You may have read our Back to Basics article about RRSP and RESP.  

If you have a question about TFSAs that was not covered off in our FAQs section, don’t hesitate to contact us. 

Who Will Make Best Use of an TFSA? 

Generally speaking, you will benefit from a TFSA if you need a tax-sheltered way to save money for use in the short-term (think of down payment savings in addition to your RRSP Home Buyers Plan, or an emergency / vacation fund), if your working income is the same or lower than you anticipate your retirement income to be, or if your annual savings exceeds your annual RRSP space. 

What It Is and Is Not 

A Tax-Free Savings Account (TFSA) is a registered account structure. This means the Canada Revenue Agency keeps an annual track of contributions and withdrawals.  

A TFSA is not a basic savings account. You have many options within a TFSA structure. 

Similar to an RRSP, think of a TFSA as a shopping basket and the various investment options as different types of groceries. Within your basket, you can add multiple different groceries (investments) to your basket: stocks, bonds, mutual funds, ETFs, GICs, investment savings accounts, etc. Not all investments are TFSA-eligible, but investors can choose between many different options, or a blend thereof, within their specific appetite for risk. 

Dual Canadian/U.S. citizens – note that the IRS doesn’t recognize the TFSA as a tax-sheltered account structure. As such, we generally advise dual citizens against the use of a TFSA, as it adds an element of complexity and cost to U.S. tax returns. 

How Does a TFSA Work? 

• All adult-aged Canadian citizens and residents generate new TFSA contribution space each year.
• For 2020, $6,000 of contribution space was added for all Canadian adults.
  
• There is no tax savings on contributions. You contribute after-tax money.
  
• Like an RRSP, money invested in a TFSA grows tax-free.
  
• Unlike an RRSP or RRIF, money redeemed is not subject to any taxation.
  
• Funds redeemed are added back to your TFSA limit on January 1st of the next year.

Consider Jasmin, 36 years of age. She maximizes her TFSA space annually. She has contributed $69,500 to her TFSA and it has grown to $75,000. In late-November 2020, Jasmin wishes to redeem her entire TFSA to fund the down payment on a home purchase that closes in February of the following year.  

By redeeming the $75,000 in November, the entire $75,000 (not just the original $69,500 she contributed) will re-open on January 1, plus her new TFSA space for that following year. If she waits until mid-January, a bit closer to the home closing date, that $75,000 of space will be locked until the following January 1, and she’ll only be able to maximize the newly generated space. 

Frequently Asked Questions 

Question: I have contributed above my lifetime TFSA limit. What are the consequences and what do I do?
Answer: Unlike with the RRSP, there is no “buffer” over-contribution amount. If you over-contribute, you will have to pay a penalty of 1% per month on any excess. This 1% per month will add up fast, so if you even think you may have over-contributed, you’re better off investigating right away. 

Question: What is the current lifetime TFSA contribution maximum? 
Answer: If you are the age of majority in your province of residence since 2009, have been a Canadian resident the entire time, and have never contributed to a TFSA, your 2020 contribution limit is $69,500. We can help to determine your contribution limit if one or more of these stipulations does not apply to you (for instance: turned 18 in BC in 2014; already have a TFSA and have contributed; lived in Canada for some but not all years since 2009). 

Question: What happens to my TFSA space if I don’t use it? Do I lose this space?
Answer: No. Any contribution space that you do not use is carried forward indefinitely. 

Question: How much tax do I pay when I take money from my TFSA?
Answer: You don’t pay any tax on redemptions, or on any other aspect of the TFSA. 

Question: What about the growth in the TFSA. Surely I must have to pay some kind of tax?
Answer: No. This is truly about as straightforward as it gets. Growth is entirely tax-free. There are some exceptions to this rule but generally the exceptions apply to “professional investors”.  

Question: How many TFSAs can I have?
Answer: You can have as many accounts as you want, provided your aggregate contributions do not exceed your lifetime TFSA contribution limit. 

Question: How do I find my TFSA Contribution Limit?
Answer: You can get your “as of January 1st” TFSA space via the CRA website, but the CRA tabulates contributions for a given year once all financial institutions have uploaded contribution and withdrawal data. This means the CRA website can inaccurately reflect your true space in early months of a calendar year. 

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Here are the key facts:

• Annual maximum contribution: $2,500 (or $5,000 if you have carry-forward room) per child
• Matching annual grant: 20%, or $500, if you make a $2,500 contribution
• Maximum lifetime grant: $7,200 per child (would require $36,000 in contributions)
• Maximum lifetime contributions: $50,000 per child
• BC Training and Education Savings Grant: One-time $1,200 government grant (no contribution required) for BC children between ages 6-9
• Tax-Sheltered Growth
• Same investment options as an RRSP or TFSA
• Account can stay open for 35 years from the date it was opened
• Funds can be accessed when child attends post-secondary. If child never attends post-secondary, the grant will have to be repaid. The growth can be rolled over to RRSP (room permitting). The contributions can be fully refunded
• Definition of post-secondary enrolment is flexible (university, college, technical school, community colleges, trade schools…)
• Withdrawals require proof of enrolment, but you do not need to justify what the funds will be used for
• Any withdrawals are taxed in the hands of the child. Only grant / investment growth is taxed. Contributions are not taxed

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Who Will Make Best Use of an RRSP?

You will benefit from an RRSP if you are working and your income is greater than your anticipated retirement income will be, you want to save money for retirement, you want your savings to grow in a tax-sheltered manner, and you will not need this money until retirement.

How Does an RRSP Work?

• RRSP contributions made from March 2nd of the current calendar year through March 1st of the following calendar year will count toward your tax return for the current calendar year. For your 2018 Tax Return, your contributions made from March 2, 2018 through March 1, 2019 can be deducted.

