Saving for the Future
37 Personal Savings
Anne Lee
Tax-Advantaged Accounts
With regular investment accounts (brokerage accounts), Canada Revenue Agency would tax investors as described above. There are a number of Tax-Advantaged accounts that Canadian tax residents may benefit from. These accounts have significant advantages in that the earnings in the account usually grow tax-free, individuals are able to defer taxes, and some allow one to also reduce the tax liability starting in the year of contribution.
Understanding the common tax-advantage accounts and its benefits will allow individuals to really build up their wealth at a much faster pace on the road towards financial freedom.
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan is an account in which you, your spouse or common-law partner can contribute to. These RRSP contributions made can be used to reduce the amount that is subject to tax, to arrive at a lower taxable income amount.
Example: RRSP Contribution Room
Mark has reviewed the last Notice of Assessment filed on the Income Tax and Benefit Return (T1), confirming that there is available contribution room limit for 2023 of $30,000. Mark has never contributed to a RRSP account before. Mark has available funds of $10,000 savings this year, and makes a contribution to the RRSP account on February 15, 2024.
| Timeline | Amount | Tax-Effect |
| Mark reviews RRSP Deduction Limit Statement on Notice of Assessment | $30,000 for 2023 tax year | Non-taxable event |
| Mark makes a contribution to RRSP account up to 60 days of following calendar year | $10,000 | RRSP tax slip issued to Mark by March 31, 2024 |
| Mark files T1 Tax Return | $10,000 | Deduction of $10,000 can be taken to reduce taxable income and tax liability for 2023 taxation year. |
| RRSP account investments grow to $17,000 | $17,000 total account value ($7,000 income earned) | Non-taxable event |
| Mark withdrawals $17,000 from RRSP account in retirement | $17,000 | Taxable event. All withdrawals from RRSP account are taxable in year of withdrawal unless under approved plan (eg. Lifelong Learning Plan (LLP), Home Buyers’ Plan (HBP)) |
| Alternative: Mark turns Age 71 and RRSP account mandatory turns into RRIF (Registered Retirement Income Fund) | Transfer of RRSP to RRIF not taxable event. However, RRIF has mandatory minimum withdrawal amounts each year that will be taken into taxable income. |
Tax Tip: Delaying RRSP deduction
When a RRSP contribution is made for a taxation year, a full deduction is available on the tax return to reduce taxable income, in turn reducing the tax liability for the year. Even though an individual makes a RRSP contribution, it is not required to take the deduction in the same year. Individuals, such as trade apprentices, may only be employed for part of the year or have significant tuition tax credits, may have a lower taxable income in the year that a RRSP contribution is made. If a trade apprentice estimates that a future taxation year will be at a much higher marginal tax rate, then a RRSP deduction can be taken on the next tax return making the tax benefit higher.
Example
Evelyn is a metal fabricator trade apprentice, and only worked half the year due to attending the last 2 technical block training semesters of the program. For the 2023 taxation year, Evelyn made a RRSP contribution of $5,000 to the RRSP account. Evelyn estimates the marginal tax rate is 20% for the 2023 tax year based on the Federal and Provincial tax brackets. For the next calendar year 2024, Evelyn will have a significant raise in her annual salary as Evelyn will have the Red Seal Endorsement in the trade. Also, the employer provides a signing bonus once she starts working full-time as a journeyperson. Thus, Evelyn will probably have a marginal tax rate of 42% in the following 2024 taxation year.
- 2023 Deduction: $5,000 Reduction to Tax Liability: $1,000 ($5,000 x 20%)
- 2024 Deduction: $5,000 Reduction to Tax Liability: $2,100 ($5,000 x 42%)
Evelyn is able to take the $5,000 RRSP deduction in either 2023 or 2024 future taxation years. The RRSP tax deduction will be more advantageous being taken later when Evelyn has more taxable income. However, not taking the RRSP deduction in the current year means that there will be an increased $1,000 tax liability now and would want to factor the time value of money (eg. inflationary costs).
Tax-Free Savings Account (TFSA)
A Tax-Free Savings Account is a program for individuals 18 years and older with a valid social insurance number (SIN) to set money aside tax-free throughout their lifetime. The TFSA account is one of the most tax beneficial accounts in Canada, as contributions to a TFSA as well as any income earned in the account is generally fully tax-free even when withdrawn. However, contributions to a TFSA are not deductible for income tax purposes. The government sets the annual limit that an individual can contribute to the TFSA each year. Any available contribution limits that did not previously have contributions accumulate each year increasing the available limit.
Example: TFSA Account
Tom turns 19 during the 2024 calendar year and is a Canadian tax resident. Tom has not previously made a contribution to the TFSA account. The TFSA contribution limit for 2024 is $7,000 and for 2023 was $6,500. Tom makes a contribution of $10,000 to the TFSA during 2024.
| Timeline | Amount | Tax-Effect |
| Tom turns 19 years of age in 2024 | 2023 – $6,500
2024 – $7,000 |
Non-taxable event. Tom can contribute up to $13,500 to TFSA in 2024. |
| Tom contributes to TFSA | $10,000 | Non-taxable event. No deduction available on tax return. |
| TFSA account investments grows to $12,000 | $12,000 total account value ($2,000 income earned) | Non-taxable event |
| Tom withdrawals $12,000 from TFSA account in 2026 | $12,000 | Non-taxable event |
TFSA Contribution Room Calculator
Tax Tip: TFSA Recontribution Timing
If an individual makes a withdrawal from the TFSA during 2024 without any further contribution limit remaining, the taxpayer would need to wait till the following calendar year January 1st to contribute the withdrawn amount.
