Canadian taxpayers don’t need a calendar to know that the registered retirement savings plan (RRSP) contribution deadline is approaching — the glut of television, radio and internet ads which fill the airwaves and screens this time of year are reminder enough. And, while RRSP planning and retirement planning generally are best approached as an ongoing, year-round activity, it is true that an imminent deadline tends to focus the minds of taxpayers on such issues

This year, an RRSP contribution for 2015 can be made any time up to and including Monday February 29, 2016. The allowable current year contribution to be made by any individual for 2015 is equal to 18% of income earned in 2014, to a maximum contribution of $24,930. However, many if not most Canadian taxpayers have contribution “room” carried over from previous years, and such carryover amounts can also be added to the 2015 contribution amount and deducted from income for 2015 .

Every taxpayer who filed an income tax return for 2014 received a Notice of Assessment from the Canada Revenue Agency (CRA), and the total amount of one’s allowable RRSP contribution for 2015 (including any carryover amounts) can be found on page 2 of that Notice of Assessment. Taxpayers who didn’t keep or can’t find their Notice of Assessment can call the CRA individual enquiries line at 1-800-959-8281 to obtain that information. When making that call, it’s important to have a copy of the last return filed on hand, as the CRA representative who takes the call will request information from the return, as part of the Agency’s information security procedures. At a minimum, a taxpayer will be asked to provide his or her social insurance number, date of birth, and the figure which was entered on line 150 of the previous year’s tax return.

Any amount contributed to an RRSP for the 2015 tax year is deducted from income for that year and then is allowed to grow, tax-free, once it’s in the RRSP. It doesn’t matter how the funds in the RRSP are invested or what kind of investment income (interest income, dividend income, etc.) is earned by those funds— no tax is payable on such investment income as it accumulates. However, when a withdrawal is made from the RRSP, all amounts withdrawn, whether original contributions or investment income earned, are subject to tax.

While RRSPs have been around for a long time, a newer tax savings vehicle in the form of Tax Free Savings Accounts (TFSAs) became available to Canadians starting in 2009. TFSAs are, in many ways, the mirror image of RRSPs. No deduction from income is permitted for contributions made to a TFSA, but investment income earned within such a plan is not taxed as it is earned, and amounts withdrawn from a TFSA (whether original contributions or investment income earned) are received free of tax. As is the case with RRSPs, where a contribution is not made to a TFSA for a particular taxation year, the contribution amount is carried forward and may be contributed by the taxpayer in any future year. However, TFSAs have one feature which completely distinguishes them from RRSPs: where an amount is withdrawn from a TFSA, that amount is added to the taxpayer’s contribution room and may be re-contributed in any subsequent taxation year. Finally, while an RRSP contribution for 2015 must be made on or before February 29, 2016, there is no such deadline for TFSA contributions—such contributions for 2015 can be made at any time during 2015 or, given the very flexible carryforward rules which apply to such plans, at any time in the future.

There is also a new “wrinkle” to TFSA planning in 2016 since the maximum annual TFSA contribution has, for the first time, been reduced. When TFSAs were introduced in 2009, the maximum yearly contribution amount was set at $5,000. That limit was increased in 2013 and 2014, and nearly doubled for 2015. However, for 2016, the contribution limit returns to pre-2015 levels.

Overall, the list of annual contribution limits looks like this:

The annual TFSA dollar limit for the years 2009, 2010, 2011, and 2012 was $5,000.

The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.

The annual TFSA dollar limit for 2015 was $10,000.

The annual TFSA dollar limit for 2016 is $5,500.

It’s understandable, given the frequent changes in TFSA contribution limits, to say nothing of the calculations required to deal with the re-contribution of withdrawn amounts, that taxpayers would be confused about just what their total current and carryforward contribution amount limit is at any given time. Fortunately, the CRA keeps track of that information, and information on one’s current overall limit can be obtained by calling the CRA’s individual income tax enquiries line at 1-800-959-8281.

A decision about making a contribution isn’t, and shouldn’t be, an either/or choice, as it’s perfectly possible for Canadians to contribute to both an RRSP and a TFSA in the same year. The financial and cash flow limitations faced by most Canadians, however, mean that making the maximum contribution to both kinds of plans in the same year just isn’t a realistic possibility. Where that’s the case, it’s necessary to decide which kind of contribution, or combination of contributions makes the most sense. As is almost always the case in tax planning, there is no one “right” answer for everyone and no “one-size-fits-all” solution. That said, there are some general considerations which may help in determining which savings/investment vehicle is preferable for a particular individual for 2015/16.

• The minority of taxpayers working in the private sector who are members of registered pension plans (RPPs) will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2015 tax year is calculated as 18% of earned income for 2014, to a maximum contribution of $24,930. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, and a TFSA contribution the logical alternative.
• For younger taxpayers, where the savings goal is short-term—for example, a down payment on a home or paying for next year’s vacation or a new car, the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year’s return and, probably, a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one’s ability to save for retirement.
• Taxpayers who are expecting their income to rise significantly within a few years (e.g., students in post-secondary or professional education or training programs) can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, allowing the funds to compound on a tax-free basis, and then withdrawing the funds tax-free once they’re working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted against income which would be taxed at the much higher rate, generating a tax savings. And, if a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.
• For taxpayers aged 72 and older, the RRSP vs. TFSA question is simply irrelevant, as taxpayers who are older than 71 years of age cannot make RRSP contributions. Many of those taxpayers, however, have savings accumulated in a registered retirement income fund (RRIF) and are required to withdraw a specified percentage of funds from that RRIF each year. Particularly in cases where the required RRIF withdrawals exceed the RRIF holder’s current needs, that income can be contributed to a TFSA. While the RRIF withdrawals must be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn in the future from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or for the federal age credit.
• Lower income taxpayers who are in a position to put some money aside are likely better off using a TFSA for those savings. A major benefit of saving for retirement through an RRSP results from the assumption that one’s income—and therefore one’s tax rate—will be lower after retirement than it was before, meaning that a permanent tax savings will be achieved. Where that’s not the case—where there isn’t likely to be a great difference between pre- and post-retirement income—that benefit is lost. As well, lower income taxpayers who would otherwise be eligible for means-tested government benefits like the Guaranteed Income Supplement or tax credits like the GST credit or age credit could find that making withdrawals from an RRSP pushes their income to a level which reduces or eliminates eligibility for such benefits or credits. Since monies withdrawn from a TFSA are not included in income for the purpose of determining eligibility for any government benefits or tax credits, saving through a TFSA will ensure that receipt of such benefits is not put at risk.

There are, clearly, a number of factors, both present and future, to consider when deciding which savings vehicle best suits one’s circumstances. To meet the need for information in making that determination, the CRA has dedicated sections of its website to information about both TFSAs and RRSPs. That information can be found at www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html and www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html.