• Generating RRSP Space: individuals who live in Canada and derive earned income will generate RRSP space. The calculation is 18% of earned income to a maximum of $26,500 for 2019. The annual earned income required to maximize the annual RRSP generation is about $147,250.

• Generating Tax Saving: you receive a tax saving on RRSP contributions equivalent to your marginal tax rate. Let’s use the example of Suzie, an executive at Wonderful Foods Inc. Suzie makes $100,000 per year. Based on this income, her 2018 combined BC + Federal marginal tax rate is 38.29%.
  Suzie receives a bonus in cash and decides to contribute $5,000 of it to her RRSP. She will therefore generate a tax saving of $5,000 x 38.29% = $1,914.50. If we assume Suzie’s employer withholds tax such that she has a tax refund/balance due of exactly $0, then this $5,000 contribution will give Suzie a refund of $1,914.50. It is important to remember that “tax saving” isn’t necessarily the equivalent of “tax refund”.

• Carry Over Unused RRSP Contributions: You can carry over your RRSP contributions if you want. This is helpful if you want to contribute now, but you know that in the next few years, your marginal tax rate will be higher.

• Tax-Sheltered Growth While Invested: Anyone who has invested in a non-registered account must declare any capital gains, dividends or distributions, and interest earned on their investments. Not so in the RRSP. While money is invested within the RRSP, growth of any sort is sheltered from taxation.

• Equalize Retirement Basket (with a Spousal RSP): Consider the case of Suzie and her husband, Ralph. Suzie earns $100,000 per year but Ralph stays at home taking care of the children. Thus, if Suzie contributes only to her RRSP, then there will be a sizeable retirement income disparity. This disparity can be dealt with ahead of time by utilizing the Spousal RSP. In this example, the SRSP is in Ralph’s name (so at retirement, Ralph claims the income) but contributions use Suzie’s RRSP space. This makes sense because Suzie is in a high marginal tax bracket compared to Ralph, so there is a sizable tax savings in the present, and income sharing lowers the overall tax paid in retirement.

• Defer Tax until Retirement: In theory, your working-age income (and resulting tax rate) will be higher at retirement. Ramin makes $175,000 per year, so his marginal tax rate is 45.80%. He contributes $20,000 per year to his RRSP and realizes a tax saving of (45.80% x $20,000) $9,160. In retirement, Ramin converts his RRSP to a Retirement Income Fund (RRIF) and withdraws $10,000 from the RRIF. His total income at retirement is $75,000 per year. At $75,000 per year, Ramin’s RRIF withdrawals are taxed at 28.20%. By deferring his income via RRSP, Ramin has effectively saved 17.60% in tax upon redeeming, or $176 per $1,000 redeemed in this example.

Frequently Asked Questions

Question: How do I find my RRSP Deduction Limit?
Answer: You can find your new RRSP limit on your Notice of Assessment.

Question: What happens to my RRSP space if I don’t use it? Do I lose this space?
Answer: No. Any contribution space that you do not use in a given year will be carried forward indefinitely.

Question: What happens to my RRSP space if I don’t use it? Do I lose this space?
Answer: No. Any contribution space that you do not use in a given year will be carried forward indefinitely.

Question: I have a workplace/group RRSP, how is this treated at tax time?
Answer: An important benefit of a workplace RRSP is that you receive the tax saving at the time of the contribution. Your employer will take gross income and contribute it to your work/group RRSP. In addition, most (but not all) work/group RRSPs will contain an employer matching component. For this reason, it is almost always advisable to maximize any workplace RRSP prior to contributing to an external RRSP.

Question: What if my working income is the same as, or lower-than, my RRSP income?
Answer: If this is the case, and you don’t foresee a situation where your working income will ever exceed your retirement income, you may not derive a meaningful tax saving in the present, but redemptions at retirement still count as income. The TFSA may end up being best for you. We can assist you in determining what makes the most sense given your specifics.
However, if you feel that over time, your working income will increase and there will be a subsequent tax advantage versus your projected retirement income, you can always contribute to your RRSP and carry over your contributions until your income and marginal tax rate have increased.

Question: I’d like to save up to buy a house, so I need my savings prior to retirement. I suppose I should just contribute to my TFSA then, right?
Answer: Not necessarily. There is a provision called the Home Buyers Plan (HBP), which allows you to withdraw up to $25,000 for use toward the down payment on your first home. Think of this as an interest-free loan to yourself. Of course, the loan must be repaid to your RRSP over time. You have a 2-year grace period, at which point you must repay a minimum of 1/15^th of the balance withdrawn per year, over 15 years.
Consider Suzie from our previous example. Suzie withdrew $15,000 via HBP to fund a portion of her down payment. After her 2-year grace period, Suzie will have to repay her RRSP $1,000 per year for the next 15 years.

Question: Is there a provision for people returning to school?
Answer: There is! The provision is called the Lifelong Learning Plan (LLP). You can redeem up to $10,000 in a calendar year, and up to $20,000 in aggregate, to help fund your continued education. Repaying the LLP is similar to the HBP, but you have to repay 1/10^th per year over 10 years.

Question: I have over-contributed above my RRSP limit. What are the consequences and what do I do?
Answer: Every person has a cumulative “buffer” amount of RRSP space. This amount is $2,000. So, over-contributions less than $2,000 don’t require any action. If you have contributed in excess of this $2,000 buffer amount, you will have to pay a penalty of 1% per month on any excess above the $2,000 buffer. This 1% per month will add up fast, so if you even think you may have over-contributed, you’re better off investigating right away.

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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