How to Save Tax to Maximize Wealth

In a high-income tax regime like Canada's, one of the most reliable and predictable ways to maximize long-term wealth is through effective tax planning. Here are four simple tax planning strategies that are applicable to most tax-paying families and are easy to implement. Scroll to the end to see a quick visual representation of the content.

Tax-Free Investing using a TFSA

The Tax-Free Savings Account (TFSA), which was introduced in 2009, is a registered account that allows investors to grow their investments completely tax-free. To be eligible to open a TFSA, one must be at least 18 years of age and a tax resident of Canada. All contributions made to one's TFSA account are exempt from tax on interest, dividends, and capital gains, both while invested in the account and also on withdrawal. Do keep in mind that, unlike RRSP contributions, those made TFSAs are not tax-deductible, i.e., they do not reduce your taxable income. The TFSA can hold various investment instruments from low-risk bonds and debt funds to more risky instruments like stocks and equity funds. This flexibility effectively means that a 30-year-old could potentially reach a tax-free million-dollar investment portfolio at the time of retirement by way of regular, modest investments within a TFSA. Read this article to find out how.

Tax Deductions through RRSP contributions

One of the most effective ways of reducing tax in the present is to reduce one's taxable income, without actually earning less money. This notional reduction of one's income is made possible through provisions in the system that allow for certain types of investment contributions to reduce one's taxable income. In the Canadian system, the Registered Retirement Savings Plan (RRSP) plays this role. The RRSP is a registered investment account that encourages retirement savings by offering investors a deduction in taxable income equal to the amount of the contribution made. The RRSP too has yearly contribution limits but unlike the TFSA, these limits are (i) determined as a percentage (18%) of one's previous year's earned income (ii) to a maximum upper limit which was $26,500 for 2019.

Tax Deferral through investments in RRSPs and RESPs

Tax deferral is the provision within the tax system of sheltering investments from tax while invested but taxing them on withdrawal. One's investments continue to compound without any tax liability as long as one leaves them invested. Unlike tax-free investing in a TFSA, these investments are taxed on withdrawal. Tax deferral is offered in the RRSP and well the Registered Education Savings Plan (RESP). The RESP is a type of registered account meant to save for one's children's post-secondary education. Contributions made to the RESP are not tax-deductible, but the investment growth while within the account is tax-free. Withdrawals for post-secondary education made in the form of 'Educational Assistance Payments' are taxed in the hands of the student. This is an advantage since students typically do not earn high incomes and so the addition of this amount to their income calculations would usually not lead to a high tax bill.

Income Splitting through the use of a Spousal RRSP

The spousal RRSP is a way for the higher-income spouse to contribute to the RRSP of the lower-income spouse in an effort to lower the family's total tax outflow in retirement. Since each individual's tax is calculated separately, reducing the retirement income of the higher income earner helps reduce their tax liability. Since one's tax bracket increases progressively with higher incomes, passing on some income to the lower earner would lead to an increase in their taxable income in retirement, but their tax owing would usually be calculated at a lower tax bracket. Thus, while this strategy does not always avoid tax in retirement, it helps to lower the couple's overall tax bill.

For a quick snapshot of the information contained in this article, please take a look at and save this infographic.

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