Like organic chemistry or eating lentils, taxes aren’t meant to be fun. Which means a lot of us have a lot of questions, especially when it comes to tax-advantaged accounts. Here are answers to some of the most common questions about TFSAs, FHSAs, RRSPs, Spousal RRSPs, RRIFs, and the Home Buyers’ Plan. That may not sound exciting, but it is useful.
Top questions about TFSAs
1. Do my TFSA contributions impact this year’s taxes? Nope! The money you put into your TFSA does not reduce your taxes owed for that particular year. The big benefit of a TFSA comes when it’s time to withdraw your money. No matter how much your investments have grown, you pay zero taxes when you withdraw them. That can add up to quite a bit of savings.
2. How many times can I withdraw from and contribute to my TFSA? As many times as you like, as long as you are within your contribution room. But remember: when you withdraw from your TFSA, you don’t get that contribution room back until January 1 of the following calendar year.
3. If I contribute $20,000 to my TFSA and make a profit of $10,000 from investing that money in stocks, can I withdraw $30,000 without any tax implications? Growth within a TFSA is tax-free, so you can make that withdrawal without paying taxes.
4. Me again. What’s my new contribution room after the withdrawal of $30K? On January 1 of the following year, the $30,000 will be added to your contribution room (along with your new contribution room for the new year).
5. Is it a good idea to sell my non-registered investments to take advantage of the extra contribution room of my spouse’s TFSA? It depends on a lot of things, including how much capital gains you’d be taxed on when you sold those investments and your overall investing timeline. Sometimes it would make sense, and sometimes it would not. Your best bet is to contact a financial advisor.
6. My spouse has no income. Should I be putting money in their TFSA? You can gift money to your spouse to contribute to their own TFSA — without affecting your contribution room or your taxes.
7. Can I transfer funds from my RRSP into my TFSA? You can, but it’s not always the smartest move. You’d need to pay taxes on the funds withdrawn, and you would lose that RRSP contribution room. There could be other options available to reach your goal that are more tax-efficient. Check with an advisor first.
Top questions about FHSAs
1. I already have a house. Can I contribute to a family member’s FHSA and get a tax deduction? No.
2. Can I combine my FHSA and RRSP (using the Home Buyers’ Plan) to buy a first home? Yes!
3. What happens to the portion of an FHSA I don’t use to buy a house? It can be rolled into your RRSP — without being taxed and with no effect on your RRSP contribution room. Just remember that you will be taxed on the money at your marginal rate when you withdraw it, since it will then be coming from your RRSP and is subject to the same rules.
4. Do I need to claim an FHSA contribution in the same year as I file my taxes, or can I defer it the way I can with an RRSP? In this case, FHSAs follow the same rules as RRSPs.
5. Can I have more than one FHSA? Yes. As with other registered accounts, you can open multiple FHSAs with no tax implications. But your contribution limit stays the same, so be sure to keep good records.
6. If I inherit a property abroad, does that make me ineligible to open an FHSA, since I would then already own a house? It doesn’t. FHSAs can be used toward your first home in Canada, no matter how many homes you own in other countries.
7. Can I transfer funds from my RRSP into my FHSA? You can, but it’s not always a good option, depending on your situation. You would not receive a deduction from the transfer, and you would lose the RRSP contribution room. You may want to check with a financial advisor first.
Top questions about RRSPs
1. Do things like pension deductions, group plans, or dividends affect contribution room? If your employer has a Group RRSP, Registered Pension Plan, or Deferred Profit-Sharing Plan, any money you receive from those things will count against your contribution room. (Unlike Group RRSP contributions, RPP and DPSP contributions count against your cap for the year after they were received.) But interest and dividends received don’t affect contribution limits at all.
2. What happens to the room in my RRSP when I make a withdrawal? Unlike with a TFSA, you do not get contribution room back in an RRSP.
3. I am new to Canada and have never filed taxes, hence I cannot start an RRSP. What is the best way for someone in my position to reduce my taxable income? Although it won’t reduce your taxes this year, you could open a TFSA to allow your investments to start growing tax-free. Any resident of Canada who has a valid SIN and who is at least 18 years of age is eligible to open one. Once you do file taxes, you’ll know exactly how much RRSP contribution space you have — and you’ll be able to open and contribute to an RRSP at that point.
4. How are RRSPs taxed when the account holder passes away? This is why designating a beneficiary is so important. (It’ll also keep people from arguing over your brooch collection.) If the designated beneficiary is a spouse, the account can roll over tax-free into their RRSP or RRIF — and then that person would need to pay taxes on any withdrawals. If it’s a child, however, the RRSP proceeds would be taxed with the estate, and then the beneficiary would receive the RRSP value as cash. If there is no beneficiary at all, the RRSP would count as income on the account holder’s final tax return, and the government would receive taxes owed before distributing to the estate.