Example
George has made full contributions to the TFSA account each year. The balance accumulated into the TFSA account including earnings is $15,000. George has made a withdrawal of the full $15,000 on July 1, 2024. George must wait until January 1, 2025 to re-deposit any funds back into the TFSA account without an over contribution penalty.
Registered Education Savings Plan (RESP)
This registered account is designed to assist people to save for a child or grandchild’s educational future. Contributions made to the account, both from the subscriber and added grants from the government, can grow tax-free within the RESP. There is no annual contribution limit for each beneficiary (child), but a total of $50,000 can be contributed in a lifetime. Funds from an RESP can pay the costs of full-time and part-time education programs including universities, college, trade school, and apprenticeship programs.
Example: RESP
Susan has been contributing to a Registered Education Savings Plan for child beneficiary Aaron, $2,500 for the last 10 years. The federal and provincial government has provided the RESP with $1,000 of additional grants each year a contribution was made. Aaron is now 20 years old, and wants to attend a full-time foundation program in sheet metal worker at an accredited post-secondary institution. The RESP account has grown to $42,500.
| Timeline | Amount | Tax-Effect |
| Susan makes contributions | $25,000 ($2,500 x 10 years) | RESP contributions are not deductible in the year of contribution. There has been no over contribution into the account. |
| Government provides grants | $10,000 ($1,000 x 10 years) | Non-taxable event |
| RESP account earns income | $7,500 ($42.5k – $25k – $10k) | Non-taxable event, tax-free growth |
| RESP withdrawal contribution amount for Aaron to attend post-secondary school | $25,000 | Non-taxable event, withdrawal of original contributions |
| RESP withdrawal government grants and earned income for Aaron to attend post-secondary school | $17,500 | Taxable event to Aaron. Aaron to receive T4A tax slip and report income on Line 13000 of Individual Tax Return |
First-Home Savings Account (FHSA)
The Canadian government has introduced the new First-Home Savings Account (FHSA) in 2023. The FHSA is a registered plan that allows for first-time home buyers to save for their first home tax-free.
The FHSA participation room in the year that an individual initially opens the FHSA is $8,000. The lifetime contribution limit in the FHSA account is $40,000.
| Timeline | Amount | Tax-Effect |
| Susan makes contributions | $25,000 ($2,500 x 10 years) | RESP contributions are not deductible in the year of contribution. There has been no over contribution into the account. |
| Government provides grants | $10,000 ($1,000 x 10 years) | Non-taxable event |
| RESP account earns income | $7,500 ($42.5k – $25k – $10k) | Non-taxable event, tax-free growth |
| RESP withdrawal contribution amount for Aaron to attend post-secondary school | $25,000 | Non-taxable event, withdrawal of original contributions |
| RESP withdrawal government grants and earned income | $17,500 | Taxable event to Aaron. Aaron to receive T4A and report income on Line 13000 of Individual Tax Return |
Tax Tip: Order of Tax-Advantaged Accounts
If deciding which tax-advantaged account to contribute savings to in a given taxation year, it is recommended to review the individual’s tax situation including estimated taxable income, carry forward tax credits available, and the effective tax rate / marginal tax rate. Having an increased understanding of these tax-advantaged accounts will allow one to decide which may the most beneficial account to contribute to.
Summary of Tax-Advantaged Accounts
| Tax-Advantaged Account | Deduction available to Reduce Total Income upon Contribution | Taxable upon Withdrawal | Annual Contribution Limit |
| RRSP | Yes | Yes | 18% of previous years earned income up to fixed annual contribution limit. 2024 limit $31,560. |
| TFSA | No | No | 2024 annual limit $7,000. Individual must be 18 or older. |
| RESP | No | Contributions – No
Education Assistance Payment (EAP) – Yes |
No annual limit. $50,000 lifetime limit for a beneficiary. |
| FHSA | Yes | Yes | First year of account opening $8,000; $40,000 lifetime limit |
Tax Tip: Intended Purpose of Tax-Advantaged Accounts
It is recommended to utilize each of the tax-advantaged accounts for its intended purpose, and to keep investment and tax affairs as simple as possible. There are some Canadians who open additional TFSA accounts and utilize it as a means of a chequing account to track unrelated items such as property tax payments. An individual can participate in more than one type of tax-advantaged account by opening an additional tax-advantaged account of the same type, very easily with a different financial institution. Having multiple RRSP accounts or TFSA accounts require reconciliation of all the accounts with the records of CRA each year. There is risk that one would make an over contribution during the same taxation year. The penalties for over contribution are 1% of the excess balance per month plus interest. This can significantly add up as it isn’t until at least 1 taxation year later that CRA reviews and assesses the over contribution. Having one account for each type of tax-advantaged account is sufficient for most Canadian tax residents.
An example for this would be deciding if a taxpayer wants to make a Registered Retirement Savings Plan deduction in the current taxation year. This example will be discussed further in Chapter 7 – Saving for the Future.
Taxable Accounts
Non-registered account (referred also as taxable accounts) allows individuals to make investments in a variety of assets and then earn income that will be taxed according to the Canadian Income Tax Act. It is often a myth that the ‘better’ tax rules only apply to the ‘rich’ in Canada. The tax rules are outlined to promote equity and fairness. Overall, the tax rules implemented through the Canadian Income Tax Act would apply to all Canadian tax resident individuals. Thus, how one is taxed on certain types of income should be available with similar methodology to all Canadians.
The methodology of how interest, dividends, and capital gains are taxed in Canada will be discussed further in Chapter 8 – Investment Basics. These are popular earnings made for investment accounts, and would net very different after-tax amounts.
