{ 22 comments… read them below or add one }

1 The Financial Blogger

when you withdraw money from your RRSP, this amount is added to your existing income. Therefore, you are paying your MARGINAL TAX RATE and not your AVERAGE TAX RATE.

For example, if you are making 50K while working, your marginal tax rate is about 38%. If you make a RRSP contribution, you will receive a tax return of 38% of this amount (unless you make a big contribution and you hit a lower marginal tax rate).

If you are still making 50K at retirement (employer’s pension + gov’s pension), your RRSP withdrawals will still be taxed at 38%. There is no situation where you pay an average tax rate in Canada…

2 Four Pillars

FB – I know that – I clarified the post to indicate that you pay the average tax if you have no other income.

If you have a good pension then the idea of paying average tax on rrsp withdrawal is not true but in my case it is because we will get very little money from other sources.


3 MillionDollarJourney

*raises hand* – I’m a geeky personal finance blogger.

Yes, i’m with FB on this one. There were some comments on MDJ about only paying average tax. That’s a big assumption that there will be no other income during retirement.

I can see this TFSA being very beneficial for those with defined benefit pension plans (gold ticket). As their RRSP contribution room is limited, this is their opportunity to save for extra (and tax free) income during retirement.

I’m still really partial to the idea of using the TFSA contribution room to buy “income” investments as a way of a tax free salary boost.

4 Four Pillars

The amount of tax paid on a rrsp withdrawal is very dependant on the scenario. In our case we hope to live on about $45k (gross) per year which is split between two people. If I retire early enough then there will be NO other income for several years so the amount of tax paid on the rrsp withdrawal will be the average tax.

Later on when CPP & OAS kicks in then the tax rates will rise for the rrsp withdrawals but they still won’t equal the marginal tax rate.

A lot of the scenarios I’ve seen use the marginal tax rate only when calculating taxes on rrsp withdrawals which I don’t think applies to everyone, especially the marjority of us who don’t have a pension plan.

Maybe a post on this topic is in order….

5 Traciatim

I wonder if you could use the TFSA to ‘bump up’ your earnings from a non-registered smith manouver account. I haven’t run through it and I’m at work so I probably can’t, but what if you use the smith to gain dividends from a HELOC and all the dividends go in to your TFSA and get reinvested in there, after that gains some momentum you can then use this as collateral to secure an additional line of credit to snowball your smith to new higher heights. It may be worth looking in to once all the rules are finalized. I’ll name it ‘the UberSmith’.

6 Four Pillars

Traciatim – that’s an interesting idea.

I believe the normal SM is to use the dividends to help pay down the non-deductible mortgage which increases the amount you can borrow so I’m not sure if diverting that cash flow will increase your overall leverage or not.

Let us know what you come up with!


7 Nobleea

One of the big benefits, I think, is for families that have one big income earner, and a stay at home parent. The spousal RRSP should be maxed out, then after the holding period (3 yrs), the stay at home parent can withdraw enough each year to reach the exemption limit and then move that cash over to the TFSA. All that money has now become tax free from the time it was earned to the time it will eventually be spent.
This would have to be done in 3 or 4 yr spurts (due to attribution rules). For a high income earner in the top bracket, this could have the effect of saving approx 2K every year in taxes and even more in the future due to the tax free withdrawals of the TFSA.

8 Four Pillars

Nobleea – that’s a great idea. This is the situation that I’m in.

A couple of potential problems are

1) You lose the spousal tax credit on any income from the spouse.
2) I’m not sure exactly how the 3 year rule works for spousal rrsps. How do you (or more importantly the CRA) know that the money you are withdrawing has been in the account for three years and isn’t the money that was deposited last week?


9 Cheap Canuck

Read Cardhu’s last two comments on this topic on FWF for more clarification as to why applying a marginal tax rate to RRSP withdrawals can be misleading :


10 Cheap Canuck

To further illustrate this example, go to:

http://www.walterharder.ca/T1.html (Income Tax Estimator)

Punch in tax year 2008. Single, age 65-69
Select province of British Columbia

OAS will autofill = $6070
Put in $6000 in CPP field
Put in $5000 in Canadian dividends (Public corp) field
Put in $10000 in Eligible Pension Income field (RRSP withdrawal)

This individual will receive $27070 in income for that year. Now look at the tax payable:

How can anyone claim this individual is facing MTR on his RRSP withdrawal of $10,000 when his total tax bill is only $489.10?

11 Nobleea


I don’t know much about the spousal tax credit. Is there a certain income they can earn while still keeping the credit? I don’t know how much the credit is, perhaps it equates to more than $2K in tax savings every year.

As for attribution rules, you’d have to do it in 3 or 4 year segments.
Start of Year 1 Contribute max contribution to spousal rrsp (say 20K)
Start of Year 4 Spouse begins to take cash out of rrsp keeping it under the exemption limit and transfers it to TSFA (10K in yr 5, 10K in yr 5)
repeat process starting the next tax year.

during years 2, 3 you wouldn’t contribute to the spousal plan (maybe to yours and TSFA instead).

12 Four Pillars

Nobleea – if memory serves me correct I think we reduce our taxes by about $1800 if my wife has an income of zero. As she makes more money the credit goes down and disappears somewhere around $10k of earnings by her.

13 Nobleea

Hmm, that’s quite a bit. I guess you wouldn’t be able to claim the tax credit in the 1 or 2 years (out of 4 or 5) where she is taking money out of the RRSP. But the other years you could.

Now if only you could have 3 or 4 spouses, this could all overlap perfectly.

