CRA Money: Do This to Fight Bracket Creep

You can fight bracket creep by making RRSP contributions. You can hold dividend stocks like Brookfield Corp (TSX:BN) tax free in your RRSP.

| More on:

Did you know that the government can raise your tax burden without actually raising your tax rate?

It’s true! Thanks to a phenomenon known as “bracket creep,” your tax bracket can rise while your purchasing power declines. When this happens, it’s effectively like an extra tax, because it causes your taxes to increase as a percentage of your purchasing power, even if they don’t go up as a percentage of your dollar income.

Bracket creep is the most common form of stealth tax in Canada. It has been going on since at least the 1980s, when automatic inflation indexing of tax brackets ended. Canadians’ real tax rates increased as a result of that policy. Since then, there have been measures to return some level of inflation indexing to Canada’s tax code. Generally, Federal tax brackets inch a little higher each year – though not always to the same degree that the Consumer Price Index (CPI) rises.

How to fight bracket creep

When it comes to fighting bracket creep, your options are fairly limited. One option that might make sense for those living in provinces with bracket creep is to move to another province with lower tax rates. Although Alberta has experienced some bracket creep, its tax rates are generally low enough that the average Canadian from a different province would likely pay less tax if he/she moved to Alberta. That’s one option, but it’s pretty drastic.

Another option is to make RRSP contributions. RRSP contributions lower your net income; if you make enough of them, you can push yourself all the way down into a lower tax bracket. The tax savings realized by making RRSP contributions can be substantial. The only catch is that you need to keep the money in the account for many decades in order to withdraw it later at a lower tax rate. RRSPs really are for retirement saving: using them for short-term savings is a bad idea (save rare exceptions like withdrawing under the Home Buyers’ Plan).

What kinds of investments to hold in your RRSP

Once you’ve committed to fighting bracket creep by making RRSP contributions, you need to choose what to invest in. This is a bigger deal than you might think. An economist once did a detailed study of the RRSP and found that the main benefit of the account was not the tax break (which he claimed was no benefit at all), but rather the years of tax free compounding you get. If he’s right about that, then the money you put into an RRSP is worth less than nothing un-invested.

So, you’re going to want to invest your RRSP money. Index funds and GICs are well-established long-term winners that have worked out well for many Canadians. If you’re looking to get a bit more adventurous with your investments, you could consider shares in a diversified conglomerate like Brookfield Corp (TSX:BN). Brookfield has enough different things happening under the hood that it won’t go bankrupt because of a failure in one business unit. The investment manager owns 75% of the world’s biggest alternative asset manager. It owns stakes in various Brookfield partnerships and funds. Finally, it has an insurance subsidiary that is growing at a rapid pace. All these different assets make Brookfield one of Canada’s most diversified financial conglomerates. If individual stocks are what you’re into, you might benefit from taking a look at Brookfield.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has positions in Brookfield. The Motley Fool recommends Brookfield and Brookfield Corporation. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Caution, careful
Dividend Stocks

The CRA is Watching TFSA Holders: Here Are Some Red Flags to Avoid

There are some bad red flags that many investors may be overlooking, but fear not! Here's how to side step…

Read more »

Start line on the highway
Dividend Stocks

Invest $7,000 in This Dividend Stock for $3,727.60 in Passive Income

Dividend stocks are the perfect fit for any TFSA contribution, but after strong earnings, this one should be top of…

Read more »

Hand Protecting Senior Couple
Dividend Stocks

2 High-Yield Dividend Stocks for Canadian Retirees

These top TSX stocks still offer attractive yields.

Read more »

alcohol
Dividend Stocks

How to Earn $2,680 of Annual Passive Income That the CRA Won’t Tax

Trying to boost your annual passive income? Here's one way you could earn $2,680 annually, completely tax-free!

Read more »

monthly desk calendar
Dividend Stocks

Buy 1,970 Shares of This Top Dividend Stock for $252.44/Month in Passive Income

This monthly dividend stock not only provides you with a high yield, but a monthly one!

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

1 Dividend Growth Star Perfect for a TFSA

CN Rail (TSX:CNR) is a fantastic rail play that's looking too cheap to pass up for investors focused on landing…

Read more »

A worker gives a business presentation.
Dividend Stocks

2 Recession-Resistant Stocks to Close Out 2024

Waste Connections and GFL Environmental are two top TSX stocks positioned to deliver market-beating returns to shareholders.

Read more »

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

Top Canadian Stocks to Generate Passive Income in 2025

These top Canadian stocks have a growing earnings base, which will support their high dividend payments in 2025.

Read more »