Tax-free compounding: A risk-free way to boost investment returns

Unlike most investment strategies, an effective tax strategy generates risk-free returns by utilizing and coordinating the tax tools available to average Canadians.

If you are one of the millions of Canadians patting themselves on the back for meeting the March 1 registered retirement savings plan (RRSP) contribution deadline: congratulations. 

You will likely be rewarded with a cash refund after the May 2 deadline to file your income tax. 

But before you book that vacation getaway, there’s a compelling case for using it as a down payment on a long-term tax strategy that could generate thousands of dollars through what tax experts term “tax-free compounding.” In other words, tax savings can be used to generate further tax savings, which can continue to compound in investments over time.   

Unlike most investment strategies, an effective tax strategy generates risk-free returns by utilizing and co-ordinating the tax tools available to average Canadians. 

A qualified tax professional can provide a tailor-made strategy for your specific financial circumstances. Here are some basic steps to get started.

The RRSP is a great retirement savings tool because contributions can be deducted from your income. The biggest savings come to those with big incomes who would normally be taxed at a high marginal rate. As an example; if your top rate is forty per cent, your refund will be about forty per cent of your contribution.