14 moneygardener

Great post 4P. I agree with most of your assessments. I will certainly be using the maximum TFSA amount every year for my wife and I. It would really make no sense for me not to use the TFSA to it’s maximum because I invest quite a bit into a non-reg. account currently.

15 Four Pillars

Nobleea – I think one is enough! 🙂

MG – thanks. Yes, the TFSA is a useful tool for just about everyone to utilize in some way.


16 David

Maybe I’m one of those people that don’t get how RRSPs are suppose to be a good thing…

As I see it, if you put your money in RRSPs, sooner or later, you have to take it out to spend it. When you do, it counts as income and you pay taxes on it, and (this is the kicker) you get reduced benefits for all kinds of stuff because you’ve made “that much money.” For example, my 80 year old father gets $800 or so in pension, but another $550 or so in GAIN, because his pension is too small. If he took any money out of RRSPs, or whatever they had to be converted into, he’s loose the GAIN, and the subsidy for his Assisted Living place, and… (it’s a long list). So, he would have to take out probably over $10 or more per year before he had any extra money to spend. His effective taxes would be huge.

But, if I manage to put away $5k per year in this TFSP thing for the next 20 years, then I’ll have $100k (in today’s dollars, assuming the interest keeps up with inflation). But, the bonus is that I can take this out, or the interest earned on it, and spend it at any time without it being counted as income. I will continue to get whatever low-income subsidies that I manage to qualify for. I’d be technically poor, getting any available government assistance, but still have $100K in the bank, just for fun.

Sure, for people that intend to retire rich, RRSPs may make more sense. But, for us regular folk that will likely get income support in our old age, these TFSAs seem to make a whole lot of sense.

17 Four Pillars

David – you have summed it up perfectly – RRSPs are not a good financial tool for low-income people.

Non-registered accounts (and now TFSA) have always been a better choice for low income investing.

18 Sean

This TFSA worries me. As you’ve pointed out, this is not as good a retirement savings vehicle as an RRSP. What really concerns me is that the Canadian government is not in the habit of giving out gifts to the Canadian tax payer and that is exactly what this account is. So why did they do it? To figure that out, let’s look at a few facts about our government.

1. The people who make up the rules only benefit from them for a short peroid of time.

2. Taxing money in the future isn’t as good for the government as taxing it now. People in power now would probably prefer the money now rather than in 30 years when they are retired.

3. The above point is also true from an inflationary point of view. Look at the tax you can take on $5000 now vs. the tax you can take on that $5000 investment, even after it has grown over 30 years. If you’re getting an average of 5% on that investment it’d be worth about $22000 in 30 years. What do you think the tax rates would be on both of those figures would be based on the sccenario of RRSP vs. TFSA?

The way I see it, the government will probably do something like this:

a) Let everybody get used to the idea of having a TFSA, some or many will even make use of it.

b) Announce that they are phasing out the RRSP but because of their generous nature they will allow a portion, or maybe even all of your RRSP to be rolled into your TFSA, without a tax penalty.

People will jump at this because it’d be an incredible deal. Not having to pay taxes on your tax free dollars? Yes please! But then we’d have screwed it for the future generations and all RRSP contributions will now be TFSA contributions made with after tax dollars.

Maybe I’m just being paranoid and should break out my tin foil sombrero, but I have to ask myself this: “Why on earth would the Canadian government, one that is so fond of taxing it’s citizens to death, suddenly give us a tax free present?”

19 Nobody

ANother Trojan Horse delivered by our government made out of thieves. DO NOT trust them whatever they give you, nothing is free nowadays, remember that. Find some “good” bank (we all know there is no good bank anyway) with some nice interest rate on your savings account and save it that way. Last 6 years, I put 80 thousand just in savings + interest of course that I get. That’s my savings account, that’s what’s going to pay my child’s education and help us in the future. No one is going to tell me what to do with my money. I worked hard for it and I can do with it whatever I want. Oh, yes… Have I mentioned that I never ever used credit cards? Not a single loan in my whole life, not a single cent of debt. If you manage your money properly, you don’t need these government suckers to tell you what to do with your money.

20 nobleea

You’re supposed to pee in the toilet. Not your corn flakes.

21 Anil

One of the RRSP arguments not frequently expounded on is the content of the RRSP itself. If I understand the argument correctly, a lower marginal tax rate at withdrawal time compared to the contribution time generally favours RRSP over the TFSA. I question the validity of this argument if most of the gains in the accounts consist of capital gains.

I’ve used my TFSA for frequent trading and am generally able to average about $100/day on my $14k balance. I don’t always make it, but I am quite certain that this will be possible as a conservative average once I hit $20k. Don’t know how successfully this can be scaled up, but I’ll give you an update in a year or so.

Assuming this is all valid, my point would be that the gains made would all capital in nature, but had it been in an RRSP, it would have been taxed at the max rate at withdrawal. In the TFSA, the entire growth (regardless of nature) is tax free, and in my humble opinion, makes it a superior vehicle (at least from a frequent trading perspective).

I would like to hear of any support or criticisms of this scenario. Have I overlooked anything obvious? Trading fees are fairly negligible at $0.01/share.

22 Mike Holman

Anil – That’s a great comment and yes, it’s absolutely true. The higher the capital gain is – the more advantageous the TFSA is compared to the RRSP. I’ve been planning a post on this very subject.

This is why it makes sense to try to put your investments with a higher expected rate of return (ie equities) in your TFSA and things like bonds in the RRSP.

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