Tax Free Savings Account (TFSA) vs. Registered Retirement Savings Plan (RRSP)
A Tax Perspective
February 6, 2019 by Erica V N O'Grady
Both RRSPs and TFSAs shelter you from any tax on the income earned if the investments stay held within the registered account. With an RRSP, you can deduct the contribution from your income, which earns you a tax refund, but the money becomes fully taxable when you take it out. The TFSA is the reverse. You don't get a tax break on contributions, but you don't pay tax on withdrawals.
So, if you're deciding between the two options, the question boils down to whether you should pay the taxman now or later. That answer depends on your tax rate. If you're in a higher tax bracket when you put the money in than when you take it out, it's better to use an RRSP. Basically, your original RRSP contribution gives you tax savings now, and the taxman takes a smaller bite on withdrawal. However, if you take the money out when you're in a higher tax bracket than you're in now, it's better to go with a TFSA.
There are always other considerations when deciding which option is the best fit for you. Make sure to have a conversation with your accountant or financial advisor.
- At the retirement age, depending on your income level, if take out your RRSP's this increases your income even more and you run the risk of Old Age Security Clawback and loss of Guaranteed Income Supplement or other provincial senior benefits.
- RRSP or TFSA contribution room and limits should always be verified.
- Are the contributions funded from cash withdrawn from a corporation? It might not be to your benefit to invest outside of the corporation.
- You can invest in the same types of investments in either, but the RRSP contribution gives you some cash back on your taxes paid during the year that you can use to pay off debt, book a vacation or invest more.
Canada Revenue Agency Inconsistent in Application of Provisions of Income Tax Act
January 24, 2019 by Kerry Leckie
The recent Auditor General report highlighted that Canada Revenue Agency (CRA) is inconsistent when it comes to applying the provision of the Income Tax Act, the collection of outstanding taxes and the auditing of taxpayers returns.
Inconsistencies were found between regions of the country and who you are (corporate vs. personal, large taxpayer vs. small taxpayer). They also found inconsistencies between auditors. Who you are, where you live and who is doing the audit all play into how an audit will be performed and the resulting taxes collected.
CRA spends more every year on compliance monitoring. They now have projects where they will audit a large number of specific claims. They have sophisticated analytical tools to identify potential audit areas and use the information gathered in their project audits to identify other areas of interest.
There is enormous pressure to generate more and more revenue for government spending.
While technology is making it easier and easier to file your own tax returns it is disconcerting that CRA is taking advantage of this by inconsistently applying the provisions and policies that are in place to protect the taxpayer.
The Taxpayer Bill of Rights includes the right for the law to be applied consistently.
Having a tax professional prepare your return and assist in any dealings with CRA is your best defense against these inconsistencies. Even if you have prepared your own return, if you find yourself under the scrutiny of CRA, engaging the assistance of a professional to assist with that is well worth it to ensure you are protected.