RRSP Quick Facts
2020 tax year RRSP contribution deadline: March 1, 2021.
Any person age 70 or younger as of January 1, 2020 can contribute to their RRSP as long as they have sufficient contribution room. Contribution room is based on earned income (such as employment income reported on a T4 slip). An RRSP must be converted to a RRIF by the end of the calendar year in which the person turned 71. If you have a younger spouse, you may be able to continue to make RRSP contributions into a Spousal RRSP in their name even after you are 71.
New contribution room for the 2020 tax year will have accrued based on 18% of your 2019 earned income, up to a maximum of $27,230*. In addition to this, you may have unused contribution room from prior years. Therefore, prior to making a contribution you should always confirm your current contribution room by reviewing your most recent Notice of Assessment or Notice of Reassessment from CRA, or by visiting My Account through the CRA website. Any contribution room remaining after March 1 will be available for future contributions.
Common RRSP Strategies
Contribute and deduct only as much as necessary to bring taxable income down to a certain level. Depending on your situation you may wish to try to:
Completely eliminate your tax owing for the year.
- Bring your taxable income down to the top of the income bracket just below your current bracket. This allows for maximum value on each dollar contributed and saves unused contribution room for future years when income may be higher.
- Bring your income down to a point where you avoid exposing yourself to a clawback of your Old Age Security (OAS). For the 2020 tax year, OAS clawback will begin if your net income exceeds $79,054*.
- It is possible to contribute to an RRSP and deduct only a portion of the contribution against your income for the current tax year. This can be a handy way to invest while receiving the most value from your contribution. The portion of your contribution that you do not apply as a deduction will be saved for use in a future year.
*This figure will vary per individual based on any pension adjustments, pension reversals and unused contribution room carried forward from previous years.
TFSA Quick Facts
There is no deadline to make TFSA contributions since these are not deducted from income.
Canadian residents who were 18 years of age or older in 2009 (the year the TFSA was introduced) will have a cumulative contribution limit of $75,500, which includes the 2021 addition of $6,000.
Unused contribution room is carried forward. Withdrawals made in the current year will increase the TFSA room for the next calendar year by the withdrawal amount, plus the new year’s contribution limit (simply, the contribution room is ‘put back’ the next year if you withdraw). There is no tax on the growth, income or dividends of investments held within a TFSA and, generally, any investments eligible for an RRSP are also eligible for a TFSA.
Common TFSA Strategies
Within the context of an appropriate overall asset mix, you could look to maximize growth opportunities inside your TFSA as the full upside will be tax-free. However, it is important to note that losses cannot be used to offset capital gains incurred within taxable accounts.
Conservative investors who do not typically invest in equity markets may wish to shield interest bearing investments within TFSA accounts, rather than focussing on growth.
When you invest in foreign dividend-paying companies, the foreign government will withhold a percentage of the dividend back as a withholding tax. When this occurs within a TFSA, you lose the ability to claim a foreign tax credit on your tax return the way you could if the same were to incur within a non-registered account. As a result, there is a small amount of effective tax that is paid by TFSA investors. Due to this, some investors will choose to focus on capital appreciation rather than dividend yield when picking foreign investments inside TFSA accounts.
TFSAs make sense for nearly every Canadian age 18 and over.
Generally, the CRA allows for the deduction from income of “fees to manage or take care of your investments… (and) fees for certain investment advice.” Section 20(1)(bb) of the Income Tax Act allows fees (not commissions) paid to an investment counsellor (such as CWB Wealth Management) for ”advice on buying or selling a specific share or security… or for the administration or the management of the shares or securities of the taxpayer.”
This allowance is currently only for fees in non-registered accounts (not TFSAs or RRSPs). We’ll continue to monitor this and will connect with our clients as it develops. We encourage you to discuss this option with your accountant.
Deferred Income Annuities
The 2019 Federal Budget introduced Advanced Life Deferred Annuities (ALDA). These proposed products were designed to allow Canadians to move a portion of their savings out of a RRIF and into an annuity, which defers payments until age 85 rather than the usual starting age of 72. These products will allow further flexibility to retirees in planning the timing and magnitude of their retirement income.
Please note that the enabling legislation was intended to be effective in early 2020, however, to date this has not occurred and as a result these products are not yet available for purchase.