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Tax-Efficient Investing Strategies

Most people think investing is all about choosing the right stocks or bonds. In reality, a big part of investing wisely also has to do with minimizing taxes on your returns. By embracing tax-efficient investing savvy investors can effectively reduce tax obligations and optimize their after-tax gains.

There are three categories of tax-efficient investing strategies you should know: Tax Deferral, Tax Reduction, and Tax Avoidance. 

1. Tax Deferral Strategies

Tax deferral strategies allow you to defer recognizing certain taxable gains until a future date, so you can grow your returns without immediately experiencing the tax impact. Examples of tax deferral strategies can include: 

  • Limiting Portfolio Turnover: In a progressive tax system like Canada’s, where investors’ tax rate increases with income, some investors prefer to delay stock sales to defer the realization of capital gains until their retirement or a future date, when they expect their marginal tax rate to be lower than it is currently.
  • Tax-Deferred Accounts: Investing in tax-deferred accounts like Canada’s RRSP that permits earnings to accumulate tax-free, but requires taxes be paid when assets are withdrawn from the account. Households with different levels of income might want to consider income splitting using a Spousal RRSP.
  • Tax Loss Harvesting: This involves selling securities at a loss to offset taxable gains. You must follow strict rules when implementing this strategy, such as avoiding the purchase of an identical security within 30  calendar days before or after the sale of the asset.

2. Tax Avoidance

Another tax-efficient investing strategy is called tax avoidance.  This strategy allows you to structure your investments legitimately to eliminate the effect of taxes. Tax avoidance should not be confused with tax evasion, which is illegal! So what is an example of a legal form of tax avoidance? 

  • Tax-exempt accounts, or holding assets in a tax-exempt account versus a taxable account, such as a TFSA, is a legal way to avoid paying taxes on investments. There are no taxes on interest income, Canadian dividend income, or capital gains earned in a TFSA. And, unlike an RRSP, you don’t have to pay tax when you withdraw from a TFSA. 

3. Tax Reduction

Finally, there are tax reduction strategies, these strategies aim to reduce the effect of taxes on your investments. Here are some examples. 

  • Strategic Asset Allocation: This strategy limits your exposure to asset classes with less favorable tax characteristics while increasing your exposure to more tax-efficient asset classes. For example, in Canada, assets that produce capital gains are generally considered more tax efficient because only half of the net capital gains are included in taxable income and are taxed at your marginal tax rate.
  • Account Selection: As a general rule, investments that are subject to the highest tax rates should be held in registered accounts that are tax-exempt or tax-deferred, such as a TFSA or RRSP. On the other hand, assets that are eligible for lower tax rates should be allocated to taxable accounts. For Canadian investors, holding equity investments like Canadian dividend-paying stocks in taxable accounts can leverage the preferential tax treatment of capital gains and dividends. Meanwhile, investments generating fully taxable income, such as bonds and Treasury Bills, are best positioned within registered accounts to defer or eliminate taxes. 

Various forms of investment income, including capital gains, interest income, and dividend income, are subject to different tax treatments. These rules vary depending on whether the income stems from Canadian or foreign assets, and the type of account in which they are held. 

It’s crucial to recognize that optimizing your portfolio after taxes should be based on your unique financial circumstances, investment objectives, and time horizon. By understanding the tax implications associated with your investments, you can develop a strategy aimed at preserving as much of your gains as possible.


  • Caroline Maughan
    Caroline began her professional career in 2018, working as an analyst in the wealth management industry. She holds a Bachelor of Commerce in finance from Concordia University and is a CFA charterholder since 2023. Caroline joined the Claret team at the end of 2022 as an Associate Portfolio Manager and has since moved into the role of Portfolio Manager.

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