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It’s the time of year when many Canadians begin to partake in one of life’s great pleasures – preparing our yearly tax return.
To help guide you through this process, we break down the tax benefits of three popular registered accounts, TFSAs, RRSPs and FHSAs and we answer your most frequently asked questions as we enter tax season.
Canadians have access to several types of investment accounts that provide them with the opportunity to help protect their investment income from taxation. Understanding the differences in these account types and the unique advantages they offer can help you achieve your goals – whatever they may be!
Three popular account types are the Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA) and the First Home Savings Account (FHSA) – which was recently introduced in March 2023. As you may consider making contributions to these accounts around this time of year, let’s review the features and benefits they each present.
For each of these accounts, you generally do not pay taxes on gains, interest, or dividends when the funds are held within the account.
RRSP
With an RRSP, you can reduce your taxable income when you make contributions to the account. Additionally, you do not pay any taxes until you withdraw your funds (at which point, the withdrawn funds are subject to taxation). This is known as “tax deferral”. An RRSP is generally well suited to those in the higher earning years of their career and who are looking to save for retirement. RRSPs can also be used to save towards a home purchase and can be tapped tax free to be used towards yours or your partner’s education through the Home Buyers’ PlanLegal Disclaimer 1 and Lifelong Learning PlanLegal Disclaimer 2.
TFSA
A TFSA does not offer tax deferral benefits; however, withdrawals from a TFSA are entirely tax-free. This makes it more flexible than the RRSP and therefore is generally better suited for building an emergency fund or saving for a major purchase. Furthermore, any funds you withdraw from the TFSA can be re-contributed the following calendar year, whereas RRSP withdrawals cannot generally be re-contributed.
FHSA
FHSAs share features of RRSPs and TFSAs. Like a TFSA, you typically do not pay taxes on returns earned within the account, and withdrawals are tax free (provided the funds are used towards a qualifying home purchase). An FHSA is similar to an RRSP in that contributions can be deducted against your taxable income which can potentially reduce your tax bill. As a bonus, investors can combine withdrawals from both their FHSA and their RRSP (following the existing rules under the Home Buyer’s Plan) when making a home purchase.
When deciding which account to prioritize contributing to, it is important to consider your liquidity needs, potential tax savings, and how much of your current income you are able to contribute to each account type.
Looking to learn more? RBC has also published a table comparing the three account types.
Lastly, we’ve addressed some frequently asked questions posed by our clients regarding contribution limits, deadlines and tax documents.
February 29th, 2024 is the last day to make RRSP contributions for the 2023 tax year. Contributions made to your InvestEase RRSP account before 11:59 pm on February 29th, 2024 will be eligible to receive a contribution receipt for the 2023 tax year. Making your contribution well in advance of the deadline helps ensure that your RRSP contribution can be used towards your 2023 tax return.
To make your RRSP contribution from the InvestEase dashboard, select Move Money – New Deposit – From Bank account. If you are making a contribution directly from another financial institution, please indicate “RBC Direct Investing Inc.” as the payee and include your 10-digit RBC InvestEase account number (which can be found on your most recent account statement). It may take 2-3 business days for a contribution to be received from another financial institution and credited to your RBC InvestEase RRSP account.
If you have submitted an application for a new RRSP account before midnight, February 29, 2024 and if you have made an initial pre-authorized deposit in the account application, we will process the initial deposit as a contribution towards the 2023 tax year and issue a contribution receipt, provided: (i) the information provided in your account application is complete, accurate and matches the records maintained by the CRA; (ii) we are able to verify your identity; (iii) and funds are available to be drawn from the bank account indicated in your account application for the initial deposit.
If you are in position to invest, a volatile market climate alone should not dissuade you from investing your funds. By investing at regular intervals (which can be achieved by setting up pre-authorized contributions), you avoid decision fatigue which could lead to long delays in investing your funds and missed opportunities. Instead, you can implement a dollar cost averaging strategy and use market volatility to your advantage.
TFSALegal Disclaimer 3: The annual TFSA limit is indexed to inflation and rounded to the nearest $500. For 2024, the TFSA contribution limit is $7,000 – up from $6,500 last year. If you have been eligible to contribute to the TFSA since the inception of the account type, your total contribution room would be $95,000.
RRSPLegal Disclaimer 4: The RRSP contribution limit for is 18% of your preceding year’s earned income up to a maximum of $31,560 for 2024 (up from $30,780 for 2023). As always, any unused contribution room from previous years would carry forward.
FHSALegal Disclaimer 5: The 2024 FHSA contribution limit is $8,000. If you opened an FHSA in 2023 and you did not contribute the maximum $8,000 to it, you can carry forward your unused contributions from 2023 and use it in 2024.
You can track your contribution room for your TFSA, RRSP and FHSA through your online account with Canada Revenue Agency (CRA).
The CRA will reflect contributions and withdrawals for your TFSA made in the prior year shortly after the end of February.
There are no tax documents issued for TFSA accounts.
For InvestEase RRSP accounts, contributions made between March and December will be summarized in one RRSP contribution slip that will be mailed to you or posted on the RBC InvestEase dashboard (depending on your document preferences) by mid-January. A contribution slip will be issued for any contributions made in January and February and will be generated approximately 2-5 business days afterwards. RRSP contributions made in January and February can be used to claim an income tax deduction in either the current or the preceding year (or unused and carried forward)
For 2023 RRSP withdrawals, T4RSP/R2 tax slips will be posted online or mailed to you by early March. Any amounts that you withdrew from your RRSP in 2023 will be included in your overall income and taxed at your marginal tax rate. Your marginal tax rate may be higher or lower than the withholding taxes that were applied to your RRSP withdrawal.
For FHSAs, a T4FHSA/RL-32 annual information returnLegal Disclaimer 6 will be mailed to you towards the end of February. This slip will summarize the totals of the transactions made in your FHSA in 2023 which you would report on your tax return.
If you are planning on opening a registered a plan, keep in mind the amount of time your money is invested can have a substantial positive impact on your long term investment returns. It’s a good idea establish an investment plan to ensure that you’re on track to achieve your financial goals.
If you have questions about RRSPs, TFSAs and FHSAs, how to decide which one to prioritize, or which portfolio is right for you, please reach out and our Portfolio Advisors would be happy to share their advice.
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