The Canada Revenue Agency (CRA) has established a multitude of programs to help Canadians optimize tax and grow long-term wealth. In fact, certain programs will even pay you cash to participate. Unfortunately, many Canadians forget to optimize these tax-free/deferred opportunities.
Luckily, it is never too late to start. Here are three CRA programs that could help you save tax in 2024 and beyond.
The TFSA is the best CRA plan to start with
The simplest CRA program Canadian investors should maximize is the Tax-Free Savings Account (TFSA). All income (interest, dividends, and capital gains) earned in the TFSA is tax-free.
Inside the TFSA, Canadians can invest in everything from stocks to bonds to exchange traded funds (ETFS) to guaranteed investment certificates (GICs).
By paying no tax on your investment income, you can save as much as 10 to 20% of tax on your investment income per year. The more cash you can keep in your TFSA, the more you can compound your investment wealth over time.
The best part about the TFSA is that when you withdraw your cash, there is no tax liability. It is the best way to invest tax-free with very few strings attached.
The RRSP can help you reduce your cash taxes
The Registered Retirement Savings Plan (RRSP) is another avenue to optimize tax savings. It is a tax deferred account.
Like the TFSA, you can invest in a mix of investments completely tax-free. However, that tax is deferred until you withdraw (hopefully in retirement when your tax rate is lower) where the future withdrawal is recognized by CRA as income.
When you contribute cash to your RRSP, you get to deduct the contribution against your income in that year. A large contribution can drastically reduce your tax bill.
Many people use the contribution to get an income tax credit. They then take that credit cash and invest it into other tax-free accounts like the TFSA.
CRA will pay you cash to use the RESP
The Registered Education Savings Plan (RESP) is an account that pays you to use it. It was created to help families prepare for the costs of post-secondary education when their children become adults.
The CRA will pay you 20% on the first $2,5000 contributed annually. Canadians can earn a free grant of up to $500 a year if they contribute the annual maximum amount!
Like the RRSP, the RESP is a tax-deferred account. You don’t pay any tax on your income or gains, but it will be taxable when it is withdrawn (hopefully when your child still has a low tax bracket).
Build wealth by investing tax efficiently and picking smart investments
Canada has plenty of great options for Canadians to optimize their tax. Other than understanding these programs, Canadians need to also plan what investments to make. For many Canadians, buying an index or ETF is a perfectly good passive way to invest.
However, if you enjoy investing in individual stocks, it is best to look for those that can compound returns at high rates for long periods. A stock like Alimentation Couche-Tard (TSX:ATD) is a great example.
Its stock is up 126% (a 17.7 compounded annual growth rate (CAGR)) over the past five years and 500% (a 19.6% CAGR) over the past 10 years. It has become a dominant player in the convenience store and gas station segment with 14,425 sites globally.
Couche-Tard has a great mix of organic and acquisition growth. It just added a major portfolio in Europe. It earns higher margins on food and services, so it is looking to continue expanding that mix. The retail chain has earned a low teens return on invested capital over 10 years.
It plans to double its business over the next five years. For a long-term investment, ATD would be a great stock for any CRA registered plan like the TFSA, RRSP, or RESP.