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Keep more to grow more

One of the best ways to maximize your savings is to take advantage of tax-sheltered plans.

If you held an investment outside of a tax-deferred plan, you are required to report the following income on your Canadian income tax return:

  • Distributions in the form of interest, dividends or capital gains paid to you by any fund, including those reinvested

  • Gains (or losses) realized when selling or redeeming units or shares of your fund (except conversions of different series of the same Class or reclassifications of different series of the same Fund or Portfolio)

On the other hand, distributions on funds held in a tax-sheltered plan – such as a Registered Retirement Savings Plan (RRSP), a Registered Retirement Income Fund (RRIF), a Registered Education Savings Plan (RESP), or a Tax Free Savings Account (TFSA) – do not need to be reported as taxable income as they are automatically reinvested in registered plans. Taxes are reported and owed only when money is taken out of the registered plan (the exception being a TFSA).

For example, let’s say you decide to set aside $500 a month. Maybe you want to save for a dream vacation. Or a new car. Or to renovate your kitchen.

Does it really make a difference if you put the money into a tax-sheltered plan, such as a TFSA, which can be used for any financial goal?

The chart below shows:

  • the same amount of money ($500/month) being invested in the same product (a hypothetical investment with a 5% annual return)

  • the only difference – Investor A chose a TFSA account, while Investor B chose a non-registered account

After one year, the amount may not seem significant but it makes a big difference over a longer time period.


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