When you can defer tax, it’s often seen as a worthwhile opportunity, simply because you’d rather pay tax later than now. But there’s a lot more to it – you can benefit in three ways.

First, by putting off paying taxes, you keep more of your money to cover your cost of living today. Second, you can pay less tax if you have a lower marginal tax rate when the tax is payable in the future. Third, if you defer tax on mutual fund investments, you increase your funds’ potential to grow and compound.

Here are some situations where one or more of these benefits apply.

Saving for retirement

A Registered Retirement Savings Plan (RRSP) provides all three benefits. You have more funds to meet your current needs thanks to the tax deduction, received in exchange for deferring tax. Your mutual fund investments have greater growth potential thanks to the plan’s tax-deferred environment. Also, if you had taken your contribution amounts as income, those funds would be taxed at your marginal rate, but those amounts in your RRSP may be taxed at a lower rate when eventually withdrawn.

Drawing income

When it comes to drawing retirement income, some retirees include mutual funds that provide a non-taxable return of capital in their distributions. In this case, the tax on capital gains is deferred, either payable on future distributions or when the investment is sold. In the meantime, you receive more funds to support your retirement. If you’re in a lower tax bracket in the future, you may also pay less tax when it’s payable.

Leaving assets to your spouse

When you pass away, your estate may face a significant tax bill on investments and property. But you can leave these assets to your spouse, which defers the tax. Your spouse has more assets to support their retirement, and the assets can continue to grow on a tax-deferred basis.