Canada’s Savings and Pension Plans

If you are a new comer to Canada or perhaps a young Canadian adult looking to start your journey of independence, you probably would have heard the acronyms RRSP, TFSA, FHSA, RESP etc. being thrown in the discussion for savings and planning for retirement and have begun to wonder what are these exactly and how do they work towards helping you save and achieve your financial goals. The government of Canada has supported the design of some effective saving accounts with added tax benefits for its residents. This article aims to provide you with just enough information to understand some of Canada’s most popular saving and pension plans.

Registered Retirement Savings Plan (RRSP)

The RRSP is one which you set up with your financial institution being either a bank, credit union, trust or insurance company. The financial institution should brief you on the types of RRSP and investments (funds in the account can be used to invest in different financial securities) you can use the account to make. This account although set up and held with a financial institution is recognized and registered by the Canadian Revenue Agency (CRA) which upholds certain tax considerations for contributions made to the account and for income earned through the account. Contributions to the account can be made by either you or your spouse or your common-law-partner ^[1]. As was mentioned before the funds paid into a RRSP can be used to invest in securities and generate passive income. This said income will be exempt from income tax if it remains in the account and not withdrawn. You will have to pay income tax on whatever income you receive (withdraw) from the plan. Contributions made to the RRSP can be considered as tax deductible and can be claimed against your income tax liability for an applicable year ^[2]. There is a RRSP deduction limit (the maximum amount you are allowed to deduct from contributions made to the RRSP for the year in question) that you have to be informed on and wary of for each fiscal year. If you have contributions in excess of your RRSP deduction limit, there are tax penalties levied at a certain threshold. The RRSP deduction limit is generally calculated by the Canadian Revenue Agency (CRA) but there are tools on its website that intends for individuals to calculate this amount for themselves if they wish to do so ^[3]. The deduction limit would vary from person to person based on the calculation criterion. However, there is one figure which is the same for all individuals and this is called the RRSP annual limit. Note, the wording is close and can be confusing but pay heed that the former says “RRSP Deduction Limit” and the latter says “RRSP Annual Limit”. The RRSP annual limit is one of the criterions used to determine your deduction limit. It is usually added in the computation of the deduction limit once a specific criterion is met. For your general knowledge the RRSP limit for F/Y 2024 and F/Y 2025 are CA$ 31,560 & CA$ 32,490 ^[4] respectively. To put into perspective, the aforementioned figures represent the total contribution an eligible individual starting with a clean slate (new RRSP account) would be able to contribute to a RRSP in a respective year and reap the benefits discussed earlier.

Tax Free Savings Account (TFSA)

The TFSA offers qualifying residents of Canada an avenue to save money and potentially use it to earn passive income through investments with the account, and these funds (contributions & and any income earned) will be tax free whether they remain in the account or withdrawn for use. However, the contributions made to a TFSA are not tax deductible against the holder’s income tax liability for any year ^[5]. To get this account started an individual would have to be at least 18 years of age, hold a valid Social Insurance Number (SIN) and be considered a resident of Canada (Non-residents could also open a TFSA but there are tax stipulations to be considered). It follows that the account is held with a financial institution (Bank, credit union, trust or insurance company) who should brief you on the types of TFSA’s and the relevant stipulations associated with them. The account must be registered with the Canadian Government for its tax considerations to be upheld. This account can be held throughout the holder’s lifetime, however, there are annual dollar limits (contribution limits) that one should be aware of ^[6]. The TFSA was launched in the year 2009 and at the time, once an individual was 18 years or older, with valid SIN and a resident of Canada they would be able to contribute a maximum of CA$5,000 to the TFSA. The annual limit is cumulative year over year, meaning any year which a portion or all of the annual limit is unused this amount is available to be added to what is considered the “contribution room” (total amount available to be contributed in a year and Is the result of summing the current annual limit, previous unused annual limits & any amounts withdrawn from the TFSA in the previous year) of the holder of a TFSA. Thus, if you met all the aforementioned criteria for a TFSA in 2009 but you are just now opening a TFSA in 2024 the total amount you would be able to contribute to this account in 2024 is the aggregate of all the unused annual limits spanning from the year 2009 to 2024 ^[7]. The annual limits for the TFSA in F/Y 2024 & F/Y 2025 are CA$7,000 and CA$7,000 respectively ^[4]. Information on all the applicable annual limits for the TFSA can be found on the Government of Canada website: Contributions – Canada.ca.

