Tax series: A little bit of shelter can go a long way

There are several types of registered plans that let you shelter your investments from tax.

I registered my son for my childhood sport of field hockey last year, thinking that all those frigid outdoor winter games on muddy, pitted grass would be great for building his character. It turns out that the game has changed quite a bit since I played it and is less like J.K. Rowling’s Quidditch now that they use smooth artificial turf fields. Because they practise in a cozy indoor gym where there’s no risk of frostbite they’ve quickly become skilled players. This proves that environment is everything: a little bit of protection from the elements means their skills can grow, fast.

The same principle applies to your hard-earned money. There are several types of registered plans that let you shelter your investments from tax. Once your money is inside the plan it’s in a protected environment and the income on your investments is not taxed, provided the income also stays inside the plan. Because of the effect of compounding, your original investment can grow faster than if it was held in a non-registered account, where investment income would be taxed as it was earned.

Two of the more common ways to shelter your investments are through registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). With an RRSP you get tax relief up-front – you can deduct your contributions directly from your income when you’re filing your taxes so your contribution reduces the tax you have to pay on your income. There are strict limits on how much you can contribute and deduct so you have to make sure you follow the rules otherwise you will have to pay a penalty tax. While your contributions stay in the plan the investment income earned is tax-free. When you retire and start making withdrawals, these are treated as taxable income.

TFSAs don’t give up-front tax relief but just like an RRSP, investment income earned inside a TFSA doesn’t get taxed; unlike RRSPs, when you take money out of a TFSA there is no tax to pay. Even though they’re called “tax-free savings accounts” you’re not limited to keeping just cash in a TFSA; they can also be used to hold stocks and bonds. There’s an annual contribution limit ($5,500 for 2014) and unused contribution room from previous years rolls forward.

Here’s a quick summary of some of the main tax features of RRSPs and TFSAs:

Is there tax relief for
Yes No
Is tax charged on
Yes No
Is investment income taxed
if it stays in the plan?
No No
Are contribution limits based
on your earned income?
Yes No
Does your unused contribution
room roll forward?
Yes Yes
Is there a maximum age limit? Yes No


The start of the year is a great time to review your savings habits and make sure that you’re making the most of RRSPs and TFSAs. Here are some things to think about:

  1. Has your income gone up?
    If you’re earning more than last year you might be able to increase your regular RRSP contributions or open a TFSA.
  2. Should you make an additional RRSP contribution?
    Remember that you have until the beginning of March 2014 to contribute to your RRSP and still be able to deduct it on your 2013 tax return (provided your deduction limit is high enough).
  3. TFSA or RRSP?
    Whether you should contribute to an RRSP or TFSA depends on your individual situation and particularly on whether your income is likely to go up or down in future. Talk to your financial advisor if you’re not sure what’s best for you.

About the Author

Gael Melville