Four pillars of investment tax planning

Mar 17, 2023

Fully informing the tax strategy for your portfolio

You harnessed your spending habits to set aside savings. You researched the investments you deemed worthy of your hard-earned dollars. And now, as you admire your accumulating wealth, there’s a dark cloud ahead – income tax.

Yes, earning investment income and paying tax on it can sometimes feel like you’re taking two steps forward, and one step back. But taking a positive view, it’s better to earn income and pay tax on it, than not to earn at all. Still, you don’t have to leave yourself open to the full force of taxes.

Guided by a few simple principles, you can position your investments to optimally navigate toward your future spendable wealth.

1. DEFER – Making sense (cents?) of the time value of money

The later you pay tax, the longer your money works for you. Secondly, given that inflation erodes the value of money over time, in effect it costs you less to use future dollars to pay tax than to use today’s more valuable dollars.

An example in a non-registered account that you don’t pay tax on while the market price of your holdings rises year-to-year, but instead pay on those capital gains the year you sell. Or, with a registered retirement savings plan (RRSP), you get a current tax deduction when contributing, understanding you’ll be taxed on the withdrawal – which you expect will be years or even decades ahead.

2. SHELTER – Keep your umbrella up to keep tax erosion down

Beyond the initial deposit, an RRSP is also an ongoing tax shelter in that there is no tax on the income earned while inside the plan. However, the sheltering effect ends when money is withdrawn, at which time it is fully taxable.

Comparatively, a tax-free savings account (TFSA) is funded out of your after-tax money, has that same tax-sheltering while inside, and then has no tax on withdrawals.

3. PREFER – It’s not just how much, but sometimes also ‘what’ you earn 

Certain types of income are taxed more favourably than others. Taking money from your RRSP is, once more, fully taxable.

In a non-registered account, interest and foreign stock dividends are also both fully taxable. However, only half of realized capital gains are taxable, and dividends from the stock of a Canadian corporation can be at an even lower tax rate, especially for those in low to mid tax brackets.

4. SPLITTER – Whose income is it?

Up to now, we’ve looked at the what and where of the income; “income splitting” shifts the focus to who is earning it. Because we have a progressive tax system – imposing higher tax rates as your annual income rises – the household tax bill may be reduced if income is split with someone at a lower bracket.

That could be as simple as contributing to your RRSP on the expectation you’ll be at a lower bracket later, or another option is to use a spousal RRSP. With non-registered investments, spousal income splitting is not as straightforward, but still possible with informed planning and conscientious recordkeeping.

As you can see, there is a fair amount of overlap among these concepts. Even so, it’s important to clearly understand the distinctions between them, as sometimes trying to achieve one requires a concession with another. You’ll need to evaluate the tradeoffs so that you can make the best choice for you.


Learn more about Qtrade. 

The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.

Online brokerage services are offered through Qtrade Direct Investing, a division of Credential Qtrade Securities Inc. Qtrade, Qtrade Direct Investing and Write your own future are trade names and/or trademarks of Aviso Wealth.

Recent Posts

Aviso Weekly Market Monitor: September 18th – September 22nd

Market developments Equities: The S&P 500 Index faces its worst week in six months as global investors grapple with the possibility of sustained high interest rates to combat inflation. The index slipped -2.9% for the week despite technology stocks partially...

Aviso Weekly Market Monitor: September 11th – September 15th

Market developments Equities: The U.S. stock market saw increased volatility and a decline in response to a $4 trillion options event, alongside concerns about a strike impacting Detroit automakers. Big tech companies like Nvidia led the losses, with the S&P 500...

NEI Monthly Market Insights: August 2023

Markets cool off in August The end of July marked the peak for the S&P 500 so far this year, as the steady market uptrend that began in mid March started to retreat as soon as the August began. Following a 20% S&P 500 Index return in the first seven months of...

Aviso Weekly Market Monitor: September 4th – September 8th

Market developments Equities: This week concerns surrounding economic slowdowns in China and the euro area, alongside rising oil prices caused equities to slide. Notably, technology stocks, such as Apple and Nvidia, played significant roles in market movements,...

How to choose a mutual fund

Mutual funds continue to be extremely popular with investors of all types. According to the Investment Funds Institute of Canada (IFIC), as of the end of 2022, Canadians owned a total of $1,809 billion in mutual fund assets. In recent years, exchange-traded funds...

Aviso Weekly Market Monitor: August 28th – September 1st

Market developments Equities: U.S. stocks saw a significant weekly rise as monthly jobs data suggested the Federal Reserve might halt its tightening measures. The S&P 500, Nasdaq, and TSX all increased by over 2.5% ahead of the long weekend. Despite improved...