Taxes, RRSPs and You!

A recent media headline marveled at how far TFSAs have come and how they are catching up to RRSPs as a preferred investment vehicle for Canadians. Often however, this choice is made at the expense of contributions to an RRSP.

With the RRSP contribution deadline fast approaching on March 2nd, it is time to take a look at the benefits of using an RRSP, even for many modest income earning Canadians. If you compare the full RRSP amounts invested versus the net after tax amounts going into a TFSA and then allow the invested amounts to compound on a tax-free basis over time, the RRSP will grow to a larger capital base over longer 30-40 year time periods.

There are two reasons for this, more money is going to work from Day One in an RRSP, than the equivalent TFSA after tax contribution amount. The second reason is you are compounding more capital in your RRSP than you are using a TFSA with the same equivalent pre-tax dollars. A final benefit for an RRSP is that far more money can be contributed to an RRSP with a 2019 limit of $26,500 versus $6,000 for a TFSA. But even if we use the same $6,000 contribution limit for both RRSPs and TFSAs the RRSP will win out over time.


Some argue that the tax due on RRSP withdrawals makes them less favourable to a TFSA where all withdrawals are always tax-free. While this is a fair point, RRSPs - when converted to a pension - are never intended to be fully cashed out all at once.

For example, using a 4% return assumption, and a 15% retirement average tax rate (ATR), the RRSP will generate income of $39,372 or $33,465 net of tax. The TFSA will generate net income at 4% of $25,592.**

Finally, while some commentators will point to the taxability of RRSP income withdrawals (usually from a RRIF) and no tax on withdrawals from a TFSA, one could speculate that there may come a day when TFSA are taxed in some way as revenue hungry Governments eye the large capital values of TFSA accounts.

Let’s use some math here with the understanding that the amount of capital (savings) committed to both scenarios is still $6,000:


  • Contribution $6,000 pre-tax
  • Invested capital $6,000.
  • Amount available for compounding $6,000.


  • Scenario A) @15% average tax rate (ATR) is $6,000 minus tax of $900 or $5,100 net of tax

    Invested capital is $5,100

    Amount available for tax-free compounding is $5,100.

  • Scenario B) @25% ATR is $6,000 minus tax of $1,500 or $4,500 net of tax.

    Invested capital is $4,500

    Amount available for tax-free compounding is $4,500.

  • Scenario C) *@53% ATR is $6,000 minus tax of $3,180 or $2,820 net of tax.

    Invested capital is $2,820

    Amount available for tax-free compounding is $2,820


For this RRSP season please consider maximizing your RRSP contribution room first, if you have an income that is higher than say $40,000, before contributing to a TFSA.

Call us today to discuss your personal situation and to see which makes more sense for your situation!

*This is the top marginal tax rate in Ontario and for some taxpayers with high enough incomes it becomes their Average Tax Rate.

** The objective is retirement income and the key assumption is that your income and income taxes will be lower than during your higher earning working years. Finally, the average Canadian, according to surveys and media reports ideally wants retirement income of about $50,000. We used the capital values from the graph.

Copyright © 2020 AdvisorNet Communications Inc., under license from W.F.I. All rights reserved. This article is provided for informational purposes only and is based on the perspectives and opinions of the owners and writers only. The information provided is not intended to provide specific financial advice. It is strongly recommended that the reader seek qualified professional advice before making any financial decisions based on anything discussed in this article. This article is not to be copied or republished in any format for any reason without the written permission of AdvisorNet Communications. The publisher does not guarantee the accuracy of the information and is not liable in any way for any error or omission.

What our clients are saying...

  • I was looking for a financial planner who could provide clarity and show me the best possible way to structure and plan for my retirement. Anthony’s expertise was clearly evident. He is professional, punctual, and answered all my questions and concerns. I would definitely recommend Anthony to my family and friends.

  • We expect a Financial planner to be thorough, detailed and have a strong understanding of their clients' needs. It was a pleasure working with Anthony and his team. He delivered a tremendous package and reviewed his findings in great detail. Anthony's attention to detail, solutions, recommendations and in-depth reports provides a great deal of confidence in his recommendations. We would absolutely refer our family, friends and associates to Anthony.

  • I expect my financial planner to review and discuss my financial goals along with how my goals can be achieved. I valued Anthony reviewing my investments and the projections of what they will equate to when I reach my eventual retirement. Anthony has certainly met my expectations and I would be happy to refer my family and friends.

  • My expectation was to be provided with the best possible advice specific to my situation (as it evolves) and to be provided with objective, evidence-based solutions which will provide me with the maximum financial benefit (and peace of mind). I valued the very thorough process of gathering all pertinent information regarding my estate, pension, income and expenses in order to produce a very detailed and fulsome projection of my current and future financial situation. I really appreciate the time Anthony has taken to answer all of my questions and provide sound advice based on my goals and concerns. I am really looking forward to continuing my investment and financial planning journey with Anthony. I would certainly recommend Anthony to my family and friends!

  • We valued receiving a detailed report and explanation of our finances. When working with a financial planner, we expect to have our questions answered with adequate detail and to have a plan developed to help grow our money. Our expectations were clearly met and we would be happy to recommend Anthony to anyone looking for a Financial Plan.

  • We valued the fact that you sat down with us, heard what we wanted to say, asked for clarification and offered suggestions, and then came up with a detailed and well-reasoned plan in a short period of time and communicated that back to us so that we knew what we needed to do moving forward. Thanks!

    Our expectations for a financial planner are several fold: (1) Does the planner communicate well, in that they both listen but also offer suggestions and ideas in a clear easy-to-understand way, (2) Are they able to meet their client at the same energy/level and meet their specific needs? In our case we needed a tax minimization strategy within a short turn around time. (3) Did the planner actually do their job, in that were they able to provide ideas and suggestions that helped address the client's asks?

    We came to see you because we realised that we hadn't looked at how to minimize the taxes related to my Father’s estate planning and my mother’s future financial planning, and you were able to tell us things that we didn't know about, and offered us solutions that helped us with our future financial planning.

    You definitely met our expectations! In some ways, you actually exceeded our expectations. We were hoping that you could respond quickly, and you came up with a detailed and well-reasoned plan faster than we expected!

    Our only area of improvement we could think of was, given that the plan was very detailed, if we had an explicitly spelled out action plan with a timeline for completion.

    We are very happy and would definitely recommend you to our family and friends and in fact have already done so!