Welcome to CB’s personal-finance advice column, Make It Make Sense, where each month experts answer reader questions on complex investment and personal-finance topics and break them down in terms we can all understand. This month, Zoe Wolpert, a chartered investment manager and senior advisor at money-management platform Wealthsimple, tackles tax strategies to improve your long-term investments. Have a question about your finances? Send it to [email protected].
Q: Aside from remembering to maximize my RRSP contributions before the end of February, what other tax strategies can I be taking advantage of to improve my long-term investment performance?
While talking about taxes can feel about as fun as doing seven loads of laundry on a Friday night, it’s worth it. Tax strategies can be very important, especially as your income increases. With just a few smart tactics, you could keep thousands of extra dollars a year in your own pocket. Or better yet, invested.
Of course not every account is right for every investor, so you’ll need to consider your savings goals, salary and cash flow. But here are the best options available.
The first strategy probably isn’t news to you: Using registered accounts for your savings. There are a few good options depending on your goals and circumstances. For higher-income earners, the idea you mentioned of maximizing your Registered Retirement Savings Plan (RRSP) contributions is the most beneficial for tax efficiency because those contributions immediately lower your overall taxable income. (If you’re just starting out in your career, you may be better off investing in your TFSA first. I’ll get into that below.)
If you’re married or in a common-law relationship, you may also want to consider a Spousal RRSP. These special RRSPs can be helpful for couples in which one partner earns significantly more than the other. A Spousal RRSP allows the higher-earning partner to contribute to their partner’s retirement savings while still getting the tax savings on their own income. And it helps lower the couple’s overall tax burden in the future.
If you’re eligible, a First Home Savings Account (FHSA) has even more benefits than an RRSP. You can contribute up to $8,000 each year. Whatever you contribute reduces your taxes for the year, and, unlike an RRSP, when you withdraw the money, you’re not taxed at all—as long as you’re using it to buy your first home. (And don’t worry: If you never end up buying a home you can always transfer your FHSA, tax-free, to an RRSP without affecting your RRSP contribution room.)
The last of the big three registered accounts is the Tax-Free Savings Account (TFSA). While contributions don’t reduce your taxes, any money you put in can grow (and be withdrawn) completely tax-free.
If you’ve already maxed out all of those accounts and are starting to use non-registered accounts, you’re probably ready for something called tax-loss harvesting. It involves purposely selling assets that have gone down in value, which allows you to write off those losses on your taxes, and then immediately buying a similar (but not the exact same) asset so that you still have basically the same investment. The loss you incur from selling the initial asset can be used to offset any realized capital gains you might have, now or in the future.
Related: What’s the Best Way to Invest in 2024?
One warning: There are considerations and rules to take into account before you attempt to do your own tax-loss harvesting. But if you use a managed-investing platform or a portfolio manager, they will typically handle all the hard stuff for you.
Because we’re coming up on it, it’s worth a reminder that the deadline for RRSP contributions is February 29, 2024. So if you are ready to embrace a real tax strategy and didn’t max out your contributions last year, there’s still time.
