Category Archives: Taxes

6 Ways to Build Tax Efficient Wealth

By: GenXinvestor

Hetax efficient wealthre’s my post on 6 ways to build tax efficient wealth.  To build and maintain wealth, we need to take advantage of every available resource to help us reach our goals.  One important dimension to our finances that can help us literally save thousands of dollars a year is taxation.

Like many other people I despise taxes but, as onerous a thing as taxes can be, I’ve learned that there are many ways to run my finances as tax efficiently as possible.  By building my nest egg as tax efficiently as possible I get to keep more of money and delay or defer taxes for as long as possible, which lets me build wealth quicker than otherwise would be possible.  So here are some of my favourite strategies for building tax efficient wealth.

RRSP

Every year I make it a priority to contribute to my RRSP.  Doing so results in a tax deduction that can net middle income earners a 30%-40% refund, depending on their tax bracket.  I take the tax refund and either invest it or pay down my mortgage – either way I’m getting ahead by growing my financial assets or reducing a big liability.

The money contributed to the RRSP can grow on a tax-deferred basis until retirement or until a person reaches the age of 71.  The downside to the RRSP is that at some point down the road I’ll have to draw on it and the money will be taxed as income.

TFSA

I was sad to see that the government recently reduced the annual TFSA contribution back to its original $5,500 because, once my RRSP is full, that’s where I put extra money.  While contributions to the TFSA does not give me a tax refund, it is still a worthwhile investment vehicle because, as I explained in my TFSA article, my money can grow on a completely tax-free basis and I won’t be taxed on any withdrawals.

RESP

One of the things that I like about the RESP is that it’s another tax-sheltered investment vehicle.  That means that my children’s education fund can grow tax-free until they’re off to pursue post-secondary education.  I don’t do anything fancy with my kids’ education money, I just invest it in low-cost index funds.  The other thing I like about the RESP is that for every dollar I put in, the government will match 20% of it, up to a maximum of $500 per year.

My Primary Residence

One of the great things about owning a home in Canada is that our primary residence is exempt from capital gains taxes.  That means that when we sell our home, 100% of the proceeds are ours to keep no matter how much the home has increased in value.  That makes home ownership one of the greatest tax-free investments.

Taxable Investments

Sadly, there are only so many tax shelters for us to take advantage of.  Sooner or later, if one is a diligent saver, he will be able to max out his RRSP and TFSA every year and anything above and beyond will have to go to a taxable investment account.

Dividend income offers certain tax advantages that rental income and interest income do not.  The main tax advantage is that if a person owns stock in a Canadian company that pays an eligible dividend then he gets to claim the dividend tax credit that reduces the amount of tax payable by about 30%.

Investing for capital gains can also be a tax shelter for those who buy a stock or an investment property and hold it for the long term.  Once the stock or property is sold, 50% of the gain is added to the owner’s income for that year and taxed at the marginal rate.

Borrowing to Invest

When a person borrows money to invest in something that will generate income, he can write off the interest paid on the loan.  Basically, borrowing to invest gives someone all the advantages as those mentioned under taxable investments plus the bonus that the interest expense, fees and commissions are tax deductible.

These are 6 ways to build tax efficient wealth.  If you enjoyed this article you may also like:

How to Build Passive Income Streams

How to Become a Millionaire

How to Save Money

Photo Credit: Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Tax Question

By: GenXinvestor

TaxesOver the past few weeks I’ve been gathering information to do my family’s income taxes.  I’ve started to input the info into Turbo Tax and run some optimizing tools to make sure that we get a decent refund.

My taxes were pretty straightforward and I ended up getting a refund of about $2,200.  I managed to get this in spite of having filed paperwork to reduce my taxes at their source for 2014.  A couple of things came together last year that resulted in that tax refund. I worked a lot of overtime, I maxed out my RRSP in 2014 and I had some interest expenses to deduct as a result of having borrowed money to invest in eligible dividend stocks.  That’s all good and my taxes are done.

My wife’s taxes, on the other hand, are another story.  She owes just over $7,000 in income taxes! Her taxes can be a bit tricky because she is self-employed.  Typically she is required to pay income tax by instalments every quarter.  The amount owing is based on the prior year’s earnings and this is where we got caught.  She made substantially more in 2014 than she did in 2013 (due to a mat leave).

Luckily, we are in a pretty good financial position so this isn’t as big a hit as it may seem at first glance.  Because we recently moved into a new home we’ve built up our cash reserves to cover any unexpected expenses.  It appears to me that this is one such expense that warrants dipping into that cash pile.

In addition to my own refund of $2,200 I found out that I will be getting a work bonus that will amount to about $3,000.  So my question is what should I do with this money?

Option 1 – invest it in my wife’s RRSP so it will reduce the amount of taxes owing.  My wife has lots of RRSP room and I think that it would be wise to invest the 5k there so we get a tax break.  If we go that route her tax owing will be reduced to about $5,000.  Personally, I like the idea of getting a tax break and having that money grow in tax-sheltered investments over our lifetime.  This will increase our asset base while also reducing the amount of taxes that we pay.  To me it seems to be a win-win situation.

Option 2 – Pay the full amount of tax owing and look for other opportunities to invest whatever is left over.  I’m not a huge fan of this option because it means that we lose 7k without any tangible benefits.  I should also mention that I’m in the process of moving non-registered investments into my wife’s TFSA so we can max it out.  I’ve already maxed out my TFSA for the year so that really leaves us with limited options.

Let me know what you all think…the March 2nd deadline is just around the corner!

Image credit: Stuart Miles / FreeDigitalPhotos.net