There is no way to escape paying taxes to the Canada Revenue Agency (CRA). While the CRA has deferred the tax filing and tax payment deadline for Canadians amid the COVID-19 pandemic, you still need to pay your dues. However, there are some ways to reduce your tax burden and take advantage a multitude of tax breaks.
One is by establishing an RRSP (Registered Retirement Savings Plan), a registered Canadian account. Contributions towards the RRSP are tax deductible, and any income you earn in this account is exempt from tax as long as the funds remain in the plan. This means you pay a tax on the withdrawal. However, there is one way to withdraw up to $35,000 from your RRSP without paying a dime to the CRA.
Canadians can take advantage of the Home Buyers’ Plan (HBP), which allows first-time home buyers to withdraw from their RRSP. The HBP withdrawal limit stands at $35,000 and applies to any withdrawals made after March 19, 2019.
While these withdrawals are tax-free, you have up to 15 years to repay these funds to your RRSP. The CRA will send you an HBP statement of account each year with your notice of assessment. This statement will include details such as the amount repaid so far and your remaining HBP balance as well as the amount you have to contribute towards the RRSP and designate as a repayment for the following year.
Become a landlord and earn tax-free income from your TFSA
Another way to avoid CRA taxing your income is by allocating capital towards your TFSA (Tax-Free Savings Account). The TFSA is another popular registered account where any withdrawals in the form of capital gains or dividends are exempt from CRA taxes. Unlike the RRSP, contributions towards your TFSA are not tax deductible.
The TFSA contribution room for 2020 stands at $6,000, and you can invest this amount in buying quality residential real estate investment trusts (REITs) such as Killam Apartment (TSX:KMP.UN). While buying a house is a tedious, expensive, and capital-intensive process, investing in REITs is quite the opposite. Further, if you are bullish about Canada’s residential real estate, having an exposure to Killam Apartment makes perfect sense.
Killam is a growth-oriented REIT that owns, operates, and develops apartments and manufactured home communities (MHCs). It owns around $3.4 billion in real estate portfolio across Ontario, British Columbia, Alberta, and Nova Scotia. Killam’s real estate assets comprise of 16,703 apartment units, 5,786 MHCs, and 0.7 million square feet of commercial space.
While Killam Apartment REIT has a dividend yield of 3.9%, it has also managed to increase investor wealth via capital appreciation. The REIT went public back in January 2016, and its stock more than doubled in four years before the 2020 market sell-off. Despite recent weakness, Killam stock is up over 70%.
Killam has managed to outperform broader markets due to its focus on growth. It has increased net operating income at an annual rate of 9.2% between 2015 and 2019. Comparatively, its total assets have increased by 12.5%, while funds from operations and distribution per unit are up 4.4% in this period.
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The Foolish takeaway
Whether you are looking to invest in a house or in a REIT, we can see that Canadians can benefit from tax-free withdrawals or returns. You need to reduce taxes, leverage the tax breaks, and put these savings to use, which will help increase your wealth over time.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.