Registered Education Savings Plans (RESP)

A RESP is a savings vehicle for Canadians to help plan for their children post-secondary education. The account represents a contract between a subscriber (usually a legal guardian) and a promoter (financial institution), whereby contributions are made by the subscriber to the account on behalf of a beneficiaries (children). The beneficiary must have had a valid SIN and be a Canadian resident at the time contributions were made to the account for said contributions to be considered to have been made on their behalf. The promoter’s role is administrative and primarily consists of making payments from the account to the beneficiary at the designated time. This account is also registered with the CRA. The contributions made by the subscriber are not tax deductible. The contributions pooled in the account can be used for investing in securities to earn income. This income is also paid out to the beneficiary as educational assistance payments (EAP) according to the terms of the RESP. Funds in the account will be tax free as long as they stay in the account. While the beneficiary does not have to report the contributions paid to them from the account in their income tax filing, they must report the EAP’s received. The RESP creates the opportunity for beneficiaries to benefit from grants such as the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB) and designated provincial education savings programs once specific criterions are met ^[8]. The aforementioned grants are paid out in the form of EAP’S. Contributions can be made to a RESP for beneficiaries as long as they are under 31 years of age. Since 2007 there has been no annual limits for contributions that can be made to a RESP. However, one should be aware of the lifetime limit of CAD$50,000 that can be made to a RESP on behalf of its beneficiary. This means not considering the age restrictions, the maximum contributions that can be paid to a RESP is CAD$50,000 for each beneficiary throughout their lifetime ^[9]. There are tax implications to be borne if this is exceeded.

First Home Savings Accounts (FHSA)

This account is geared towards helping qualifying residents of Canada buy or build their first home within Canada. This is one of the newer saving instruments launched in April 2023 and backed by the Canadian government to help its people achieve their financial goals. Eligibility for a FHSA includes an individual being 18-71 years of age, a resident of Canada and have not lived in a qualifying home as a principal place of residence that they owned or jointly owned in the year of application nor the preceding 4 years and have not lived in a qualifying home as a principal place of residence that is owned or jointly owned by their spouse or common-law partner in the year of application nor the preceding 4 years or they do not have spouse or common-law partner (note the last condition is one or the other, not both). Once all the applicable criterions have been met, the applicant can open a FHSA with the help of their financial institution who should also brief them on the types of FHSA, types of investments that can be funded through the accounts and the tax implications associated with contributions to and withdrawals from the account ^[10]. Contributions to a FHSA are generally tax deductible up to a certain limit. The limits you want to be aware of with this account is the participation room which speaks to the maximum contribution you can make to the FHSA without creating an excess for the year in question. Each year for the FHSA is started with a participation room of CAD$8,000. Unused amounts of the participation room are transferrable to the next year which means the participation room for that year would increase (8,000 + prior year unused) and you would be able to pay more to the account without creating an excess. The other limit is the lifetime limit of CAD$40,000. This means that the maximum you would be able to contribute to a FHSA and claim as a tax-deductible expense on your income tax returns throughout your lifetime is CAD$40,000 ^[11]. Once you have breached the participation room and lifetime limits of the FHSA there are tax penalties to be borne.

Each of the accounts described in this article are common in their ability to help Canadians save and plan for their future and at the same time unique in each of their individual approach to this end. You can make strides towards achieving your financial goals once you have informed yourself on what these accounts have to offer and have made plans to capitalize on same. Whether its planning for your retirement with the RRSP, expecting the unexpected with a TFSA, securing your child’s future with a RESP or switching from rentals to an owned home with the help of a FHSA.