Getting Started

The Tax-Free Savings Account (TFSA) label can be somewhat misleading in that this option, or plan, is not restricted to any single type of Investment. You have all of the options Canadians are familiar with for RRSPs (Savings Accounts, GICs, Bonds and Equities) available to you in a Tax Free Savings Account. With the flexibility and tax sheltering features that the TFSA offers, it is the best option for individuals who only have one savings or investment vehicle. With this option, every dollar earned from this investment is kept fully sheltered from taxation. Tax-Free savings Accounts are a relatively new way to earn investment income tax-free. Beginning in 2009, Canadian residents aver 18 are able to contribute into a TFSA that is not subject to taxes an investment income, including interest or capital gains, earned on this type of account Taxes will not be charged on the money withdrawn from this account. However, contributions made to this account will not be tax deductible. There is no lifetime Limit to the TFSA, and if you are unable to make the maximum contribution in a particular year, the unused portion is carried forward and you can use it to contribute in future years. Amounts withdrawn from a TFSA will increase the subsequent calendar year’s contribution limit by the same amount.

A Registered Retirement Savings Plan (RRSP) is an investment account designed primarily for saving toward your retirement years. As a retirement savings vehicle, regulated by the Canadian government, RRSPs have special tax benefits. Your annual RRSP contribution can greatly reduce the amount of income tax you pay in that year and the money you put away can have years of tax-deferred growth potential You only pay tax on the amounts you withdraw. Contributions to an RRSP can only be made by individuals with “earned income” taxable in Canada, which includes salaries, self-employment income, maintenance and alimony payments, and net rental income (but does not include income from pensions or investments). Certain other types of income may be eligible – consult a tax advisor or Canada Revenue Agency (CRA). CRA issues statements to individual taxpayers with their “Notice of Assessment” informing them of their RRSP contribution limit for the following year. It is calculated as 18%, prior gross earned income, less pension adjustments. Each contribution will generate a tax reduction and can be made up to 60 days into the next calendar year.

The more taxable income you have, the higher your tax bracket. You should, therefore, consider allocating future taxable income as evenly as possible between you and your spouse or common-law partner. This is commonly known as “income-splitting”. You are entitled to put all or part of any allowable RRSP contribution into an RRSP in the name of your spouse or common-law partner. Generally, the maximum benefit is achieved by using all the contribution room of the spouse with the higher marginal tax rate first. When you both withdraw your RRSP savings during retirement, the combined income tax you pay as a couple may be lower than what you would pay if all your savings were in a single RRSP. As the contributor to a spousal RRSP, you benefit from the tax deduction while building a retirement nest egg for your spouse or partner. Amounts withdrawn from a spousal RRSP will be considered part of the taxable income of your spouse or partner, to the extent that you have not contributed any amount to a spousal plan in the current year or the two preceding years. A spousal RRSP is most beneficial in a situation where the spouse would otherwise have little retirement income while the contributor would have a significant amount of income. With the introduction of pension splitting, less care in balancing spousal RRSP to pensions is required as some adjustments can be made on each spouse’s tax return when pension and retirement income is received.

High interest savings accounts are ideal for short term holdings such as emergency funds or planned expenditures within twelve months as they are not subject to market fluctuations. These accounts may offer several times the return that is provided on major bank accounts. These accounts may also be used in conjunction with an allocation or reallocation to other investments to take advantage of dollar cost averaging.