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What Is a Deferred Tax?

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:

  1. Due to inflation, a dollar today is worth more than a dollar tomorrow, so it’s better to pay in the future.
  2. 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.

RRSP and RESP Tax Deferral Strategies

Under RRSP rules, small business owners can contribute up to 18% of their employment income annually, within the annual contributions cap. For 2018, the cap on contributions is $26,230 and for 2019, it’s $26,500. Maximizing your contributions each year means deferring tax payments until your retirement years when you’re likely to have less annual income. If you’re still building your business and can’t max out your contributions, the carry-forward rules let you apply the amounts you don’t use to future years.

Generally, small business owners who make contributions to RESPs pay no taxes on that income as long as the income remains in the RESP. Any RESP contribution students don’t use can be returned tax-free to the contributor.

You work hard to build your business and support yourself and your family. Deferred taxation strategies help you enjoy more benefits of your labour. QuickBooks Online can help you maximize your tax deductions so you can keep more of what you earn today.

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