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Dale Jackson

Personal Finance Columnist, Payback Time


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The Canada Revenue Agency has announced Canadian adults will be able to add another $6,000 to their tax-free savings accounts (TFSA) in the new year.

The amount is consistent with previous years, but is determined by Ottawa on a year-by-year basis. As Canadians think about adding to their TFSAs, there are key characteristics of the investment vehicle to keep in mind.  

Funds can be withdrawn at any time and investment returns – be they capital gains on equities or income from dividends and fixed income –  are never taxed.

In comparison, half of capital gains on equities in non-registered accounts, are taxed and income is fully taxed. Dividends are also subject to full taxation with the exception of a tax credit on eligible payouts.    

The federal government introduced the TFSA in the aftermath of the 2008 global financial meltdown and consequent market plunge in an effort to encourage Canadians to get back into the financial markets. Since then, allowable contribution levels have crept up each year. As of Jan. 1, the total contribution limit for anyone who was at least 18 years old in 2009 is now $75,500. Inflation adjusted contribution limits are expected to continue rising in future years, although Ottawa gives no guarantee and increases could end at any time.

Contribution space from TFSA withdrawals can be reclaimed the following calendar year. Over-contributions are subject to penalties from the CRA. If you want to know your personal limit, the CRA provides them in annual Notice of Assessments on individual tax returns, and for individual taxpayers who set up a CRA online account. A word of warning: contribution limits posted by the CRA are usually for the previous year, so be sure to include contributions made in the current year.

From a tax perspective, the closest thing to a TFSA available to the average Canadian is the principal residence tax exemption, which allows Canadians to avoid paying any tax on the capital gains they generate from the sale of their principal residences.

The TFSA was originally intended as a short-term savings tool but over time has become a potential tax saving dynamo in retirement when used in conjunction with an RRSP. 

While RRSP contributions can be deducted from current income, those contributions – along with the returns that are generated over the years – are fully taxed when they are withdrawn in retirement.

Like the TFSA, the RRSP can hold just about any type of investments including stocks, bonds, mutual funds, exchange-traded funds, real estate investment trusts and even options.

It is important to note, however, that non-Canadian dividends are subject to a withholding tax on behalf of the U.S. Internal Revenue Service (IRS). That includes the big U.S. blue-chip companies. It also includes U.S. mutual funds or exchange traded funds (ETFs), and even Canadian mutual funds and ETFs that hold U.S. equities. 

Both investment vehicles have the ability to generate tax-free returns over long periods. But unlike TFSA withdrawals, RRSP withdrawals are taxed as income. If RRSP savings grow too much, retirees could find themselves in a high tax bracket and even be forced to make minimum withdrawals that could result in Old Age Security claw backs.

With proper planning the TFSA and RRSP can compliment each other. Over time, RRSP contributions can be restricted to limit withdrawals in retirement to the lowest marginal tax bracket, and TFSA withdrawals can provide the rest of the income needed in retirement.

It’s hard to know how to maintain that balance but one popular strategy involves making RRSP contributions and contributing the tax refund to a TFSA. Contributions can be monitored and shifted over time as needed.

The RRSP contribution deadline for those wanting to reduce their 2020 tax bill is March 1, 2021. That leaves plenty of time to work out a strategy that puts more of your tax dollars in your pocket in retirement.

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email