Registered Accounts Explained

In Canada, registered accounts are investment accounts that offer tax advantages and are registered with the Canadian government. These accounts include:

• Registered Retirement Savings Plans (RRSPs): These accounts are designed to help Canadians save for retirement. Contributions made to RRSPs are tax-deductible, which means they can be used to reduce your taxable income. The investments inside an RRSP grow tax-free until you withdraw them, which can be done in retirement when you will likely be in a lower tax bracket.
• Tax-Free Savings Accounts (TFSAs): TFSAs are a flexible savings option that allow Canadians to save for any purpose tax-free. Contributions to TFSAs are not tax-deductible, but any investment gains earned in the account are tax-free. You can withdraw your money from a TFSA at any time without paying taxes.
• Registered Education Savings Plans (RESPs): RESPs are savings plans designed to help Canadians save for their children’s post-secondary education. The government offers a Canada Education Savings Grant (CESG) that can be added to an RESP to help boost savings. The investment earnings inside an RESP grow tax-free until they are withdrawn to pay for education expenses.
• Registered Disability Savings Plans (RDSPs): RDSPs are savings plans designed to help Canadians with disabilities and their families save for long-term financial security. The government offers a Canada Disability Savings Grant (CDSG) and a Canada Disability Savings Bond (CDSB) that can be added to an RDSP to help boost savings. The investment earnings inside an RDSP grow tax-free until they are withdrawn.

Registered accounts are a popular way for Canadians to save for their future while also minimizing their tax burden. It’s important to note that there are contribution limits for each of these accounts, and the rules and regulations surrounding them can be complicated.

Here are some additional details about registered accounts to keep in mind:

	Contributions	Restrictions	Income Earned
RSP/RIF	Tax benefits for contributions, but withdrawals are taxable	Annual & income limits to how much can be contributed, certain mandates for withdrawals	Tax free
TFSA	No tax for deposits or withdrawals	Annual limits on deposits, no restrictions on withdrawals	Tax free
RESP	Deposits receive benefits (grants)	Annual deposit limits, restrictions on withdrawals	Tax free

RSP contribution limits and withdrawal rules

The contribution limit for an individual’s Registered Retirement Savings Plan (RRSP) is calculated based on their earned income from the previous year.

Specifically, the contribution limit is equal to 18% of the individual’s earned income from the previous year, up to a maximum amount set by the government. The maximum contribution limit for the 2022 tax year is $30,000.

For example, if an individual earned $50,000 in 2021, their contribution limit for the 2022 tax year would be:

$50,000 x 18% = $9,000

This means that they can contribute up to $9,000 to their RRSP for the 2022 tax year and receive a tax deduction for that amount. If they contribute more than their contribution limit, they may be subject to a penalty tax.

It’s important to note that any unused contribution room from previous years can also be carried forward to future years. Individuals can find their RRSP contribution limit on their Notice of Assessment from the Canada Revenue Agency, or by logging into their CRA My Account online.

When it comes to withdrawing funds from a Registered Retirement Savings Plan (RRSP), there are some rules to keep in mind:

• Withholding Tax: When you withdraw funds from an RRSP, the financial institution holding the account is required to withhold tax from the withdrawal amount. The withholding tax rates range from 10% to 30%, depending on the amount withdrawn.
• Taxable Income: The amount withdrawn from an RRSP is treated as taxable income in the year it is withdrawn, and will be added to your total income for that year. This means that the amount withdrawn will be subject to federal and provincial income taxes, based on your marginal tax rate at that time.
• Contribution Room: Withdrawing funds from an RRSP does not affect your contribution room, which is based on your previous year’s earned income. However, once you withdraw funds from an RRSP, you cannot recontribute that amount to the account.

