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Canada Revenue Agency: How to Pay ZERO Taxes in Retirement

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Who can pay zero taxes? Everyone, including you!

While you can’t avoid sales taxes (PST/GST/HST), you can pay zero taxes on two kinds of income in retirement. This means more money in your pocket for your enjoyment in your golden years!

TFSA income

Accumulate as much wealth as you can in your Tax-Free Savings Account (TFSA) before you retire, because all TFSA withdrawals are tax free. That’s right. The Canada Revenue Agency (CRA) can’t touch that money except for rare cases, which won’t apply to most people.

If you don’t treat your TFSA account as a trading business and don’t run your account from $10,000 to $100,000 in a year, the CRA won’t chase after you.

When 2019 rolls over to 2020, you will have a maximum TFSA contribution room of $69,500 (unless you’ve performed withdrawals with profits). Even targeting a super conservative return of just 6% per year, with that initial amount, you’d end up with $93,000 in five years and $124,463 in 10 years.

Earning a very reasonable yield of 4% will generate nice tax-free income of $3,720 and $4,978, respectively, in five or 10 years.

It’s more likely that your TFSA portfolio is much bigger than $69,500 if you’ve contributed the maximum allowable amount every year. Assuming a 6% return since the inception of the TFSA in 2009, you’d have roughly $85,236 today. If you contribute $6,000 in January 2020, you’d have about $91,236 to generate tax-free income from.

Earning a yield of 4% will generate passive income of $4,883 in five years and $6,535 in 10 years. That’s tax-free monthly income of $406 or $544, respectively!

Dividend income

Investors are encouraged to receive eligible Canadian dividends, which are either not taxed at all or taxed at very low rates up to a certain amount in non-registered or taxable accounts.

In 2020, residents of five provinces and territories (Alberta, British Columbia, Ontario, Northwest Territories, and Yukon) can earn up to $48,535 in eligible Canadian dividends without paying a dime!

For folks in most other locations, (including Saskatchewan, Manitoba, Quebec, New Brunswick, Prince Edward Island, and Nunavut) that amount of eligible dividends are still taxed at very favourable tax rates (compared to other income like employment income).

Most TSX dividend stocks pay eligible Canadian dividends with some uncommon exceptions, which typically have tickers ending in .un (which stands for units). These exceptions include A&W and Brookfield Renewable, which may be better placed in registered accounts such as TFSAs, RRSPs/RRIFs, RESPs, and RDSPs. When in doubt, double check at their company websites.

A wonderful business that pays generous eligible Canadian dividends and trades at a reasonable price today is Enbridge. It provides a starting yield of 6.3% and long-term annualized total returns of 11-13% — roughly double the conservative return target of 6%.

Investor takeaway

Pay zero to very low income taxes in your retirement by taking full advantage of your TFSA and earning eligible Canadian dividends in your non-registered account.

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Fool contributor Kay Ng owns shares of A&W and Enbridge. The Motley Fool owns shares of and recommends Enbridge.

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