 deadline will get a tax refund in the spring. 

While many consider it ‘found money’, the refund is actually money deducted by their employers throughout 2023. Reinvesting your refunds back in your RRSP will not only add to the total amount compounding in investments over time, but will also generate further refunds.

The RRSP is a great retirement savings tool because contributions can be deducted from your income and lower your tax bill. The biggest savings come to those with big incomes who would normally be taxed at a high marginal rate.

There are limits to how much you can contribute to your RRSP, but even they can be too much. Unfortunately, contributions and all the returns they generate over the years are fully taxed according to the going marginal tax rates when they are withdrawn. 

You could be the victim of your own success, and even have some of your Old Age Security (OAS) benefits clawed back, if your annual RRSP withdrawals are taxed at a higher rate than the original contribution.

High withdrawal rates and clawbacks can be avoided by splitting income with a lower-income spouse who is taxed at a lower marginal rate. 

Higher-income spouses can split up to half of their income with a lower-income spouse once they turn 65, but there are ways to transfer the tax burden beforehand through a spousal RRSP. The higher income spouse can deduct contributions from their income (at a high marginal rate), and withdrawals are taxed in the hands of the lower income spouse (at a low marginal rate).

2. Tax-Free Savings Account (TFSA)

If your RRSP savings are growing too much or your income is low, it’s probably better to channel your contributions and refunds to a TFSA.

Unlike RRSP contributions, TFSA contributions can not be deducted from income, but they – along with any investment returns they generate – are not taxed when they are withdrawn. The only exception are dividends from U.S. equities.

You can adjust the balance between your RRSP and TFSA according to each year’s income and over time as your retirement goals become clearer, but the ideal tax situation would allow you to draw income from your RRSP at a low marginal rate and top up any additional income from your TFSA (tax-free).

3. First Home Savings Account (FHSA)

The FHSA is new tax-saving tool for young folks saving for a down payment to invest in a new home. It has the combined tax perks of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA).

Contributions are tax deductible (like a RRSP) and gains on the investments are never taxed (like a TFSA) as long as the funds are used for the purchase of a first home. Like RRSPs, the higher your income, the bigger the tax savings. Like TFSAs, the tax savings depend on how well the investments inside them do.

Like an RRSP and TFSA, contributions in a FHSA can be invested in just about anything. 

The annual contribution limit for FHSAs is $8,000 with a lifetime limit of $40,000. 

Funds can be held in a FHSA for up to 15 years when it can be transferred to an RRSP.

4. Capital gains exemption and dividend tax credits in non-registered accounts

When contribution limits in registered accounts like the RRSP, TFSA and FHSA are maxed out, there are tax saving tools in non-registered accounts.

The biggest tax advantage for most Canadians is the 50 per cent capital gains exemption, which only taxes half of the gains on stocks or other equity investment when they are sold. 

While a 50-per-cent capital gains exemption is not as good as a 100-per-cent exemption in a TFSA, investors in non-registered accounts can also benefit from market losses. Tax-loss selling permits the use of equity losses to recoup capital gains taxes already paid in the past three years or apply them against future capital gains.  

Dividend tax credits are also granted on eligible equities in non-registered trading accounts.