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Personal Investor: Money-saving tax tools for investors

ANALYSIS: Lorn Kutner, a tax partner at Deloitte, estimates a good tax strategy over several years can boost investment returns by as much as 25 per cent.

That seems a little unbelievable at first but if investors use the tools available to them, and reinvest the tax savings, those savings will have a lot of time to flourish.

Like any good construction project, no single tool can do the job alone. The key lies in the ability to use the right tool for the right job, and the right combination of tools.

Here are the tools available to the average investor:

Registered retirement savings plan

· Contributions are deducted from taxable income - the higher the tax bracket, the bigger the tax savings.

· Contributions can be invested in just about anything

· Contributions can grow tax free but those contributions, plus gains, are fully taxed when withdrawn – ideally in retirement. It’s important to know RRSPs that grow too big could result in heavy taxation and even Old Age Security or Guaranteed Income Supplement claw-backs.

Tax-free savings account

· Contributions cannot be deducted from income tax, like the RRSP.

· Like the RRSP, contributions can be invested in just about anything.

· Unlike the RRSP, contributions and gains are never taxed.

· Investors in a low income tax bracket should consider giving first priority to a TFSA over an RRSP and save their RRSP space for higher income years.

· The contribution limit was expanded by $5,500 in 2016 to total $46,500 and is expected to grow in future years.

Investing in a non-registered account

· Investing outside registered accounts like the RRSP or TFSA might make sense even if you haven’t used up all your available space.

· Only half of capital gains from equities such as stocks or equity funds are subject to taxation

· If a stock or equity fund loses money, those capital losses can be used to offset capital gains going back three years or forward indefinitely.

· Also, dividends from eligible stocks can generate a tax credit.

· Since income from fixed-income products like bonds get no special treatment and are fully taxed, experts suggest making them a priority on a registered account.

Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI
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