5. Are RRSP withdrawals taxed the same as regular income? For instance, if I take a sabbatical year and am not working, could I withdraw from my RRSP to cover living expenses? Yes! RRSP withdrawals are taxed at your marginal tax rate, so any withdrawals made when you are not working would be taxed at a much lower rate, assuming you have no other sources of income.
6. Does it make sense to delay RRSP contributions if you think you will make more money in the future, before you retire? To save the room for higher-earning years, basically. Generally speaking, the answer is yes. But many other factors — such as contribution room, TFSA contribution room, current income, future projected income, and time horizon — may come into play that make it advantageous to begin contributions sooner.
7. If you withdraw from an RRSP before maturity, you have to pay a withholding tax and income tax. But is the income tax on the amount you withdraw, or is it on the amount left after the withholding tax is deducted? The withholding tax will go toward your total taxes owed on the withdrawal, so it will be subtracted from the total amount owed come tax time.
8. What happens if I want to use my RRSP before retirement? It depends. If you are a first-time home buyer withdrawing under the Home Buyers’ Plan, you can withdraw up to $35,000 in a calendar year from your RRSP to buy or build a qualifying first home for yourself or for a related person with a disability. The Lifelong Learning Plan (LLP) is a program that allows you to borrow up to $20,000 from your RRSP to pay for full- or part-time education and training. The maximum amount the LLP lets you withdraw in any calendar year is $10,000. If you are withdrawing outside of these plans, you’ll need to pay withholding tax on the amount you withdraw. In addition, the withdrawal is counted as income in the calendar year it’s received, so you’ll also pay income tax on that amount.
Top questions about spousal RRSPs
1. When should you use spousal RRSPs? Spousal RRSPs are a special type of RRSP that can be helpful when one spouse has a meaningfully higher income than the other. That’s because, in a graduated tax system, it’s better (in terms of your total take-home pay) for each person to have $40,000 of income than for one to have $65,000 and the other $15,000. With a spousal RRSP, couples can more evenly grow their retirement savings so that one person doesn’t have a substantially larger RRSP in retirement — and, therefore, end up in a higher tax bracket when they withdraw their money. The spousal RRSP is owned by the lower-income-earning spouse, contributed to by higher-income-earning spouse, and counted against the contributing spouse’s RRSP contribution room.
2. How does the spousal RRSP impact the contribution room of the contributing spouse? When the spouse contributes to a spousal RRSP, this reduces their RRSP contribution room.
3. How big of an income difference does a couple need to have to make a spousal RRSP make sense? There is no “one number fits all” rule. But, generally speaking, contributing to your spouse’s RRSP may make sense if you and your spouse are in different tax brackets.
4. Does contributing to your spouse’s RRSP make sense even if you have not maxed out your own RRSP? The contributing spouse would need contribution room to use the spousal RRSP, so you couldn’t make a spousal contribution if you had maxed out your own contribution room.
5. If a spouse uses their RRSP to withdraw during retirement and then also withdraws from their spousal RRSP, whose contribution space does it come out of? When the person in whose name the spousal RRSP is registered makes withdrawals, those would be under their name and be included in their taxable income. This would also be true for their own RRSP withdrawals. However, if you are withdrawing contributions made this year or two years prior, those withdrawals will count against the contributing spouse’s taxable income.
6. Is income splitting the same as a spousal RRSP? Income splitting is a financial planning strategy for reducing a couple’s overall household taxation in retirement. A spousal RRSP is just one tool that can be used to achieve this.
Top questions about the Home Buyers’ Plan (HBP)
1. Can my employer pension contributions count toward repaying the HBP? Sorry, no. Only RRSP contributions count.
2. If I make a withdrawal from my RRSP to take advantage of the HBP, does that affect my contribution limit for the year? No, it does not.
3. Can spousal RRSP contributions be used to pay back the HBP? No. If a withdrawal was made from a spousal RRSP using the HBP, the repayment would need to happen in a personal RRSP.
Top questions about RRIFs
1. At retirement, you need to convert an RRSP to an RRIF. Is it possible to self-direct RRIF holdings, or do you essentially withdraw and transfer the holdings to a non-tax-shielded account? An RRIF account can be managed or self-directed. The annual withdrawal requirements will remain the same regardless.
2. Can you convert an RRSP to an RRIF before you hit 65? You can convert your RRSP to an RRIF as early as 55. However, once it’s converted, you will be forced to withdraw a minimum amount every year. It’s also worth noting that everyone must convert their RRSP to an RRIF by December 31 of the year they turn 71 — otherwise the entire value of their RRSP would be withdrawn and taxed as income.
