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Tax-advantaged investing

As Canadians, we are fortunate that our government offers tax-sheltered savings plans that offer significant tax savings and the opportunity to create greater long-term wealth. Below is a list.

Registered retirement savings plan (RRSP)

An RRSP is a type of investment account – registered with the federal government – that is designed to help Canadians save for retirement. Your RRSP contributions, which are subject to a specified annual limit, are deducted from your income for tax purposes; this lowers the amount of tax you have to pay.

In addition, the income you earn in the RRSP is typically deferred from tax as long as the funds remain in the plan. You will have to pay tax once you eventually withdraw your funds (unless you are temporarily withdrawing funds to buy/build a qualified home or for continuing education/retraining). However, chances are you will be in a lower tax bracket during retirement, which would mean a lower tax hit when you withdraw your funds at that time.

Spousal RRSP

Spousal RRSPs allow one spouse to contribute to an RRSP for the other spouse. Typically, the spouse who contributes to the RRSP is the one with the higher income, making spousal RRSPs one of the best income-splitting vehicles available to Canadians.

The higher-earning individual – the contributing spouse – typically claims the tax deduction. However, when it comes time to withdraw the funds from the spousal RRSP, the money is taxed in the hands of the lower-earning spouse, who is likely in a lower tax bracket.

Tax-free savings account (TFSA)

Like RRSPs, TFSAs offer tax advantages and can hold similar investments such as cash, mutual funds, stocks and bonds. However, unlike an RRSP, you can withdraw funds from a TFSA at any time and for any purpose, with no tax penalty. Keep in mind that unlike an RRSP, TFSA contributions are not deductible, so they don’t reduce your income for tax purposes.

Registered retirement income fund (RRIF)

While RRSPs help you save for retirement, RRIFs are used to withdraw income during retirement. You are not allowed to make contributions to RRIFs and you are required to make minimum withdrawals each year. That being said, even though you cannot contribute to a RRIF, your investments continue to grow tax-deferred inside the RRIF until they are withdrawn.

Spousal RRIF

Assets in a spousal RRSP are transferred to a spousal RRIF. Upon withdrawal, the funds are taxed in the hands of the lower-income spouse, and not in the hands of the contributing spouse.

Registered education savings plan (RESP)

You can use an RESP to save for your child’s (or grandchild’s) post-secondary education. Contributions to an RESP are not tax deductible; however, all growth is tax-deferred until the funds are withdrawn from the plan. When funds are withdrawn, the child must claim it as income. Usually, this results in little or no tax because students tend to be in the lowest tax bracket.

A key benefit of RESPs is the Canadian Education Savings Grant (CESG) – money that the federal government will add to your child’s RESP savings, based on your contributions. The maximum lifetime grant the federal government can give through the CESG is $7,200. There are additional grants available in certain provinces.

Registered disability savings plan (RDSP)

RDSPs were created to help people with disabilities and their families save for the long-term financial security of the disabled person. RDSPs are eligible to receive up to $70,000 in grants and $20,000 in bonds from the Canadian government. While taxes on the growth of your RDSP are tax-deferred, contributions to the plan are not tax-deductible.

The contents of this piece are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.


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