Investing in Canada? Do THIS to Slash Your Taxes—Up to 50%!

Taxes can be a huge obstacle when you’re trying to grow your investments, especially in Canada, where they can swallow up to half of your investment income. But don’t worry, in this video, I’ll share 5 practical strategies we use with our clients to reduce their tax bills and grow their wealth faster. We’ll start with the simplest approach and work our way up to the most advanced, starting with…

1. Choose Tax-Efficient Investments

Choosing tax-efficient investments in your taxable accounts is a simple and effective way to keep more of your money growing over time. Let me break it down for you.

ETFs vs. Mutual Funds

Think of ETFs (Exchange-Traded Funds) like the laid-back cousin of mutual funds. They generally don’t trade assets as often, which means fewer taxable events for you. Mutual funds, especially the actively managed ones, are constantly buying and selling, and you get stuck with the tax bill for those trades—even if you didn’t sell anything yourself. If you’re investing in a taxable account, ETFs are usually the smarter choice.

Consider Non-Dividend Paying Stocks and ETFs

Stocks like Warren Buffett’s Berkshire Hathaway are great for taxable accounts because they purposely don’t pay annual dividends, avoiding yearly taxable income. Instead, gains are taxed only when you sell, and only 50% of the capital gain is taxable (under $250K), making them far more tax-efficient than dividend-paying or interest-generating investments. For example, A $20,000 gain is taxed on only $10,000, and only when you sell it. 

Permanent Life Insurance

Permanent life insurance is not just for protection—it can also grow investments within the policy, and the payout to your beneficiaries is tax-free. It’s an advanced strategy, but worth thinking about for estate planning if you want to reduce taxes in death.

2. Prioritize the Right Registered Accounts

Choosing the wrong investment accounts to prioritize could cost you big—potentially tens or even hundreds of thousands of dollars over time. Let me show you an eye-opening example that highlights just how much of a difference this decision can make.

TFSA vs Taxable Account

Meet Jason, he’s 30 years old, and invests $10,000 in both a TFSA and a Non-Registered, taxable account. This is over a 30-year time frame, at a 7% annual return, and his tax rate on the non-registered account is 30%. Here’s the comparison:

AccountInitial BalanceFuture ValueTaxes PaidFinal Balance
TFSA$10,000$76,123$0$76,123
Non-Registered$10,000$42,001Ongoing taxes on growth$42,001

Key Details:

  • TFSA: Jason invests $10,000, which grows tax-free to $76,123 after 30 years.
  • Non-Registered Account: The same $10,000 grows to only $42,001 due to ongoing taxes.
  • The TFSA outperforms the Non-Registered Account by $34,122, nearly double the value, demonstrating the power of tax-free compounding over time.

Now that you can see how important it is to invest in the right account, here’s the order you should invest in to maximize your savings and minimize taxes.

1. RRSP (With Employer Matching)

Employer matching is free money—always maximize this first. For example, if your employer matches 50% of contributions up to $1,500, that’s an easy $750 added to your savings.

2. RESP (If Saving for Education)

For your child’s education, the RESP offers a 20% government match (up to $500/year per child, lifetime max $7,200). Families with lower incomes can also receive the Canada Learning Bond, adding up to $2,000 without requiring contributions.

3. FHSA (If Saving for a Home)

First-time homebuyers should prioritize the FHSA. It offers tax-deductible contributions and tax-free withdrawals. Even if homeownership isn’t immediate, you can invest and grow funds tax-free or transfer them to an RRSP later.

4. TFSA or RRSP

  • TFSA: Best for flexibility, emergencies, or lower-income years. Withdraw funds tax-free anytime.
  • RRSP: Ideal for higher incomes due to tax-deductible contributions and tax-deferred growth.

Final Order of Priority

  1. RRSP (with employer matching)
  2. RESP (if saving for child’s education)
  3. FHSA (if saving for a home)
  4. TFSA or RRSP (depending on income and goals)

I go over this in way more detail in another video of mine, the ideal order of investing in Canada. 

3. Optimize Your Asset Location

Tax efficiency isn’t just about what you invest in—it’s also about where you hold those investments. Different types of income, like interest, dividends, and capital gains, are taxed differently in Canada. Here’s a breakdown of the tax rules:

How Investments are Taxed in Canada:

  • Interest Income: Taxed at your full marginal tax rate—least tax-efficient.
  • Canadian Dividends: Benefit from the dividend tax credit, reducing your effective tax rate.
  • Foreign Dividends & Interest: Subject to withholding taxes, which can’t be recovered in a TFSA.
  • Capital Gains: Only 50% of the gain is taxable (unless over $250K), making it more tax-efficient than interest or dividends.

