Deferred taxes are current tax payments that you push into the future, often via an investment or retirement account. Like deferred expenses, tax deferrals in Canada have two primary advantages:
- Due to inflation, a dollar today is worth more than a dollar tomorrow, so it’s better to pay in the future.
- Instead of being controlled by the Canada Revenue Agency, tax deferral gives you control over when you pay your taxes.
In addition to other investment income strategies, most Canadians use registered retirement savings plans and registered education savings plans as avenues of tax deferral. Money in RRSPs and RESPs grows tax-free, and it doesn’t get taxed until the student withdraws from the RESP or the retiree receives payments from the RRSP.