John Manuel


RRSP       (Registered Retirement Savings Plan) 
or TFSA   (Tax-Free Savings Account) ?

Which way should I invest my savings?  The short answer is, it's up to you.  You need to know the benefits and disadvantages of each system.
First, you should understand that you don't "buy an RRSP or a TFSA."  They are not 'things' that you buy or particular types of investments.  They are simply ways of registering your savings for income tax purposes.  Within either type of plan, you can hold Cash Accounts, GIC's, Bonds, Shares, Mutual Funds, etc., just as you might in your own name without registering.  Registering the investments in either type of plan gives you certain specific advantages and obligations.  CRA has publications that explain both methods, and there is not enough space here to do more than a very brief summary of each.  In short, RRSP defers income tax to the future, and TFSA eliminates it completely.

Registering your savings as RRSP permits you to deduct your deposits from your income for tax purposes, thereby saving taxes in the year you deposit the money.  When you take the money out in the future, tax will apply for the year you withdraw it.  When you are over 65 and you arrange regular monthly withdrawals, they will qualify for the $2,000 Pension Income Credit.  But that might already be used up by any other private pensions (from previous employment, etc.) that you may also earn.  Your CRA Notice of Assessment will show how much you are entitled to invest each year.  There are penalties for investing more than your limit, so be careful.

Registering your savings as TFSA means that, while your deposits will not be tax deductible, earnings in the plan, whether interest, dividends, capital gains, or similar, will not be taxed, and future withdrawals will also not attract tax.  There are also limits as to how much you may deposit, and CRA will keep you up to date each year as to your limits.  The big advantage in retirement is that TFSA withdrawals will not be counted as income, so they will not reduce your other entitlements for Old Age Pension, Age Deduction, GST/HST credits, and the like.  But ... (there's always a but) ... the tax-free benefit begins only when you place existing investments into the plan.  If you invest existing stocks or bonds into the plan, you will be considered to have 'sold' them on the day you transfer them.  This could trigger some initial capital gains tax or interest income in that year, so get some advice before your start.  Tax paid up front might be worth it in the end, because it will be the last time you pay any tax on those investments.

There is much more to this than space permits here, so do your research.  Check CRA publications, and discuss your situation with me.
Here are some links to CRA sites: