The registered retirement savings plan (RRSP) and the tax-free savings account (TFSA) are widely considered as essential tools for sheltering investment returns from taxes. The former allows you to defer your tax bill until the funds are withdrawn (usually at retirement), and the latter provides a permanent tax shelter for your deposits and any appreciation.
However, both of these vehicles have contribution ceilings. And for individuals with significant income, these ceilings might not be high enough to accommodate the investment of all their available savings in a tax-efficient manner.
A Special Challenge
Individuals who have reached their deposit ceilings for both their RRSP and TFSA - and who still have money to invest – will face a special challenge. If they want to reduce their tax bill on the savings they hold outside of these plans, they must consider more complex strategies where the advice of specialized professionals could make all the difference.
In this context, many financial security advisors believe that it’s important to accept that tax will have to be paid, and to avoid complex strategies and higher risks that could ultimately cost more than any tax savings. But, there are still many simple tax-efficient solutions.
Here are some of the most commonly considered solutions:
- Investments that generate capital gains and dividends
As a rule, capital gains and dividends are taxed at a lower rate than interest income in Canada. - Corporate-class funds
This class of mutual funds are advantageous because buying and selling different mutual funds within the same corporate-class do not realize gains or losses for the investor. - T-class funds
T-class funds aim to provide distributions consisting of return of capital, which is not taxable, deferring the realization of capital gains until the shares are sold. They are popular for those requiring some income, particularly retirees. - Life insurance
Life insurance benefits are paid on a tax-free basis; because of this, life insurance is often considered to be a tax-efficient investment, especially in the context of estate planning. Other types of insurance may also be worth considering, especially for business partners. - Individual pension plan (IPP)
An IPP is a defined benefit pension plan set up by a business owner for retirement. The IPP has many features that can make it an attractive alternative to an RRSP for some people. - Real estate
Finally, real estate could be a tax-efficient solution since any profit from the sale of your home (principal residence) is tax-free. Profit from the sale of a secondary home is treated as a capital gain and has a lower inclusion rate.
Once again, the appropriateness of these strategies will depend on your specific situation and the applicable legislation, which is never written in stone. If you are faced with the happy problem of having to plan how to efficiently invest your non-RRSP and non-TFSA assets, your very first decision might well be to seek out a financial services professional.
Les sources suivantes ont été utilisées dans la rédaction de cet article:
Advisor.ca, « What to do after maxing out RRSP and TFSA », 4 novembre 2016. « Consider T-series for tax-efficient cash flow », 6 octobre 2015.
Finance et investissement, « L’effet des nouvelles mesures sur la fiscalité des PME », 1er avril 2018.
Financial Post, « You've maxed out your RRSP and TFSA: Now what do you do? » , 20 janvier 2017.
Gouvernement du Canada, « Cotisations », 6 février 2018.
Money Sense, « What are corporate class mutual funds? », 26 août 2016.
Raymond Chabot Grant Thornton, « Le Planiguide fiscal 2017-2018 », 24 octobre 2017.
The Globe and Mail, « What to do when you've maxed out your RRSP », 26 mars 2017.