For decades, February has been considered the month for RRSP contributions, with Canadians scrambling to make their contributions by the deadline to be entitled to claim the tax deduction on the prior year’s tax return. This year, the deadline to be able to claim the contribution on a 2019 tax return is Monday, March 2, 2020, as the normal 60-day deadline date – February 29th – falls on a Saturday.
But before contacting all your clients and encouraging them to make their RRSP contributions before the deadline, why not take some time to consider whether contributing to a TFSA is the smarter long-term financial choice for some of your clients? After all, with the TFSA just celebrating its eleventh anniversary and cumulative room now sitting as high as $69,500 for someone who has never contributed, some clients could have more than enough TFSA contribution room available to meet their targeted savings goals for 2020.
While the RRSP and TFSA are meant to be tax-neutral, that’s only true if the taxpayer’s upfront tax rate is the same as their tax rate in the year the funds are withdrawn. RRSPs will make more sense when the tax rate upon withdrawal is expected to be lower than the tax rate upon original contribution. Conversely, TFSAs will work out better if the expected tax rate (including the effect of RRSP withdrawals on benefits such as the Guaranteed Income Supplement or Old Age Security, which are clawed back based on income) will be higher upon withdrawal than it was in the year of contribution.
But the math doesn’t tell the full story, since TFSAs are much more flexible. For example, amounts withdrawn from a TFSA can be recontributed back into a TFSA, beginning the following calendar year. This can’t be done with RRSPs unless new contribution room is generated based on new earned income.
TFSAs have proven particularly popular among both younger and lower-income Canadians, who love the flexibility that TFSAs provide and who may find themselves in a higher tax bracket when the funds are ultimately withdrawn. But advisors need to be careful when dealing with younger clients (i.e., those under age 30) and not automatically assume that they have $69,500 of available contribution room just because they have never opened up a TFSA. After all, TFSA room only started accumulating in 2009 and only accumulates annually for those Canadians over age 18 in a particular calendar year.
If you’re meeting with clients who were born in 1992 or later, use the handy chart below to determine their maximum TFSA limit for 2020, assuming no contributions have ever been made to a TFSA and the client has been resident in Canada since the year they turned 18.
| Birth year | Age in 2020 | Tax year | Annual limit for tax year | Cumulative 2020 limit |
|---|---|---|---|---|
| 1991 & earlier | 29+ | 2009 | 5,000 | 69,500 |
| 1992 | 28 | 2010 | 5,000 | 64,500 |
| 1993 | 27 | 2011 | 5,000 | 59,500 |
| 1994 | 26 | 2012 | 5,000 | 54,500 |
| 1995 | 25 | 2013 | 5,500 | 49,500 |
| 1996 | 24 | 2014 | 5,500 | 44,000 |
| 1997 | 23 | 2015 | 10,000 | 38,500 |
| 1998 | 22 | 2016 | 5,500 | 28,500 |
| 1999 | 21 | 2017 | 5,500 | 23,000 |
| 2000 | 20 | 2018 | 5,500 | 17,500 |
| 2001 | 19 | 2019 | 6,000 | 12,000 |
| 2002 | 18 | 2020 | 6,000 | 6,000 |
| 2003 & later | 17 and under |