In some ways, the annual March 1 deadline for making a contribution to a registered retirement savings plan (RRSP) couldn’t come at a worse time with respect to the tax and non-tax financial obligations of most Canadians. During February, credit card bills for holiday spending will be coming due, taxpayers who pay tax by instalments will be facing the March 16 deadline for the first such instalment payment of 2026, and, for all taxpayers, any balance of income tax owed for 2025 must be paid to the federal government on or before April 30, 2026.
Notwithstanding all of those competing financial priorities, the unvarying rule is that RRSP contributions, in order to be deducted on the income tax return for 2025, must be made on or before March 1, 2026. (Where, as is the case this year, the March 1 contribution deadline falls on a Sunday, CRA administrative policy extends the deadline by one day, to Monday, March 2, 2026.)
The basic rules governing RRSP contributions allow a Canadian taxpayer to make a current year contribution to their RRSP of the lesser of 18% of earned income for the previous taxation year or the annual RRSP limit, which is a specified dollar amount. (For 2025, the annual RRSP dollar amount limit is $32,490.) Where a taxpayer has not made the maximum allowable RRSP contribution in a previous tax year, that unused contribution room is carried forward and added to allowable RRSP contribution room for 2025. The total contribution amount made for the year can then be deducted from income on the annual return.
The wisdom of making annual contributions to one’s RRSP has become an almost unquestioned tenet of tax and retirement planning, but the one question that doesn’t often get asked by taxpayers is whether it makes sense to contribute to an RRSP, or if a different savings vehicle is more appropriate to their tax and financial situation – or whether it’s even possible to make an RRSP contribution.
For just over 50 years after RRSPs were introduced in 1957, they represented the only means by which taxpayers who were not members of a registered pension plan could save for retirement on a tax-assisted basis. That changed in 2009, when the tax-free savings account (TFSA) program was introduced.
The tax treatment of TFSA contributions is essentially the inverse of the tax rules governing RRSP contributions. RRSP contributions made can be deducted from income and all contributions and all investment income earned by those contributions can compound free of tax inside the RRSP. However, when funds are withdrawn from the RRSP (which can be done at any time but must start, at the latest, the year after the taxpayer turns 71) all such funds are fully taxed as income. Conversely, contributions made to a TFSA are not deductible from income in the year they are made. However, as is the case with an RRSP, contributed funds and investment income earned on those funds can compound free of tax inside the TFSA. However, any and all funds withdrawn from the TFSA are received free of tax, whether they represent original contributions or investment income earned on those contributions.
Given the specific rules governing RRSPs and TFSAs, taxpayers must consider whether it is possible for them to make an RRSP contribution and, if so, whether an RRSP or a TFSA is their best vehicle for short-term or long-term saving. Some of the considerations which will influence that decision are as follows.
Where no RRSP contribution can be made
For Canadians over the age of 71, there is no real choice. All individual Canadians must collapse their RRSPs by the end of the year in which they turn 71, and no RRSP contributions can be made after that time. Practically speaking, a TFSA is the only tax-sheltered savings vehicle to which taxpayers over age 71 can contribute. Most taxpayers over the age of 71 have transferred their RRSP savings to a registered retirement income fund (RRIF) and are required to withdraw a specified percentage of funds from that RRIF each year. Taxpayers who are in the fortunate position of having such income in excess of current cash flow needs can contribute some or all of such amounts to a TFSA, to the extent of their TFSA contribution room for the year. While the RRIF withdrawals must still be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when any funds in the TFSA are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn in the future from a TFSA will not affect the planholder’s eligibility for Old Age Security benefits or other means-tested tax credits.
When RRSP contribution room is reduced
The minority of Canadian taxpayers who belong to an employer-sponsored registered pension plan (RPP) save some percentage of income for retirement through contributions made to that RPP, with the employer also making a contribution to the benefit of the employee. The value of benefits earned under the RPP each year by the employee is known as a pension adjustment, and generally any such pension adjustment reduces the employee’s ability to contribute to an RRSP in the following year. Where the ability to contribute to an RRSP is limited in this way, a TFSA is likely the best available alternative for tax-assisted savings.
When the savings goal is short-term
Where savings are being put aside for an expenditure that is likely to be made in the next five years (like a new car, a wedding, or a “bucket list” vacation), saving through a TFSA is almost certain to be the better option. Taxpayers in that situation are sometimes tempted to make an RRSP contribution instead, in order to get a tax refund, and then to withdraw the funds when the planned expenditure is to be made. However, while choosing that option will provide a deduction on this year’s return and probably generate a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced – the contribution room used to make that contribution is permanently lost. While the amounts involved may seem small, the loss of compounding on even a relatively small amount over 25 or 30 years can make a significant dent in one’s ability to save for retirement.
When income is likely to increase significantly in the near future
The greatest tax benefit of contributing to an RRSP is realized when contributions are made when income (and therefore tax payable) is higher, and the intention is to withdraw those funds when both income and the rate of tax payable on that income is lower. Taxpayers who are expecting their income to rise significantly within a few years – for example students in post-secondary or professional education or training programs – can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, allowing the funds to compound on a tax-free basis, and then withdrawing the funds tax-free once they’re working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted against income which would be taxed at the much higher rate, generating a tax savings. And, if a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.
When income after retirement isn’t likely to change
Lower-income taxpayers, for whom there isn’t likely to be a great difference between pre- and post-retirement income, are likely better off saving through a TFSA. That’s especially the case where those taxpayers may be eligible in retirement for means-tested government benefits like the Guaranteed Income Supplement or tax credits like the GST/HST credit or age credit. Withdrawals made from an RRSP or RRIF during retirement (including the minimum required withdrawal from an RRIF) will be included in income for purposes of determining eligibility for such benefits or credits, and lower-income taxpayers could find that such withdrawals have pushed their income to a level which reduces or eliminates their eligibility. On the other hand, monies withdrawn from a TFSA are not included in income for the purpose of determining eligibility for any government benefits or tax credits, so saving through a TFSA will ensure that receipt of such benefits is not put at risk.
If you would like help with dealing with the CRA or would like to know more about taxable benefits, please feel free to call us at (905) 305-9722 or email us at info@eigenmachtcrackower.com and we will help you out!
