Posted by: Daryl & Wendy Ashby | March 11, 2010

Strategies to Defer Taxes

If you can’t avoid paying taxes, the next best thing is to defer them. There are a few different strategies that are available, but often it is just a matter of correcting the structure of your investments.

1) If you have loaned your money to a financial institution, company or government you have likely purchased some form of fixed income product, such as a term deposit, GIC or bond. The only way to defer tax on fixed income investments is to hold them in your registered accounts, such as RRSP, RRIF, LRSP etc.

2) Equities sometimes pay dividends but when they do not, the shareholder profits from appreciation in the price of the stock. Holding growth stocks in a non-registered account is one way to defer tax.

3) Unrealized gains (appreciation) are not taxed until the investment is sold. Holding certain positions longer term in a non-registered account again may make some sense and defer the tax.

4) RRSP and RESP contributions are the most common means of deferring tax and is generally understood by most people so I won’t belabour them here. What I will say however, is moving your contributions into these registered accounts as early as you know your contribution limit will allow more of the income generated to be sheltered for a greater period of time thereby compounding the growth of your investment.

5) Tax Free Savings Account or TFSA is one of the few situations where tax is completely avoided on investment income even when it is withdrawn in the future. You should maximize this investment every year.

6) Building up equity through investing in your principal residence provides benefits similar to a TFSA. Gains on your principal residence are generally not taxed at all.

7) Purchasing real estate not considered your principal residence may allow for tax deferral until the property is sold. Consult your accountant first to get a better understanding of your particular taxation risk.

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