It’s well known that taxes on investments in Canada can be high, especially when compared to Nigeria.
After settling in Canada, the last thing you want to do is to spend so much on taxes especially when there are savings plans with tax benefits. Several plans offer tax benefits that you can take advantage of.
Thus, when you invest in these plans, the type of investment income earned is no longer important from a tax point of view.
Let’s talk about those savings plans that can help reduce taxes on your investments and how they work. They include:
Tax-Free Savings Account (“TFSA”)
A TFSA is a way for individuals who are 18 years of age or older and who have a valid social insurance number (SIN) to set money aside tax-free throughout their lifetime.
Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
If you are not a resident in Canada, you can also open a TFSA; however, any contributions made while a non-resident will be subject to a 1% tax for each month the contribution stays in the account.
The maximum amount that you can contribute to your TFSA is limited by your TFSA contribution room. Your contribution room can be seen on your Canada Revenue Agency (“CRA”) account. The TFSA contribution room is the total amount of all the following:
- the TFSA dollar limit of the current year;
- any unused TFSA contribution room from previous years; and
- any withdrawals made from the TFSA in the previous year.
Investment income earned by, and changes in the value of your TFSA investments will not affect your TFSA contribution room for current or future years.
Registered Retirement Savings Plan (“RRSP”)
An RRSP is principally a retirement savings plan that you (and your spouse) can contribute to enable you to fund your retirement. Deductible RRSP contributions can be used to reduce your tax.
Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from your RRSP.
Similar to RRSP, your contribution room can be seen on your CRA account.
RRSPs have two main tax advantages. First, you can deduct contributions against their income. Second, the growth of RRSP investments is tax-deferred. Unlike with non-RRSP investments, returns are exempt from any capital gains tax, dividend tax, or income tax. This means that investments under RRSPs compound on a pre-deferred basis.
First Home Savings Account (“FHSA”)
This was newly introduced to encourage individuals to purchase their first homes. An FHSA is a registered plan allowing you, as a prospective first-time home buyer, to save for your first home tax-free (up to certain limits).
Once you’ve opened an FHSA, you’re allowed to contribute up to a lifetime limit of CAD$40,000, with an annual contribution limit of CAD$8,000. Unused FHSA contribution room may be carried forward.
However, an FHSA’s carry forward is different from an RRSP’s, under an RRSP, your right to carry forward unused contribution room accumulates without limit. However, with an FHSA, the maximum contribution room you can carry forward to a subsequent year is CAD$8,000.
Registered Education Savings Plan (“RESP”)
With the high cost of tertiary education in Canada (compared to Nigeria), every parent should open and maintain an RESP account for their child.
An RESP is a long-term savings plan to help people save for a child’s education after high school, including trade schools, colleges, universities, and apprenticeship programs.
An adult can also open an RESP for themselves. When you open an RESP, if the child is eligible, he/ she can receive the Canada Learning Bond (CLB), which gives up to $2,000 and the Canada Education Savings Grant (CESG), which gives up to $7,200.
If your child decides not to go to school and use the funds in the RESP, it can be transferred to another child or your RRSP.
However, if the funds in the RESP were invested and you plan to transfer it to your RRSP, the grants and earnings received from the government must be returned, and you will have to pay taxes on the interest earned on the RESP.
Voluntary Registered Savings Plan (“VRSP”)
A VRSP is a new type of group savings plan. It is a defined contribution pension plan that allows you to save and invest for retirement through payroll deductions.
The VRSP offers tax advantages for both employers and employees that are similar to those offered by a traditional pension plan.
To the employee, it offers tax savings benefits as employee contributions to a VRSP are deductible from income before income tax is applied in the same manner as Registered Pension Plan contributions, the amounts you invest grow tax-free, and you only pay income taxes on the amounts that you withdraw from your VRSP.
Registered Disability Savings Plan (“RDSP”)
A registered disability savings plan (RDSP) is a savings plan intended to help parents and others save for the long-term needs of a person with severe and prolonged mental and physical impairment.
Contributions to an RDSP are not tax deductible and can be made until the end of the year in which the person turns 59.
In general, your investment and the government assistance to the RDSP grow tax-free, you do not pay income taxes when you withdraw amounts deposited in an RDSP, and persons with disabilities are expected to pay income taxes when they withdraw the investment income and government assistance