Key Strategies for Asset Location:

  1. RRSP for U.S. Dividend-Paying Stocks:
    • Avoid the 15% withholding tax on U.S. dividends by holding these stocks in your RRSP, thanks to the Canada-U.S. tax treaty. This ensures you receive the full dividend amount.
  2. TFSA for High-Growth Investments:
    • Use TFSAs to shelter capital gains and allow high-growth investments to compound tax-free.
    • Avoid foreign dividend stocks in a TFSA because withholding taxes apply, and you cannot recover them in this account. This means losing up to 15% of your dividends every year. For example, if you invest in Apple stock in your TFSA
  3. Taxable Accounts for Canadian Dividend Stocks:
    • Canadian dividend-paying stocks belong in taxable accounts, where the dividend tax credit significantly reduces taxes. This makes them more tax-efficient in a taxable account than other income types.
    • For example, If you earn $1,000 in Canadian dividends in a taxable account, the dividend tax credit lowers your tax bill significantly. For someone in a 30% tax bracket, the effective tax rate drops to around 7%, meaning you’d pay only around $70 in taxes. Compare that to $300 on the same amount as interest income.
  4. Interest-Generating Investments in Registered Accounts:
    • Place investments that generate interest, like GICs or bonds, in RRSPs or TFSAs to avoid paying high taxes on interest income in taxable accounts.

4. Income Splitting (Advanced)

a. Using Your FHSA for Income Splitting

Most people think the FHSA is just for saving for a home, but it can also help couples save on taxes. Here’s how it works:

  • Who It’s For: Couples where one partner has maxed out their tax-advantaged accounts (RRSP, TFSA, FHSA) and the other has unused FHSA room.
  • How It Works: The higher-income partner gifts money to the lower-income partner, who contributes it to their FHSA. This allows the couple to:
    • Avoid investing in a taxable account.
    • Claim a tax deduction and enjoy tax-free growth.
  • Example: Jim gifts $8,000 to Pam, who hasn’t used her FHSA. She gets a $2,400 tax deduction, avoids $132 in taxes on growth, and all future growth is tax-free—saving $2,532 total.

b. Spousal RRSP Contributions

Spousal RRSPs help balance retirement incomes and reduce taxes for couples.

  • How It Works: The higher-income spouse contributes to the lower-income spouse’s RRSP, getting an immediate tax deduction. In retirement, the lower-income spouse withdraws the funds at their lower tax rate.
  • Example: Jim contributes $12,000 to Pam’s RRSP. This lowers Jim’s taxes by $4,200, and when Pam withdraws in retirement, she pays only $2,400 in taxes—saving the couple $1,800 overall.

c. Splitting Capital Losses

Turn investment losses into tax savings by transferring capital losses between spouses.

  • How It Works: One spouse sells shares at a loss, and the other buys the same shares within 30 days. The loss is denied to the seller but transferred to the buyer’s adjusted cost base.
  • Example: Jim’s $4,000 capital loss reduces Pam’s $15,000 capital gains. This saves the couple $800 in taxes.
  • Pro Tip: This only works in non-registered accounts, and the buyer must hold the shares for at least 30 days.

You can download a copy of our income-splitting strategy guide on our website, it goes way more in-depth on this topic!

5. Tax-Loss Harvesting 

Tax-loss harvesting can help you save on taxes by using losing investments to offset your gains. It’s a bit tricky but worth it if you get it right.

How It Works:

If you sell an investment at a loss, you can use that loss to reduce the taxes on gains from other investments. Got more losses than gains? No problem—you can carry those losses forward to future years or even back to previous years to get a tax refund.

Example:

Imagine you sold a stock for a $10,000 gain this year. To cut the tax bill, you sell another stock that’s down $6,000. That loss offsets part of your gain, so you’re only taxed on $4,000 instead of $10,000. 

Watch Out for This Rule:

The Superficial Loss Rule trips up a lot of people. If you (or your spouse) buy back the same stock within 30 days of selling it, the CRA won’t let you claim the loss. Instead, they roll it into the cost of your new shares, and you’ll have to wait longer to benefit.

Bonus Tip: Avoid Costly Mistakes

Even the best tax strategies can backfire if you make simple mistakes. Here are a few common pitfalls to watch out for:

1. Overcontributing to Registered Accounts

Exceeding the contribution limits for your TFSA or RRSP can result in hefty penalties—1% of the excess amount each month. Always track your limits to avoid unnecessary costs.

2. Forgetting About Deadlines

Some strategies, like RRSP contributions, have strict deadlines (e.g., 60 days after year-end). Missing these could mean losing out on tax deductions for the year.

3. Not Planning for Withdrawals

Withdrawals from registered accounts like RRSPs can trigger unexpected taxes. Have a plan to manage these withdrawals efficiently, especially in retirement.

These strategies can save you thousands in taxes and boost your wealth. See our custom services to help achieve your investment goals!

Photo of author

AUTHOR

Christopher Liew, CFA, CFP®

As the founder of Blueprint Financial, Christopher leads a team dedicated to creating custom plans that fit your unique goals. Together, they work to help you secure your financial future and enjoy the lifestyle that you’ve worked so hard for.
Our services

What we do

Here's how we can help you:

Financial Planning

We’ll craft a custom plan to help you save, reduce taxes, retire, and protect your future—all in one clear Blueprint.

Business Services

Tailored strategies for taxes, retirement, and wealth management so you can focus on growing your business.

Investment strategy

We align your financial plan with professional investment management to keep you on track.