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Don't give your $$$ to CRA

Peter Katevatis - Jan 07, 2014
With all due respect to the services we receive as Canadian taxpayers, as a financial planner I recommend that my clients minimize their taxes to keep more of their wealth for what is important to them. As a whole it is good that taxes are paid, but

With all due respect to the services we receive as Canadian taxpayers, as a financial planner I recommend that my clients minimize their taxes to keep more of their wealth for what is important to them.  As a whole it is good that taxes are paid, but as an individual we want to pay as little as possible.  As a Canadian of Greek decent, I am not advocating evading your taxes *gasp*, but simply deferring them or avoiding them using the tools the Canadian government has given us.

I will outline the two most popular tools to do this - the Registered Retirement Savings Plan (RRSP) and the Tax Free Savings Account (TFSA).  The Canada Revenue Agency (CRA) gives all the trusted details on their website.  As an Advisor I simply say, “Don’t pay the CRA!”

RRSP – Tax Deferral

Going back to the classic line, “I would gladly pay you Tuesday for a hamburger today.”  The RRSP is simply a tax deferral tool with a tax benefit in the present.


For example, you make a contribution of an asset (cash, bonds, shares, or mutual fund) of $20,000 value and you receive a refundable tax credit to lower your tax payable in the current year.  There is even a grace period for the first two months of the calendar year where your contributions can be used against the previous year’s income.  For 2014, the deadline for contributions to be used for 2013 taxes is March 3, 2014.

There is a limit to your contributions; it is 18% of your income up to a maximum of $23,820 for 2013 ($24,270 for 2014).  If you have any unused RRSP contribution room it can be carried forward indefinitely so please check with CRA or your recent Notice of Assessment for your current limit.

Your RRSP funds can then be invested in a style that suits your investment goals and risk tolerance.  It can be in a range of investments from cash, stocks, mutual funds, and even your house.  What makes an RRSP very powerful is the compounding tax free growth.   Here is an example to show the difference between tax free growth inside the RRSP versus a cash or margin account.

If you have an income discrepancy with your spouse you should consider setting up a Spousal RRSP.

In the year you turn 71, you must convert your RRSP to a Registered Retirement Income Fund (RRIF) which works the same as a RRSP but you MUST withdraw a minimum amount.  It changes based on your age but it is usually around 5%.  So if you have a RRIF account valued at $1,000,000 you must withdraw at least $50,000 each year.  Keep in mind that this is taxed as top line T5 income regardless of how it was earned (no Capital Gains or Dividend tax credit).

TFSA – Tax Avoidance

Many lower income investors did not see the benefit of the RRSP as they did not need the tax deduction at present and did not want to pay top line tax on investments when they are forced to start making withdrawals.  The CRA introduced the Tax Free Savings Account six years ago to little fanfare but it is becoming a very compelling tool.

You can make a contribution similar to the RRSP (cash, bonds, stocks, mutual funds, etc) and the assets can grow tax free.  You do not get any short-term tax benefit, but whenever you withdraw the funds there is NO TAX.  None, nada, nothing whatsoever.  You are not “giving up” the dividend or capital gains tax credit since you are paying $0 tax on any withdrawals.

What takes the TFSA to OMG status is that any withdrawals are added back to your following year’s TFSA Contribution limit.  They have eliminated the opportunity cost of contributing your cash to your savings plan; your money is always available to you if needed.

For example:

  • Say you have maximized all of your TFSA contributions up to 2013 ($25,500)
  • You then pulled out $2,000 cash to go on a vacation in December  2013
  • Your 2014 TFSA Contribution limit would be $7,500 ($5,500 for 2014 plus your $2,000 withdrawal of 2013).  Pretty cool stuff, if you find tax avoidance cool.


The “catch” (since there is always a catch) was that the limit was only $5,000 and since grown to $5,500 per year to keep up with inflation.  But since any excess contributions are carried forward indefinitely anyone over the age of 24 would have a $31,000 TFSA limit if they have never made a contribution.

Here is a chart showing that this “measly $5k” will play a larger role in future investment planning.

There are also Registered Education Savings Plans (RESP) and Registered Disability Savings Plans (RDSP) which might be suitable for you.  Please feel free to contact me if you have any questions regarding investment plans or avoiding taxes in a safe legal Canadian way.