Steve McGuinness
Special to Niagara Now/The Lake Report
When we set aside earnings to save or invest, we want to maximize our returns. We must focus on our return after tax. So, let’s focus on the basic tax rules applying to savings and investments.
The first rule of tax-smart investing is to maximize contributions to tax-free or tax-deferred plans. Aside from specific tax plans for home ownership savings, which we earlier explored (reference), there are two main types of tax-advantaged plans Canadians can maintain.
The first and older of the two vehicles is the registered retirement savings plan (or RRSP). Aside from income accumulating on a tax-free basis in an RRSP, contributions to the plan are tax-deductible.
The downside is that all withdrawals (both of original contributions and accumulated income and gains) are fully taxable.
When you contribute to an RRSP in your peak earning years and then withdraw in retirement (when your income will be lower), there will be a reduction in taxes paid, by moving into a lower tax bracket.
Annual limits apply to RRSP contributions. If you don’t contribute the full maximum in a particular year, the unused contribution room isn’t lost.
Instead, it can be carried forward to use in future years. The contribution limit for the year is the lesser of 18 per cent of earned income or a fixed amount, indexed to inflation. The fixed maximum amount for 2025 is $32,490.
The second tax-advantaged savings/investment account is a tax-free savings account (or TSFA).
Unlike with RRSPs, TFSA holders do not receive a tax deduction for the value of contributions. However, neither do they pay any tax on withdrawals.
Similar to RRSPs, income on contributions compounds within the plan free of tax. The current annual contribution limit is $7,000.
If we withdraw amounts, our TFSA contribution room is restored. Our accumulated contribution room is monitored by the financial institution administering our plan.
Several potential plan changes have recently been proposed. Prime Minister Mark Carney’s Liberals promised to decrease the amount older Canadians are required to withdraw from a registered retirement income fund, or RRIF, this year.
A RRIF is a successor plan to an RRSP. Planholders are required to “RRIF” their RRSPs by the end of the year they turn 71.
It makes sense for RRIF planholders to delay receiving the minimum mandatory withdrawal amount from their RRIFs this year, unless urgently needed, pending clarification in the next Budget.
In prior years, there were foreign content caps applying to RRSP investments. Although they’ve been abandoned, Opposition leader Pierre Poilievre has proposed larger annual TFSA contribution maximums (increased by $5,000) for investing in Canadian properties.
However, the appetite for this change within the minority parliament is uncertain.
In 2023, 11.3 million tax filers contributed to an RRSP or a TFSA, with more affluent and older planholders contributing more. But anyone at any age can take advantage, if spending on consumable purchases is controlled.
In a future column, we will explore tax-smart investing outside of registered plans.
In his Bay Street career, Steve McGuinness was a senior advisor to large financial institutions and is now retired in NOTL. Send your personal financial planning questions to him at smcgfinplan@gmail.com.
