The average Canadian family pays more than 36% of their income to the government through various forms of taxes, according to the Fraser Institute’s Canadian Consumer Tax Index – 2021 edition. That’s a higher percentage than they pay on basic necessities such as food, shelter and clothing combined (35.4%). So it’s fair to say that many Canadians would like to minimize their tax burden where possible.
When it comes to investments, taxes on your gains and income can have a meaningful impact on your actual, realized returns – and what you ultimately end up with in your wallet. And taxes can have a major impact if you’re retired and drawing cash flow from your investments through either capital drawdowns (selling assets to generate cash) or through dividends, distributions and interest income.
Return refuge – government-sponsored investment accounts
Thankfully, eligible Canadians can avail themselves of government-sponsored, tax-sheltered investment accounts, including Tax Free Savings Accounts (TFSAs) and Registered Retirement Savings Accounts (RRSPs). These accounts offer a variety of tax benefits that can make a substantial difference to your long-term financial well-being.
TFSAs
Since their rollout in 2009 TFSAs have quickly become a very popular way for Canadians to save and invest given their many positive features:
- Growth within your account is completely tax free.
- There are no taxes levied on any money you take out (including any interest, dividends or capital gains earned within the account).
- TFSAs have no age limits (you must have attained the age of majority in your province to contribute). This can be appealing if you’re a senior who doesn’t need the money immediately, as you are not required to make withdrawals as with a RRIF.
It is important to note that contributions to TFSAs are not tax-deductible, and contributions of existing investments into a TFSA can trigger unrealized but taxable capital gains.
TFSA vs. non-registered account
If you make annual contributions to your TFSA of $6,000 for the next 20 years, at a rate of return of 6% per annum you would accumulate approximately $240,000. If the same circumstances apply but you are contributing to a non-registered, non-sheltered investment account, you would have almost $53,000 less.*
RRSPs
RRSPs are a familiar and very popular tax-sheltered account for Canadians. This isn’t surprising given their many helpful features:
- Contributions are deductible and reduce your income for tax purposes
- Income earned in your RRSP is not taxed until it is withdrawn. Capital growth is tax sheltered and so the total value may grow more quickly through tax-free compounding.
- You can contribute to an RRSP until December 31 of the year you turn 71, then you have to convert it to another vehicle, such as a RRIF
It’s important to note that money you withdraw from an RRSP is added to your income and taxed accordingly.
Talk to us about how we can help you shelter your investments from the tax storm – and help you reach your goals faster.
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*TFSA calculation: Example assumes that taxes are for an Ontario resident making $100,000 per year, with no additional deductions or earnings. This annual income is used to estimate the combined federal/provincial marginal tax rate for the purpose of this calculation. Tax-free and taxable investment results are approximations and do not reflect actual returns. The starting contribution amount is assumed to be contributed in the beginning of the year.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license.