Canadians should use the benefits of non-refundable tax credits, such as the Basic Personal Amount (BPA), to lower their tax bill each year. The BPA is an annual tax credit where the Canada Revenue Agency (CRA) offers a full deduction for individuals earning below a certain sum.
For instance, in 2023, the BPA amount stood at $15,000 for taxpayers with a net income of less than $165,430. So, a Canadian resident can earn up to $15,000 without having to pay taxes. The BPA is also indexed to inflation and has risen to $15,705 in 2024.
So, if you are filing your taxes for 2023, you can reduce your tax bill by $2,250 (15% of the BPA).
Use the BPA tax break and build a nest egg
Canadians can reduce their annual tax bill by using many other tax breaks and investing the proceeds into inflation-beating instruments such as equities. Historically, equities have outpaced inflation, allowing investors to build long-term wealth.
For instance, after adjusting for dividends, the S&P 500 index has returned 10% annually for more than five decades. A $200 investment each month would be worth more than $$41,000 in 10 years. Your nest egg would balloon to $153,000 in 20 years and more than $455,000 if the investment horizon is extended to 30 years.
Investors can gain exposure to the equity market by holding low-cost index funds. Generally, index funds track a particular index, such as the S&P 500, Nasdaq, or Dow Jones, which results in portfolio diversification.
For example, the top holdings of the S&P 500 index are tech giants such as Microsoft, Apple, Alphabet, Nvidia, and Amazon. In addition to diversification, investors should also note that 90% of large-cap mutual funds fail to beat their respective benchmarks.
Canadians can invest in index funds such as the Vanguard S&P 500 Index ETF to benefit from steady gains. Moreover, the VSP index fund is hedged to the Canadian dollar, shielding you from fluctuations in currency rates.
Invest in quality growth stocks
Investors with a higher risk exposure looking to generate outsized gains can consider holding shares of quality growth stocks such as Snowflake (NYSE: SNOW). Valued at US$76 billion by market cap, Snowflake stock currently trades 41% below all-time highs, allowing you to buy the dip.
It’s essential to look beyond Snowflake’s lofty valuation as the cloud-based data platform has massive upside potential. The company offers Data Cloud, an enterprise-facing platform that consolidates data to drive meaningful business insights.
Despite a challenging macro environment, Snowflake increased its customers by 24% year over year to 8,907, while average spending rose by 35% in the fiscal third quarter of 2024 (ended in October). This allowed Snowflake to increase sales by 32% year over year to US$734 million while adjusted net income more than doubled to US$90 million.
Snowflake’s adjusted earnings per share are forecast to expand to US$1.14 in fiscal 2025, valuing the company at 204 times forward earnings, which is quite steep. But Wall Street expects Snowflake’s earnings to touch $3.2 per share by fiscal 2028, indicating annual growth rates of over 66% between 2023 and 2028.
