The past year has seen the addition of a new registered plan aiming to help first-time home buyers, as well as increased annual contribution limits for both the Tax Free Savings Account and the Registered Retirement Savings Plan driven by inflation. In light of these changes, this article will provide an update of the various registered savings plans available in Canada.
Registered Retirement Savings Plan (RRSP)
In 2023, the RRSP annual contribution limit exceeded $30,000 for the first time at $30,780. The RRSP remains the primary savings vehicle for most working Canadians. Contributing to an RRSP confers two benefits. First, the contribution reduces the taxpayer’s income resulting in less taxes owed (or a bigger refund). A maximum $30,780 contribution by a taxpayer in Ontario’s highest tax bracket would result in reducing their tax bill by over $16,400. Second, the RRSP can hold many types of investments , and there are no taxes due on capital gains, dividends, or interest received while inside. Taxes are only due on withdrawal. As well, under some circumstances RRSP holders can borrow funds tax-free from the plan to become a first-time homeowner or to pursue higher education. Contribution room is calculated as 18% of an individual’s earned income, so a taxpayer earning $171,000 in 2023 or more qualifies for the maximum allowable contribution room.
An RRSP for a consistent saver and prudent investor can grow to millions of dollars by retirement. Consider a 35-year-old able to contribute $30,000 yearly to their RRSP. At a 6% rate of return, the account would be worth over $2.3 million by age 65.
Tax Free Savings Account (TFSA)
The TFSA annual contribution limit increased in 2023 to $6,500, the first increase since 2018. This brings the lifetime contribution room to $88,000 for those who turned 18 years old in 2009 or earlier and have lived in Canada since that time. The TFSA remains the most flexible savings plan available, with no taxes due on withdrawal, capital gains, dividends or interest, and with by far the most lenient rules surrounding withdrawal and deposit. Any amounts withdrawn from the TFSA can be re-contributed starting January 1 of the following year, in addition to any new room gained for that year.
TFSAs are highly valuable for long-term investors by eliminating erosion of investment profits to taxes. They are also valuable for short-term investors, particularly in the current higher interest rate environment, by allowing interest to be earned on short-term investments tax-free, and allowing the contributions and subsequent profits to be withdrawn without penalty.
Registered Education Savings Plan (RESP)
There have been no substantive changes to the RESP for the last several years. It continues to be the most efficient savings vehicle to plan for costs of post-secondary education. It offers two main benefits: first, like an RRSP, there are no taxes due on investment profits (capital gains, interest, or dividends) while the assets remain inside the RESP, and taxes on withdrawal are taxed in the hands of the beneficiary, who typically pays no or very little tax. Second, contributions to an RESP receive a matching government grant of at least 20%, which is increased for lower-income families.
RESP withdrawal rules are straightforward and qualified institutions include universities, colleges, and trade schools, both in Canada and abroad. Family RESPs allow for multiple beneficiaries from the same family and allow siblings to share investment profits should any of the beneficiaries elect not to pursue post-secondary education.
An RESP for a diligent saver can grow to $70,000 to $80,000 or more, per beneficiary, by the time the beneficiary turns 18, if the RESP holder starts contributing early and invests wisely. Including the annual government grant and starting contributions as soon as possible, an RESP would be expected to grow to just under $80,000 after 18 years at a 6% rate of return. Further contributions can be made once the grant has been depleted as well.
Tax-Free First Home Savings Account (FHSA)
The FHSA is a new savings vehicle, announced in 2022, aimed to launch later in 2023. It is intended for Canadians who have not previously owned a home by conferring significant tax benefits. Like an RRSP, contributions to a FHSA reduce the contributor’s income by the same amount, and when used to purchase a home, the contributions plus any investment income can be withdrawn tax-free. The value can also be transferred to an RRSP or RRIF if the contributor elects not to purchase a home.
As currently outlined, the maximum contribution is $8,000 per year up to a lifetime total of $40,000, with unused contribution room carrying forward to future years. Any of these details may change before the rollout of the plan, but it should become a valuable asset for any Canadian saving to purchase a home. You can read our writeup of the FHSA here.