Relocating abroad and succeeding when you arrive there requires knowledge. One important knowledge you need is tax avoidance. Navigating investment taxes can be a challenge for many, particularly in countries like Canada where taxes on investments are known to be relatively high.
For newcomers to Canada, the burden of taxes on investments can be an additional concern after settling in the country. However, there’s good news—there are several savings plans that offer tax benefits, helping individuals minimize their tax liability on investments.
Exploring Tax-Advantaged Savings Plans
As individuals make Canada their new home, many are seeking ways to optimize their finances, and tax-advantaged savings plans are becoming a popular choice.
These plans offer Canadians a means to invest while minimizing the impact of taxes on their investment earnings. Here’s a closer look at some of these savings plans and how they operate:
Tax-Free Savings Account (TFSA)
A TFSA is a tax-free way for individuals aged 18 and older with a valid social insurance number (SIN) to save money throughout their lifetime. Unlike regular investment accounts, contributions to a TFSA are not tax-deductible.
However, both contributions and any investment income earned within the account remain tax-free, even upon withdrawal. Non-residents can also open a TFSA, but contributions made during non-residency are subject to a 1% monthly tax.
The maximum contribution limit is determined by your TFSA contribution room, including the TFSA dollar limit of the current year, any unused contribution room from previous years, and any withdrawals made in the previous year.
Registered Retirement Savings Plan (RRSP)
An RRSP is a retirement savings plan where contributions can be used to reduce taxable income. Investment income earned within the RRSP is generally tax-exempt as long as the funds remain in the plan. Taxes are paid when payments are withdrawn from the RRSP.
Similar to the TFSA, your contribution room can be checked through your Canada Revenue Agency (CRA) account. RRSPs offer tax advantages through deductible contributions and tax-deferred growth on investments.
First Home Savings Account (FHSA)
Introduced to encourage first-time home buyers, the FHSA is a registered plan allowing individuals to save for their first home tax-free. An FHSA allows for contributions up to a lifetime limit of CAD$40,000, with an annual contribution limit of CAD$8,000. Unused contribution room can be carried forward, but the maximum carry-forward amount is CAD$8,000.
Registered Education Savings Plan (RESP)
The high cost of post-secondary education in Canada has led many parents to consider RESPs. A RESP is a long-term savings plan to help save for a child’s education after high school.
Eligible children can receive government grants, such as the Canada Learning Bond (CLB) and Canada Education Savings Grant (CESG), which boost the savings. RESP funds not used for education can be transferred to another child or your RRSP, though tax implications apply.
Voluntary Registered Savings Plan (VRSP)
The VRSP is a new type of group savings plan designed as a defined contribution pension plan. It provides tax advantages for both employers and employees, allowing for tax-deductible employee contributions, tax-free growth of investments, and taxation upon withdrawal.
Registered Disability Savings Plan (RDSP)
A RDSP is a savings plan aimed at helping individuals with severe and prolonged mental and physical impairments. While contributions are not tax-deductible, investment growth and government assistance within the RDSP are tax-free. Withdrawals from an RDSP are also tax-exempt, making it an important tool for those with disabilities.
Keying into the Trend
The growing popularity of tax-advantaged savings plans indicates a promising trend for both resident and non-resident Canadians seeking to minimize taxes on their investments.
As individuals become more informed about these plans, there’s an expectation that more people will actively explore and take advantage of the tax benefits they offer.
These savings plans are anticipated to play a crucial role in reducing the overall tax burden on investments for Canadians, helping them secure their financial future and achieve their financial goals with greater ease.
