Deferred tax

Deferred tax is the arithmetic advantage of postponing a tax payment. Money that would otherwise leave the account as tax compounds inside the account for as long as the deferral holds. The longer the horizon and the higher the return, the larger the gap between deferred and immediately-taxed outcomes.

RRSPs are the canonical Canadian deferral vehicle. Contributions reduce current-year taxable income, the account grows tax-free inside the wrapper, and withdrawals are taxed at the marginal rate in the year they happen. The structure is neutral only if the contribution-year and withdrawal-year marginal rates are identical — a condition most investors' careers violate in one direction or the other.

Deferred tax is not the same as tax-free growth. In a TFSA the tax is permanently avoided; in an RRSP it's delayed and then owed. The distinction matters for income-in-retirement planning because a deferred-tax dollar is not worth as much as a tax-free dollar.