When it comes to withdrawals from a Registered Retirement Income Fund (RRIF), the rules are similar but slightly different:

• Minimum Withdrawals: Once you reach the age of 71, you are required to convert your RRSP into a RRIF and start making minimum withdrawals each year. The minimum withdrawal amount is based on your age and the value of your RRIF.
• Withholding Tax: Like RRSPs, withdrawals from a RRIF are subject to withholding tax, and the rates range from 10% to 30%, depending on the amount withdrawn.
• Taxable Income: The amount withdrawn from a RRIF is treated as taxable income in the year it is withdrawn and will be added to your total income for that year. The amount withdrawn will be subject to federal and provincial income taxes, based on your marginal tax rate at that time.
• Contribution Room: Withdrawing funds from a RRIF does not affect your contribution room, as you cannot contribute to a RRIF.

TFSA contribution limits and withdrawal rules

The contribution limit for a Tax-Free Savings Account (TFSA) is determined by the Canada Revenue Agency (CRA) and is calculated as follows:

• For the 2022 tax year, the contribution limit is $6,000.
• Any unused contribution room from previous years can be carried forward to future years.
• If you have never contributed to a TFSA before, your cumulative contribution limit for 2022 is $75,500 (since the TFSA was introduced in 2009).
• To calculate your TFSA contribution room for a given year, you can add up your unused contribution room from previous years and add the current year’s contribution limit. For example, if you have never contributed to a TFSA and you were at least 18 years old in 2009, your contribution room for 2022 would be $75,500.

If an investor wants to withdraw funds from their TFSA, there are some rules to keep in mind:

Withdrawals from a TFSA are tax-free and can be made at any time without penalty.

• The amount of the withdrawal will be added to the investor’s contribution room the following year. For example, if an investor withdraws $5,000 from their TFSA in 2022, they will be able to contribute up to $11,000 in 2023 ($6,000 for the 2023 contribution limit, plus $5,000 for the withdrawn amount).
• If an investor has already contributed up to their contribution limit for the year and they withdraw funds from their TFSA, they will have to wait until the following year to re-contribute that amount without penalty.

It’s important to note that over-contributing to a TFSA can result in a penalty tax of 1% per month on the excess amount, so it’s important to keep track of your contribution room and withdrawal history. The CRA provides information on TFSA contribution limits and unused contribution room on your Notice of Assessment, and you can also check your contribution room online through your CRA My Account.

The withdrawal rules associated with TFSAs make them more suitable for “emergency fund” objectives since withdrawals can be made at any time. However, RSPs have certain benefits for investors saving for a home purchase, and so they are more suitable for this purpose.

How is tax applied to the income (dividends, interest, capital gains) that investors earn inside their registered accounts?

The way in which the income earned by Canadian investors inside their registered accounts is taxed depends on the type of account.

For Registered Retirement Savings Plans (RRSPs), the investments inside the account grow tax-free until they are withdrawn. When funds are withdrawn from an RRSP, they are treated as taxable income in the year they are withdrawn. This means that the investor will have to pay income tax on the amount withdrawn, based on their marginal tax rate at that time. The idea behind this is that since the contributions to the RRSP were tax-deductible when they were made, the government will tax the withdrawals as income when they are taken out.

For Tax-Free Savings Accounts (TFSAs), the investments inside the account also grow tax-free, but the difference is that withdrawals are tax-free as well. This means that the investor does not have to pay any taxes on the investment gains or the amount withdrawn from the account.

For Registered Education Savings Plans (RESPs), the investment gains inside the account are tax-free if they are used for educational purposes. When the money is withdrawn from the RESP to pay for education expenses, the earnings are taxed in the hands of the student, who is typically in a lower tax bracket. This means that the tax burden is generally lower than if the earnings were taxed in the hands of the contributor.

Which registered account should I use first?

Every Canadian should max out their registered account deposit limits each year. But, if you’re an investor who doesn’t plan to make the maximum contributions to all registered accounts each year, then it doesn’t matter too much which registered account you use first. Maybe your focus should instead be on budgeting and saving an emergency fund.

For example, if your income is so low that you feel you cannot afford to contribute the maximum amount to your registered accounts each year, then the tax benefits of these accounts won’t matter too much anyway. Say, if your income tax rate is zero, then the benefits of registered accounts such as TFSAs and RSPs won’t matter. And, if your income rises in the future, since the contribution room of these registered accounts are carried forward, you can catch up in future years when the tax benefits are useful to you.