Canadians understand the need for the government to collect taxes to fund basic and essential services. However, nobody enjoys paying taxes, especially when income is growing. Fortunately, there are ways to minimize tax bills in a progressive tax system.
Smart investors turn to two investment accounts and integrate them into their tax strategies. But before resorting to these tax hacks, taxpayers shouldn’t miss out on refundable and non-refundable tax credits.
Refundable and non-refundable tax credits
The refundable tax credit includes the GST/HST tax credit (a quarterly payment to offset everyday purchases of tax filers over 19 years old) and the Canada Child Benefit (the most relevant tax credit for parents with children under 18).
The Basic Personal Amount (BPA) is the non-refundable tax credit available to all taxpayers. For 2024, you can deduct the maximum BPA of $15,705 from your taxable income.
Other non-taxable tax credits in this group are Disability (for people with disabilities or supporting a disabled person), Charitable (15% on the first $200 and 29% on the following contributions up to 75% of net income), and Medical Expenses (of a taxpayer, spouse or dependent child under 18 not covered or reimbursed by an insurance plan, up to $2,635 or 3% of net income whichever is lower).
Tax deduction
Utilizing the Registered Retirement Savings Plan (RRSP) is a good part of tax planning. RRSP contributions are tax-exempt and the Canada Revenue Agency (CRA) will deduct taxes you paid from your tax bill. The contribution limit for 2024 is $31,560 or 18% of earned income in 2023, whichever is lower.
However, RRSP users should be aware of the contribution deadline, which is 60 days after the end of the taxation year. The RRSP offers tax shelter, but only contributions made before the deadline will qualify as tax deductions.
Money growth is tax-free in an RRSP, although all withdrawals are taxable. Account users take advantage of the tax shelter by holding dividend stocks like Emera (TSX: EMA). At 46.71 per share, the utility stock pays a 6.14% dividend. A $31,015.44 investment (664 shares) will generate $476.08 quarterly. If you reinvest the dividends every time, your RRSP balance will balloon to $75,816.58 in 15 years.
Emera is ideal for risk-averse investors because its electric and gas utility assets are regulated. In addition to its 16-year dividend-growth streak, the $13.37 billion company targets a 4-5% annual dividend increase through 2026.
Tax-friendly
If the RRSP is a tax shelter, the Tax-Free Savings Account (TFSA) is tax-advantaged. All earnings, interest, and gains in the account are tax-free, not to mention withdrawals. The $7,000 contribution limit in 2024 can purchase 904 shares ($7.74 per share) of Doman Building Materials (TSX: DBM).
The $674.5 million company pays a hefty 7.24% dividend. Your investment will produce $226.10 in tax-free quarterly passive income and can offset your tax liabilities in a year. Doman distributes building materials and home renovation products in North America.
In Q4 2023, net earnings jumped 142.9% year over year to $10.5 million. Despite lower construction materials pricing, management expects to maintain solid footing in 2024.
Lighten your tax burden
Intelligent investors can lighten their tax burdens by using their RRSP and TFSA. If finances allow, buy and hold dividend stocks in one or both every year.
