- Dustin DeHaan
How Can I Minimize My Taxes on Investments?
Are you motivated to improve your financial situation? Then it's time to consider investment options that will maximize your gains and minimize your taxes. Below we'll go into detail about wise investment strategies, from opening an RRSP to offsetting gains taxes with losses. Above all, you'll want a trusted financial advisor in Edmonton by your side.
Ask a Financial Advisor in Edmonton: How Can I Minimize My Taxes on Investments?
1. Invest in TFSAs
One of the best steps for any Canadian to take is to open a TFSA, also known as a tax-free saving account. Anyone who is a resident of Canada that is over the age of 18 and has a valid SIN can open a TFSA. You do not need to be earning income to put money into your TFSA. The TFSA is a great option for both short-term savings and investments, as well as long-term saving plans to boost your retirement savings. In 2023, the annual TFSA dollar contribution limit is $6,500. This means that you can add up to $6,500 in the year 2023 without paying tax on this money. However, your number may vary depending on any unused TFSA contribution room from previous years or any withdrawals you have made. It's best to talk to an expert financial advisor in Edmonton to see just how much you can contribute each year.
2. Invest in RRSPs
An RRSP, or Registered Retirements Savings Plan, is another savings plan you can use to minimize paying taxes on your investments. As the name suggests, you contribute money to your RRSP for your retirement. You must be earning an income to contribute to this plan. The money you add to an RRSP investment is exempt from being taxed in that tax year. These investments then grow without taxes until you withdraw the earnings at a later date. Your RRSP has an annual contribution limit of 18% of the last year's income and up to $30,780 for 2023 or $29,210 for 2022. Like you can with a TFSA, your RRSP contribution room includes the unused contributions from previous years. You can use this to your advantage by contributing less in the years that you have a lower income to have more room for future years when you expect to have a higher income, therefore reducing your taxable income.
3. Invest in RESPs
You may want to look into an RESP if you're a parent or planning on contributing to a child's education in Canada. You can put investments into this account that will grow without getting taxed. Later, the beneficiary (the child for whom the account was opened) can use the money for school-related expenses (such as tuition, transportation, and textbooks) when they are enrolled in a qualifying program at a secondary-education institution. RESPs offer flexibility depending on your needs. If you have more than one relative (child, grandchild, siblings, or stepchild by adoption) that will use the funds, a family RESP will allow you to put tax-free investments into this account and name all of the recipients as beneficiaries. An individual RESP is opened for only one beneficiary, and it can be opened for yourself, a friend, or a family member. Your RESP can be open for up to 36 years.
4. Avoid Capital Gains Tax
Your capital gains is the amount you make when you sell an investment at a price that's higher than you paid for it. If you earn a capital gain on an investment, you will have to pay taxes on that gain. However, there are a few other ways to minimize these gains aside from setting up TFSAs, RRSPs, and RESPs.
Hold Onto Investments for the Long-Run
The simplest way to reduce the amount of capital gains tax you pay is to hold onto your investments for at least a year. If you buy and sell a stock within the same year, you are subject to paying 100% of the tax. Hold onto an asset for at least 12 months, and you can get a 50% discount on the tax. Keep in mind that these rules apply to individuals, and only half of the capital gain income is subject to be taxed. If an individual were to make $10,000 in capital gains in a given year, $5,000 would be eligible to be taxed and would thus be added to their income statement. This additional "income" would be taxed at the individual's income tax rate. (Companies that make an investment are subject to a 30% capital gains tax, no matter what.)
Donate Shares to Charity
Another way to minimize capital gains taxes is to donate your shares to charity. This is a smart solution if you're already donating a portion of your income to charity anyway. When you choose to donate shares, the profit you earn from the investments is zero, so you can't be taxed on the earnings. Additionally, you can get a donation tax credit from the shares' current market value.
Offset Gains With Losses
You can offset your gains from selling stocks in a given year by taking into account any losses you incur from selling other stocks during that time. Say that you make $10,000 from selling one of your stocks in 2022, but you end up losing $6,000 from selling another stock in 2022. Instead of paying the capital gains tax on the $5,000 – remember that only 50% of the $10,000 can be taxed – you will only have to pay taxes on an additional $2,000 of income. There are some caveats. What you can't do with this strategy is to sell a stock, claim it at a loss, and then re-purchase it. Instead, ask a financial advisor in Edmonton to explain how you can take advantage of tax harvesting. It's a strategy that involves selling one stock at a loss, then buying another stock in the same sector. Keep in mind that you cannot use tax harvesting for retirement account investments.
5. Split Your Income
If you, your spouse, or your common-law partner earn more than the other, you can split your income through your RRSP or your pension fund to minimize the taxes that you pay. For instance, say that you're the higher earner of the two. You could contribute your earnings to your partner's RRSP. You would then get a tax deduction because of this contribution. As long as your partner keeps the contribution in their account for at least three years, it will be taxed at the lower-income earner's tax rate. When it comes to pensions, the higher earner can split as much as 50% of their income. Eligible pension plans include RRSP payments, RRIF payments, or life annuities. When it comes to your finances, you deserve someone you should trust. We're an independent advisor, which means that we have your best interests at heart. We're not looking to “sell” you on our investment products or pressure you into any decisions. Instead, we partner with top firms, giving you access to the best investment tools that you can use as you see fit. Contact us at Dehaan Private Wealth with any questions!