REDUCE INCOME TAXES ON YOUR INVESTMENTS

The less income tax you pay, the more financial resources you will have to enjoy life today and when you retire. There are in fact several ways of reducing the taxes you pay on your investments.

CONTRIBUTE TO YOUR RRSP

By opting for a tax shelter like an RRSP, you reduce your taxable income and decrease the amount of tax you have to pay in the short term. The funds in your RRSP are sheltered from tax until your retirement. Your income during retirement will likely be lower than your income at the time of the investment. So the income tax you pay on this money when you cash in your plan will be lower.

INCLUDE THE MOST HEAVILY TAXED INVESTMENTS IN YOUR RRSP

If you have investments in a registered account (RRSP) and in a non-registered account for your retirement, make sure that you include the most heavily taxed investments in your RRSP. Because they will be tax-sheltered there, you can significantly reduce the amount of tax you pay. The most heavily taxed investments generally include those that generate interest income, such as guaranteed investment certificates, strip coupons, bonds and bond funds. Even though the tax aspect is an important part of your investment strategy, make sure that it always takes your investor profile into account.

OPT FOR INCOME SPLITTING

To reduce the tax you pay during retirement, you need to plan ahead and take advantage of income splitting, a strategy that will provide you and your spouse with a more favourable tax treatment.

The advantage of income splitting stems from the fact that two moderate incomes are taxed less than one higher income equivalent to the sum of the two smaller ones. If your spouse earns less than you do, contribute to a spousal RRSP. You'll wind up saving a substantial amount of income tax.

KNOW WHEN TO INVEST

If, for example, you invest in mutual funds outside your RRSP, you need to take year-end distributions into consideration. Capital gains generated by mutual funds could result in income taxes payable on the gains generated during the year, even if you did not actually hold fund units for the entire year.