Hate Paying Taxes? Do This 1 Trick With Your TFSA and RRSP

Hate taxes if you will, but you can’t avoid paying them. However, you can use one neat trick using your TFSA and RRSP to pay fewer taxes. For decades-long income stream, purchase Fortis stock to hold in either investment account.

| More on:
edit Taxes CRA

Image source: Getty Images

No matter how much you hate paying taxes to the Canada Revenue Agency (CRA) every year, you can’t be delinquent in your tax obligations. Late filing will cost you already, but not paying at all is a criminal offence. Tax evasion or intentionally ignoring Canada’s tax laws has serious consequences.

However, Canadian taxpayers have ways to lessen the impact of the compulsory financial charge of the government. You can do some nifty moves or tricks using the available tax-advantaged and tax-sheltered accounts. The Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are excellent tools to offset tax payables.

Tax-free money growth

A TFSA is a one-of-kind investment vehicle, because you can grow money without the CRA’s interference. Any interest, profit, or dividend gained from the account is non-taxable. If you can maximize your annual TFSA contributions, the more you can create tax-exempt income.

Generally, TFSA contributions are after-tax income and therefore not tax deductible at the onset. The only condition to be tax-free all the way is to follow the governing rules. Otherwise, the CRA can impose penalties or withholding taxes.

Tax-sheltered contributions

The RRSP came before the TFSA, so most Canadian taxpayers have been using the account for tax-shelter purposes. With the TFSA, you can make use of both accounts to reduce taxes. RRSP contributions are instant tax deductions, although the tax obligation is due when you withdraw the funds in the future.

Like the TFSA, unused RRSP contributions carry over to the next year or indefinitely. The only drawback is that you lose the contribution room for good once you withdraw the funds. Also, you can only maintain your RRSP until age 71. For the TFSA, you can be a user as long as you wish.

Bond-like income stock

Young and old taxpayers can purchase Fortis (TSX:FTS)(NYSE:FTS) shares and hold them in either a TFSA or RRSP. The utility stock is ideal for long-term and risk-averse investors. Most dividend investors liken the $25.72 billion gas and electric utility company to bonds.

Fortis’s energy-delivery business is geographically diversified. Cash flows are stable and recurring as the bulk of revenues come from regulated utility rates. If you were to take a position today ($54.84 per share), the dividend yield is a decent 3.68%. Management plans to increase the dividend by 6% annually through 2024.

In case you’re still doubtful about Fortis’s reliability as an income provider, the stock’s total return in the last 20 years is 1,085.82% (13.15% CAGR). The company has likewise raised dividends for 47 consecutive years. A Dividend Aristocrat with bond-like features will not disappoint investors, regardless of the market environment.

Neat technique

If your income will put you in a higher income tax bracket, consider moving your TFSA funds to your RRSP. The withdrawals are tax-free, and you shelter your RRSP contributions from taxes. This neat technique shows that a TFSA and RRSP are complementing, not competing accounts. You have two great tax-saving tools at your disposal.

Inversely, if you’re about to max your RRSP contributions or the contribution room is limited, use your TFSA to boost tax savings. When you turn 71, convert your RRSP into a Registered Retirement Income (RRIF). More tax benefits await, because you become can split the pension with your spouse.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

More on Dividend Stocks

Man making notes on graphs and charts
Dividend Stocks

Put Your Cash to Work: 3 Cheap TSX Stocks (With Dividend Yields of +5%) to Buy Now

Make your money work for you. Earn over 5% dividend yields with these under-$20 stocks.

Read more »

edit Woman calculating figures next to a laptop
Dividend Stocks

2 Oversold TSX Stocks for TFSA and RRSP Investors to Buy Now

These top TSX dividend stocks look oversold.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Dividend Stocks

2 Top High-Yielding REITs to Beat Inflation

Real estate investors can beat the 7% inflation by investing in these two high-yielding REITs.

Read more »

Increasing yield
Dividend Stocks

Passive-Income Alert: 2 Top TSX Stocks to Buy Now for 6% Yields

Top TSX dividend stocks now trade at discounted prices.

Read more »

Tired or stressed businessman sitting on the walkway in panic digital stock market financial background
Dividend Stocks

Which Canadian Stocks to Buy Ahead of a 2023 Recession?

Fortis stock may not be cheap, but it looks like a far better bet than bonds or GICs as rates…

Read more »

grow money, wealth build
Dividend Stocks

1 Top Discounted Growth Stock to Buy in This Market Environment

Consider investing in this Canadian growth stock to invest in a tech company that has remained resilient, despite the challenging…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

TFSA Passive Income: 3 Incredible Stocks That Earn $365 Every Month

Are you looking to raise the passive income in your TFSA? Here are three oversold stocks that could easily earn…

Read more »

A worker uses a double monitor computer screen in an office.
Dividend Stocks

2 Top Commodity Stocks to Hedge Your Portfolio Against Inflation

Consider investing in these two commodity-backed stocks to hedge your portfolio against the inflationary environment.

Read more »