Opinion

How to cut your 2026 tax bill with a mid-year RRSP/TFSA shift: Dale Jackson

By
Dale Jackson

Published: 

Estate planning is often thought of as simply having a Will in place for the end of life. But Mindi Banach, Tax and Estate Planner at TD Wealth, says an estate plan can do much more, helping create a plan for your loved ones and clarify the legacy you want to leave behind. She also shared what to consider when getting started.

As we pass the midway point of 2026 it should be clearer what sort of year it will be in terms of income and the tax we will owe on that income.

For many Canadians, taxable income won’t vary much from previous years. For a growing number with less stable or multiple income sources, it could be shaping up to be better or worse.

No matter what sort of income year you are having there are things you can do in the second half of the year to significantly lower your tax bill for 2026 and beyond by shifting contributions between your registered retirement savings plan (RRSP) and tax free savings account (TFSA).

Make a good year better

If you’re generating a lot of income so far this year, you could be heading into a high tax bracket. Increasing RRSP contributions with that extra cash can allow you to deduct the contribution amount from your 2026 income to keep it at a lower marginal tax rate.

Here is a generic example of how boosting RRSP contributions as income grows can bring bigger tax savings. Depending on your province or territory, income under $60,000 is taxed at a rate around 20 per cent. Income above that is taxed at over 30 per cent. Income over $180,000 is taxed at around 40 per cent.

That means each dollar above $60,000 contributed to an RRSP will result in a 30 per cent tax refund and a 40 per cent refund on income over $180,000.

There are limits on RRSP contributions depending on your individual situation but there could be ways to split income with a spouse and still get the tax refund through a spousal RRSP.

Make a bad year better

If your 2026 income is lower, it will be taxed at a lower marginal tax rate. That means tax savings from an RRSP contribution will be lower (20 per cent, according to the example above).

If you decide it’s not worth making an RRSP contribution this year, your allowable contribution space will be carried forward to reap bigger tax savings in future years when income is higher.

If you still have enough to invest, a TFSA contribution could bring bigger tax savings. Contributions can not be deducted from income like an RRSP but gains generated from most investments inside a TFSA are not taxed.

Balancing your RRSP and TFSA into retirement

Shifting to a TFSA contribution could also have a longer term tax advantage.

It’s important to know that, unlike TFSAs, RRSP withdrawals are fully taxed when the funds inside them are withdrawn.

Even if RRSP contributions are well below the allowable limit, the investments inside could grow to a point where they will need to be withdrawn at a high rate - possibly higher than the tax savings on the original contribution.

Eventually, Ottawa will enforce minimum withdrawal requirements as payback for all those years of tax-free growth.

If those minimum withdrawals reach a certain threshold, Old Age Security (OAS) will be clawed back.

Diverting RRSP contributions to a TFSA over the years will allow you to cap RRSP withdrawals at a lower marginal rate and top up whatever funds you want from your TFSA.