Tax Matters

Jamie Golombek

As managing director of tax and estate planning with Canadian Imperial Bank of Commerce's wealth advisory services division in Toronto, Jamie Golombek is quoted frequently in the national media as an expert on taxation.

With the TFSA having become a worthwhile option for your clients, it’s time to consider whether an RRSP has the same allure as it once did for certain investors

By Jamie Golombek |

This year's RRSP contribution deadline of Feb. 29 is a mere three weeks away, but in many cases, your clients' best decision for 2016 may be to steer free and clear of the RRSP.

Indeed, for many Canadians attempting to save for retirement, the tax-free savings account (TFSA) may prove to be the better option. Canadian residents who are at least 18 years old are permitted to open a TFSA, provided they have a social insurance number. The amount your clients can contribute to a TFSA is based on their "TFSA contribution room." Canadians who were at least 18 in 2009 and, as of 2016, have not yet opened up a TFSA can immediately contribute $46,500 to a TFSA, consisting of $5,000 of accumulated room for each of 2009 through 2012, $5,500 for 2013 and 2014, $10,000 for 2015, and $5,500 for 2016.

Note that while the law dropping the TFSA limit back down to $5,500 for 2016 hasn't yet received Royal Assent, the effective date is Jan. 1, so you'd be wise to caution your clients not to exceed this amount for 2016.

Given limited funds, the choice to invest in an RRSP vs a TFSA will come down to your clients' effective tax rates today vs their expected marginal effective tax rates in retirement, taking into effect any loss of income-tested government benefits.

If a client anticipates she will be in a lower tax bracket in her retirement years, investing in an RRSP may be preferable to a TFSA. In fact, you might even consider recommending the client withdraw funds on a tax-free basis from her TFSA and contribute the proceeds to her RRSP.

The client could then recontribute the amount to her TFSA in a later year, once her RRSP contributions are maximized and additional cash becomes available. However, if your client is already in a low tax bracket, skipping the RRSP contribution in favour of the TFSA is likely the more prudent course.

What about clients with debt? Perhaps paying down debt trumps making an RRSP/TFSA contribution this year? The answer comes down to expected rates of return.

For example, making a contribution toward an RRSP or a TFSA may be a better option than paying down debt when the expected rate of return on investments in an RRSP or a TFSA — given the client's level of risk — is expected to be greater than the rate of interest she is paying on debt. This is particularly true with historically low mortgage rates below 3% in recent years.

On the other hand, clients with credit card or other consumer debt will often be best using all extra cash to pay down those liabilities, whose interest rates can approach 20% — or more. In fact, in many cases, clients with high-interest debt may be wise to cash in their RRSPs and TFSAs altogether and use the funds to pay off those debts as the money saved in paying down high-interest debt is guaranteed to exceed the return on any investment you could recommend in an RRSP or a TFSA.