Strategies for Deferring Taxable Income: Maximizing Your Financial Growth

Let's talk about deferring taxable income and how we can actually approach this for you, for your family, for your business and what options we have. So deferring income, let's talk about that for a minute. So what that means is that we are looking at income that has to be taxable at some point in your life. How do we push that out to a later date? Why would we want to do that? Well, the time value of money suggests that if we can avoid paying tax now, we can use that money to, to invest, to build wealth and then pay the tax related to it at a later date. So here's some of the options we have, and I'm going to focus specifically on business owners because really, that's who I continue to work with on a regular basis. So for business owners, how can we defer income? And let's talk about the personal income side for a moment. So if you're on a salary or a dividend, it doesn't really matter what compensation model you choose. When we're talking about deferring income, there's a few options for you. The first one, if you're Canadian, is an RRSP registered retirement Savings plan contribution that you can make that. What, what happens is. So if you make a $10,000 RRSP contribution, it drops your income by that $10,000. So what happens is you save the tax on that $10,000 of income now, and when you eventually pull that RRSP investment amount out and you use it personally, probably later on in retirement, you're going to pay tax on it then. So the advantage of this would be we get a large deduction now, maybe your income is higher now, and then we pay tax on it at a later date. Now, there's a lot of complexities that come into RRSPs, including selecting one investment that looks like obviously the assumption that our RRSPs are going to continue to grow in the future. But that's something we have to consider with our wealth advisor and with the accountant in the long run. The other component that we want to talk about as a Canadian corporation is to make sure that we focus on leaving as much money inside the corporation as we possibly can. The more money we pull out personally means that we're going to have more salary income, we're going to have more dividend income, where leaving that money inside the corporation and investing it inside the corporation instead of personally is going to have a huge deferral benefit to you. In fact, we can actually walk through an example. So if you were to have $10,000. And you want to take that out of the corporation and invest it personally. Let's avoid an RSP for a moment. But you want to pull that out, you're likely going to end up with around $6,000 left, right. We're going to pay dividend tax on that at about 40%. We're going to be left with $6,000. Instead, we leave that money inside the corporation or we avoid that $4,000 of tax. We invest that full $10,000 upfront. Which one's going to grow faster? The $10,000 in the corporation or the $6,000 personally? The $10,000. Right. Even with a lower rate of return, we would still be able to kick the butt of any personal investment. So keeping that in mind, leave your money in the company, build your investments inside your corporation. We want to be cautious though, that we don't want to build too much inside an operating company. We might have to set up a second company. If this is you and you're starting to accumulate great cash and you don't want to pull it out because you're trying to avoid the tax, reach out to us. We got some tax planning work we have to do. But the long term will pay 10x over getting this set up for you. In the United States, Instead of an RSP, you guys have a 401k, same situation. We essentially have income. If we make a 401k contribution, it will drop our income again, taxable at a later date. Depending upon the corporate structure that you have or the entity that you have. In the United States, if you have a C corporation, you're paying corporate tax. You can leave funds inside the corporation. The same way that I talked about the Canadian structure. If you have an LLC in the United States, it's essentially a flow through entity that we pay tax personally on it. An LLC is not going to allow you to defer the tax on that. Unless we elect to be an S corporation and pay taxes an S corporation. There's definitely some opportunities in there for deferral. We just need to know what we have available to us. Ultimately when we talk about deferred income, we just want to make sure that when we're building our income up that there's opportunities to deduct it. There's opportunities to avoid getting that as taxable income altogether. Another quick option for you when you're looking at investments. If you're looking at investments that you want to accumulate value, look at ones that are just going to grow in value versus pay a dividend. If an investment that you have is paying dividends on a regular basis, then you're going to be paying tax on that in the short term versus if you buy a stock, let's say Tesla, for example, it goes from $100 to $150. There's no tax on that until you sell it. So you can continue to reinvest that growth on a tax deferred basis until you eventually sell that stock. If you want to learn more about different deferral opportunities, it's a great opportunity to jump in one with someone from our tax team, and they can help you create a personalized plan.