Originally published on June 12, 2008


How do we choose between a TFSA and an RRSP?

Beginning next year, residents of Canada who are 18 years and older can invest up to $5,000 annually into a Tax-Free Savings Account.  They can carry forward unused contribution room for future use, and if they make withdrawals they can return the money later without penalty.

While contributions won't be tax deductible, all investment earnings will accumulate tax free.

Not unlike the introduction of RRSPs in 1957, the introduction of the TFSA in 2009 should be an impetus to get Canadians to save more.  There is now an opportunity to accumulate and then spend investment income without paying tax on those earnings.

Some taxpayers will probably wonder whether TFSAs are better than RRSPs.

The answer is no, as long as their marginal tax rate does not change between the time they make a contribution and when they make a withdrawal.

Consider Farmer Joe who contributes $1,000 into his RRSP and receives a $350 tax reduction so that his out of pocket cost is $650.  As an alternative, Farmer Joe could contribute $650 to his TFSA.  The cost for each is the same, keeping in mind that the RRSP reports a balance of $1,000 before redemption.

Let's assume both accounts double in value, with Farmer Joe's RRSP now worth $2,000 and his TFSA worth $1,300.  Farmer Joe withdraws his RRSP and pays $700 in income taxes ($2,000 multiplied by 35 percent marginal tax rate) and has $1,300 after tax.  Farmer Joe withdraws his TFSA and pays no tax and is left with the same $1,300 after-tax.

In the example, even the "advantage" of an RRSP tax refund is a mirage.  Is it better to have put $1,000 in an RRSP to get $350 back than just putting $650 into a TFSA instead?  Both leave Joe Farmer with $650 less in his pocket at the time of contributions and both are worth the same at redemption.

Taxpayers who are in their peak earning years and expect to be paying much lower income taxes when they retire should continue to contribute to their RRSP first.

However, if their tax bracket is not high enough to warrant RRSPs, they should contribute to a TFSA.  In future years when higher income pushes them into higher tax brackets, they can withdraw from their TFSA and put the money in an RRSP, which is when it will make the most financial sense to do so.

On the surface, the easy withdrawal access of TFSA retirement funds may be a temptation to spend them prematurely.  The advantage of an RRSP is the tax triggered on early withdrawal.  Often this tax provides us with a motivation to leave our retirement funds alone.

Another question is how the TFSA will affect the Registered Education Savings Plan.

Contributions to the TFSA and RESP are made with after-tax dollars and both offer the benefit of tax-deferred growth.  RESPs have the advantage of attracting a federal grant of at least 20 percent of the RESP contribution to a maximum of $500 per year.



Sixty percent of 18- to 21-year-old Canadians will attend a university or college and almost two-thirds will go to some kind of post-secondary institution.

It is important to determine the chances that a child will attend post-secondary education.  If there is a high chance that at least one child will attend university, then some savings should go to an RESP.

I expect that the TFSA will be a great tool for people in the lower tax bracket.  They can save for a home down payment, a car or vacation.  They can start an investment account without creating an RRSP fund that will be locked away forever.  For young Canadians and those with below-average incomes, the TFSA contributions will replace the RRSPs.

Middle income Canadians will have to prioritize investment decisions.  I recently read this on an investment blog: "Personally, if you are stressing about where to put all your money between an RRSP, mortgage or new TFSA, then you need to have a kid or two - that will fix up your problem pretty quick."  Most likely the choice will be first to an RESP, second to an RRSP and third to the mortgage or TFSA.

Affluent Canadians will use TFSAs to supplement their RRSP investments.

Seniors will move a portion of their investments each year into their TFSA to avoid tax on earnings, reduce potential for Guaranteed Income Supplement and Old Age Security claw back, reduce the reduction of the non-refundable age amount and remain eligible for more prescription or pharma-care deductibles.

Planning points

While TFSAs are still half a year away, the following planning points are starting to emerge:

  • If you are 18 years or older, you should file an income tax return to secure your $5,000 of TFSA contribution room.

  • If you have non-registered investments, plan to keep $5,000 per adult liquid for a January 2009 reinvestment into a TFSA.

  • If chances are good that one child will attend post-secondary education, assign $2,500 to an RESP to access the 20 percent grant.

  • If you are in the highest marginal tax rate, RRSPs are probably a good idea.

  • If you are senior, you will move a portion of your investments into a TFSA.  When you die, the proceeds will move tax free to your spouse, as does an RRSP or RRIF.  But when the second spouse dies, the proceeds of the TFSA go to the couple's estate tax free, unlike an RRIF, which typically results in a windfall gain for the Canada Revenue Agency.

The national savings rate in Canada for individuals and unincorporated businesses is close to zero and on a downward trend.  Hopefully the TFSA will reverse this trend, providing young Canadians with a tax incentive to be more responsible in saving for their future.

Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at or website All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.