Planning Strageties for Canadians: RRSPs and FHSAs

Tax Planning

the process of arranging financial affairs to minimize tax liability 

Importance of Tax planning

helps individuals and businesses reduce taxable income legally 

Tax planning benefits

keeps more money in your pocket and maximizes savings for future goals 

Key Principle of tax planning

understanding and utilizing available tax deductions and credits 

RRSP

a tax advantage account designed for retirement savings in Canada 

Established in: 1957 by the Canadian government

Primary purpose of RRSPs

to defer taxes on income until retirement when you may be in a lower tax bracket 

Key feature of RRSPs

contributions are tax deductible, reducing your current taxable income 

RRSP Contribution Rules

Contribution Limit: You can put in up to 18% of the money you earned last year, but only up to a max of $29,210 (for 2022).

Deadline: You have until 60 days after the year ends to make your RRSP contributions.

Carry Forward: If you don’t use all your contribution room, it adds up and can be used in future years.

Over-Contribution: If you put in more than $2,000 over your limit, you’ll be charged a 1% penalty each month.

Benefits of RRSPs

Immediate tax savings: contributions reduce your taxable income for the current year 

Tax deferred growth: investments grow tax-free while in the RRSP

Potential for lower tax rate: withdrawals taxed at potentially lower rates in retirement 

Income splitting: ability to split income with a spouse in retirement through a Spousal RRSP 

FHSA

a new tax-advantaged savings account introduced in 2023

Purpose of FHSA

to help Canadians save for their first home purchase 

Key Benefit of FHSA

contributions are tax-deductible and withdrawals for eligible home purchases are tax free 

FHSA contribution Rules

Annual contribution limit: $8,000

Lifetime contribution limit: $40,000

Unused contribution room: can be carried forward to the next year, up to $8,000

Eligibility: must be at least 18 years old and a Canadian resident

Account lifespan: can contribute for up to 15 years or until age 71, whichever comes first (you have to close the account)

FHSA as a Tax-Deferral Strategy

• Tax Deduction: Contributions lower taxable income.

• Tax-Free Growth: Investments grow without tax.

• Flexibility: Unused funds can move to your RRSP without penalty.

• Double Benefit: You get a tax break now and can withdraw for a home tax-free.

Comparing RRSPs and FHSAs

• Similarities: 

  • Both offer tax-deductible contributions 

  • Both allow investments to grow tax free 

• Differences:

  • FHSA has tax-free withdrawals for home purchase, RRSP withdrawals are taxable 

  • FHSA has a lifetime contribution limit, RRSP limits are based on income 

  • FHSA is specifically for first-time home buyers, RRSP is primarily for retirement