# Legal ways to pay less taxes on investment!



## kac147 (Jan 12, 2018)

How would you save taxes on investing and what tools do you use?

I'm trying to utilize the RRSP and TFSA both at the same time. Firstly, I contribute to RRSP as much as possible for the year. Then, I contribute the tax credit saved from RRSP to the TFSA. I will invest both funds on stocks and gain returns. This way I don't have to pay any taxes on the capital gains.

The RRSP is my saving account for retirement, and the TFSA is my spending account if required.


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## Jimmy (May 19, 2017)

RESP if you have kids too. 

You can save $ on transaction costs too. Assuming a $10 fee/tx , wait until you have $1000 for an equity or $2000 for a bond ETF per transaction.


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## kcowan (Jul 1, 2010)

Buy growth stocks that pay a dividend. You pay tax on the divvie but nothing on the CG. An example is the Canadian banks. Div is about 3.8% with preferred tax treatment while total return is 14% so you protect 10% of your gain.


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## ian (Jun 18, 2016)

We try to keep income producing equities inside our RSP's and other sheltered vehicles. We try to keep capital growth equities in our taxable accounts.


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## lonewolf :) (Sep 13, 2016)

TFSA for GICs unless for once or twice in a life time high confidence trade with very high reward to risk


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## fireseeker (Jul 24, 2017)

kac147 said:


> This way I don't have to pay any taxes on the capital gains.


It's not clear what you meant but this, but of course you do eventually pay taxes on cap gains (and everything else) in your RRSP. It's just deferred for (hopefully) many years.
As for your strategy, it really depends on your income level. RRSP savings don't make a lot of sense for modest incomes -- fully funding a TFSA is much more important in that case.


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## Eclectic12 (Oct 20, 2010)

It is more complicated than just withdrawals being taxed.

The bit about not paying CG taxes only applied to selling within the RRSP. As indicated, this is a deferral as eventually when one withdraws $$ or stock, one reports the $$ as income on one's tax return. The RRSP is also dropping the advantaged tax rates of eligible dividends and capital gains.

For example, someone who held eligible dividend paying stock in a taxable account that sold might have paid 18% on the dividends and 19% on the CG would be paying on the RRSP withdrawal 38%.


Some other key factors are what retirement income looks like, how big the RRSP has grown to and if there is an opportunity to make extra RRSP withdrawals before additional income kicks in.



Cheers


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## kac147 (Jan 12, 2018)

fireseeker said:


> It's not clear what you meant but this, but of course you do eventually pay taxes on cap gains (and everything else) in your RRSP. It's just deferred for (hopefully) many years.
> As for your strategy, it really depends on your income level. RRSP savings don't make a lot of sense for modest incomes -- fully funding a TFSA is much more important in that case.


I mean, for example, if you contribute $20,000 in RRSP and you make 5% every year. Do you have to pay taxes on the annual 5% capital gain eventually? I thought we only have to pay taxes on the amount we withdraw for income tax (but not the capital gain).

I am planning to contribute as much as possible every year to the RRSP first, and then contribute the tax returned from the RRSP to TFSA. I have performed a comparison and I might be able to make a million more from this strategy than investing in a cash account after 30 years. Correct me if I misunderstand any of the information described.


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## AltaRed (Jun 8, 2009)

If you contribute $10,000 to an RRSP and through capital appreciation (and/or dividend income) year by year, that contribution grows to be worth $20,000 over many years... when you do withdraw ANY funds from the RRSP, it will be taxed at your then full tax rates, i.e. all $20,000 will eventually be taxed as and when it is withdrawn.

It is true when you contribute the original $10,000 to the RRSP, you will get a tax deduction for that contribution, which you can then allocate to your TFSA. But it is not free money forever. It is tax deferred money that is taxed once you make RRSP withdrawals.


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## kcowan (Jul 1, 2010)

kac147 said:


> I mean, for example, if you contribute $20,000 in RRSP and you make 5% every year. Do you have to pay taxes on the annual 5% capital gain eventually? I thought we only have to pay taxes on the amount we withdraw for income tax (but not the capital gain).


You will eventually pay tax on the $20000 plus any interest and capital gains at 100% income rate. If you don't, your estate will. And it will do it at the tax rate for all the gains in the year of your death (i.e high rate).


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## Eclectic12 (Oct 20, 2010)

kac147 said:


> I mean, for example, if you contribute $20,000 in RRSP and you make 5% every year. Do you have to pay taxes on the annual 5% capital gain eventually? I thought we only have to pay taxes on the amount we withdraw for income tax (but not the capital gain).


