RRSPs are mainly for retirement savings and can offer significant tax savings, sometimes RRSPs are not always the right fit. If you have just started off your career and have a modest income – working full-time, you should avoid investing in RRSPs. RRSPs is all about the tax savings that are available to you. Even just a normal investment account might be a better fit than an RRSP. Even though non-registered investment accounts are not tax-free, they still allow you to benefit from tax savings in other ways based on the type of investments that you buy.
Depending on how much dividend income you are receiving from your investments into non-registered investment accounts, the taxes payable are very low, compared to the RRSP where every single dollar you withdraw from the account is fully taxable income. You can earn up to $50,000 in dividend income tax-free, assuming that’s your only source of income. In a tax-free savings account, if you are investing in Canadian dividend-paying corporations, the taxes would be $0.
Unfortunately though, at retirement, many people realized that investing in RRSPs was the wrong choice for them as they realized that they are paying more income tax now in retirement than when they were working.
If you plan on leaving the country, RRSPs may not be the right choice for you. If you are only going to be in Canada for a very short period, or you have a plan to relocate abroad in the future, you should avoid contributing to RRSPs altogether. With RRSPs, any income you withdraw from the account is considered taxable income. This is important to understand because once you leave the country, depending on where you go, your country of residence may or may not have a tax treaty in place with Canada. Tax treaties are in place between two countries to help individuals avoid double taxation.
As a non-resident, if you withdraw money from your RRSP, Canada will automatically withhold 25% of whatever you withdraw. This withholding tax essentially eliminates the need for you to file a candidate income tax return. You can then claim that withholding tax is a credit on your tax return in a country that you now live in if they have a tax treaty in place. However, if they don’t have a tax treaty in place, you might be forced to pay tax on that income twice.
When it comes to saving for retirement, RRSPs are pretty tough to beat. Your contributions reduce your annual income tax. They are generally not a good option for short-term savings. However, money withdrawn from an RRSP will increase your annual income and may result in you having to pay more taxes. Feel free to talk to our consultant to know more about it
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.