INVESTMENT
TFSA
The TFSA program began in 2009. It is a way for individuals who are 18 years of age or older and who have a valid social insurance number (SIN) to set money aside tax-free throughout their lifetime.
Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.
RRSP
What is RRSP?
A Registered Retirement Savings Plan (RRSP) is an account, registered with the federal government, that you use to save for retirement. RRSPs have special tax advantages as follows :
1. Tax-deductible contributions – You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.
2. Tax-sheltered earnings – The money you make on our RRSP investments is not taxed as long as it stays in the plan.
3. Tax deferral – You’ll pay tax on your RRSP savings when you withdraw them from the plan. That includes both your investment earnings and your contributions. But you have deferred this tax liability to the future when it’s possible that your marginal tax rate will be lower in retirement than it was during your contributing years.
How much you can contribute?
Anyone who files an income tax return and has earned income can open and contribute to an RRSP. There are limits on how much you can contribute to an RRSP each year. You can contribute the lower of:
18% of your earned income in the previous year, or the maximum contribution amount for the current tax year. If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP. You can carry forward unused contributions If you don’t have the money to contribute in a year, you can carry forward your RRSP contribution room and use it in the future. Learn more about how RRSPs work. Investments you can hold in an RRSP.
Investments that can be held in an RRSP are called qualified investments. They include:
Cash
Gold and silver bars
GICs
Savings bonds
Treasury bills (T-bills)
Bonds (including government bonds, corporate bonds and strip bonds)
Mutual funds (only RRSP-eligible ones)
ETFs
Equities (both Canadian and foreign stocks)
Canadian mortgages
Mortgage-backed securities, and
Income trusts
Ivestments you can’t hold in an RRSP
Precious metals
Personal property such as art, antiques and gems
Commodity futures contracts
RESP
A registered education savings plan (RESP) is a contract between an individual (the subscriber) and a person or organization (the promoter). Under the contract, the subscriber names one or more beneficiaries (the future student(s)) and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries.
There are two different types of RESP available: family plans and specified plans.
In Budget 2022, the government proposed the introduction of the Tax-Free First Home Savings Account (FHSA). This new registered plan would give prospective first-time home buyers the ability to save $40,000 on a tax-free basis. Like a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home—including from investment income—would be non-taxable, like a Tax-Free Savings Account (TFSA).
Budget 2022 announced the key design features of the FHSA, including an $8,000 annual contribution limit in addition to a $40,000 lifetime contribution limit. Today, the Department of Finance is releasing for public comment draft legislative proposals that provide additional details on the design of the FHSA. This backgrounder offers a summary of these details.
The government expects that Canadians will be able to open and contribute to an FHSA at some point in 2023. No matter when this happens in 2023, Canadians would be allowed to contribute the full $8,000 annual limit in that year.
FHSA
Opening and Closing Accounts
To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, an individual must be a first-time home buyer, meaning that they have not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years. For this purpose, ownership is defined broadly and includes beneficial ownership, but excludes a right to acquire less than 10% of a qualifying home.
An FHSA of an individual would cease to be an FHSA, and the individual would not be permitted to open an FHSA, after December 31 the year in which the earliest of these events occurs:
The fifteenth anniversary of the individual first opening an FHSA; or
The individual turns 71 years old.
Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis. Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.
Contributions
The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. In other words, individuals would be subject to the lesser of their annual limit and remaining lifetime limit. The full annual limit would be available starting in 2023.
The annual contribution limit would apply to contributions made within a particular calendar year. Individuals would be able to claim an income tax deduction for contributions made in a particular taxation year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year could not be attributed to the previous tax year.
An individual would be allowed to carry forward unused portions of their annual contribution limit up to a maximum of $8,000. This means that an individual contributing less than $8,000 in a given year could contribute the unused amount (i.e., $8,000 less their contribution in that year) in a subsequent year on top of their annual contribution limit of $8,000 (subject to their lifetime contribution limit). For example, an individual contributing $5,000 to an FHSA in 2023 would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). Carry-forward amounts would only start accumulating after an individual opens an FHSA for the first time.
An individual would be permitted to hold more than one FHSA, but the total amount that an individual contributes to all of their FHSAs could not exceed their annual and lifetime contribution limits. Taxpayers would generally be responsible for ensuring they do not exceed their limit in a given year. The Canada Revenue Agency (CRA) would provide basic FHSA information to support taxpayers in determining how much they can contribute in a given year.
Contributions made to an FHSA following a qualifying withdrawal being made (i.e., when buying a first home) would not be deductible from net income.
RDSP
A registered disability savings plan (RDSP) is a savings plan intended to help an individual who is approved to receive the disability tax credit (DTC) to save for their long-term financial security.
Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the beneficiary turns 59. Contributions that are withdrawn are not included as income to the beneficiary when paid out of an RDSP. However, the Canada disability savings grant (grant), the Canada disability savings bond (bond), investment income earned in the plan, and the proceeds from rollovers are included in the beneficiary's income for tax purposes when paid out of the RDSP.
Non-Registered Account
A non-registered account is a type of investment account that is subject to tax when income is earned on investments held in the account. A non-registered account is sometimes called a “taxable” or “open” account.
How does a non-registered account work?
A non-registered account can be used as part of your overall financial plan, with benefits like flexibility and no contribution limits. Typically, you need to be at least 18 to use a non-registered account, but you can use it for your entire life.
Your contributions to a non-registered account are not tax-deductible. Investments in a non-registered account can earn interest or dividend income that is taxed as it is earned or generate capital gains that are taxed as they are realized. This investment income is taxed as it is earned or realized, but withdrawals are not.
There are two common types of non-registered accounts (cash and margin) that can be opened by individuals or jointly with spouses, and there are many other alternatives. With non-registered accounts, you can invest in mutual funds, exchange-traded funds, stocks, bonds and other products.
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