You pay the top tax rate on everything withdrawn. The source of the $$ withdrawn does not matter.

Using your $20K contributed to an RRSP ... say that over time, there is a $16K capital gain with $5K income paid. This adds up to the original $20K + $16K CG + $5K income = $41K in the RRSP. If you withdraw $41K then the full $41K will be taxed at the highest rate that your income that tax year sets.

So yes - there is no capital gains tax but on the other hand, what would have been taxed at a lower rate in a taxable account or tax free in a TFSA (i.e. the $16K CG and eligible dividend income) have been converted to the top tax rate.


Depending on what your retirement income is like plus any delays in some income like CPP being started ... you may be withdrawing at a lower income level and it might not be the full $41K in a single tax year but the key point is everything withdrawn is taxed no matter how the $$ were made.




kac147 said:


> ... I am planning to contribute as much as possible every year to the RRSP first, and then contribute the tax returned from the RRSP to TFSA. I have performed a comparison and I might be able to make a million more from this strategy than investing in a cash account after 30 years. Correct me if I misunderstand any of the information described.


Not sure what your numbers were but based on the RRSP comments of "I don't have to pay any taxes on the capital gains" and "only have to pay taxes on the amount we withdraw for income tax (but not the capital gain)" - it raises the question of whether the tax bill for the RRSP has been accounted for correctly.

Part of figuring out the RRSP tax bill is to estimate what one's retirement income is expected to be.

As well, what assumptions did you build into the taxable account for selling stock before the 30 years are up or did you assume that whatever investments go bad, they will always be at a loss?


Bottom line is that without more details of how the comparison was done - only guesses about any misunderstanding can be made.


Cheers


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## kac147 (Jan 12, 2018)

For long term investment perspectives, would RRSP still be a good choice? Should I just maximize my TFSA and then invest in cash account?


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## kac147 (Jan 12, 2018)

Eclectic12 said:


> You pay the top tax rate on everything withdrawn. The source of the $$ withdrawn does not matter.
> 
> Using your $20K contributed to an RRSP ... say that over time, there is a $16K capital gain with $5K income paid. This adds up to the original $20K + $16K CG + $5K income = $41K in the RRSP. If you withdraw $41K then the full $41K will be taxed at the highest rate.
> 
> ...


I am assuming 8% ROI and 30% tax rate. For the cash account, I assumed to sell the stocks every 5 years. I am also expecting to withdraw the RRSP slowly since I got a company pension as my major retirement fund.

I have not compared the taxes after the retirement yet. I am just trying to determine what the best strategy to grow my saving in a long run.


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## Eclectic12 (Oct 20, 2010)

YMMV ... I have two co-workers who have opposite opinions on the RRSP.

One has a large DB pension where he figures he has put too much into RRSPs. By the time the DB pension income is added to CPP/OAS and investment income - he expects the OAS clawback to be adding to his tax bill. 

The other one has changed jobs several times so that his maximum DB pension is low and leaves lots of room for CPP and investment income without coming close to the OAS clawback. His wife hasn't worked long so her pension is even smaller, making a spousal RRSP attractive (i.e. tax refund today of 44% to eventually pay something like 20% when she withdraws in retirement).

http://www.moneysense.ca/save/investing/rrsp/rrsp-vs-tfsa-which-is-right-for-you/



The problem with assuming one tax rate for both working and retirement and/or ignoring the retirement taxes is that these are important parts that could change what makes more sense. For example, many of the people I talk to know about their company pension, may remember about gov't pensions (CPP/OAS/GIS) and rarely remember about their investment income. Everything adds up to affect the tax bill and income tested programs.


Keep in mind that one can withdraw slowly from the RRSP for only so long. At age 71, the RRSP has to be collapsed. Should one choose to convert the RRSP to a RRIF then an increasing scale of minimum withdrawal amounts comes into play. https://www.taxtips.ca/rrsp/rrifminimumwithdrawal.htm


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## kac147 (Jan 12, 2018)

After reading all of your comments, I think I should revisit my strategy. Other than going through a financial planner, are there any sources or calculators online including all the options for helping to determine the best way of saving for retirement?


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## AltaRed (Jun 8, 2009)

The key is to read materials before even considering calculators. Such as this forum or www.finiki.org educational materials et al. The taxtips website is also very good. There are tons of resources online.


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## kac147 (Jan 12, 2018)

Thanks AltaRed, I will go through the materials and determine if what strategy would work for me.

For others, I found a calculator from Services Canada which is pretty helpful.

https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html


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