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Beginner guide
TFSA vs RRSP for stocks
If you invest in stocks in Canada, the account you hold them in can matter as much as the stocks you pick. The Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) both shelter investment growth from tax, but in very different ways.
Contribution limits and rules are set by the federal government and can change. Check your personal contribution room in your CRA My Account, and confirm the current rules on Canada.ca before contributing.
The TFSA in brief
- Contributions aren't tax-deductible. You invest money you've already paid tax on.
- Growth and withdrawals are tax-free. Capital gains, dividends and interest earned inside the account aren't taxed, and you don't pay tax when you take money out.
- Withdrawals are flexible. You can withdraw at any time for any reason. The amount you withdraw is added back to your contribution room on January 1 of the following year.
- Room builds every year from the year you turn 18 (if you're a Canadian resident with a valid SIN), and unused room carries forward.
- Over-contributing is costly. Excess contributions are generally taxed at 1% per month until removed. Re-contributing a withdrawal in the same calendar year is a common way people over-contribute by accident.
The RRSP in brief
- Contributions are tax-deductible. They reduce your taxable income for the year you claim them, which can mean a refund.
- Growth is tax-deferred. Investments grow without tax while they stay in the account.
- Withdrawals are taxed as income. Money you take out is added to your income for that year, and tax is withheld at the time of withdrawal. Withdrawn contribution room is generally not restored.
- Room is based on earned income: 18% of your previous year's earned income, up to an annual maximum, minus any pension adjustments. Unused room carries forward.
- It has an end date. You must close the RRSP by the end of the year you turn 71, usually by converting it to a RRIF or buying an annuity.
- Special programs such as the Home Buyers' Plan and Lifelong Learning Plan let you withdraw for specific purposes and repay over time.
Side by side
| TFSA | RRSP | |
| Tax break | On the way out | On the way in |
| Withdrawals | Tax-free, room restored next year | Taxed as income |
| Room based on | Annual limit set by government | 18% of earned income, to a max |
| Age limits | Open from 18, no upper limit | Must close by end of age 71 |
| Best suited to | Flexible or long-term goals | Retirement saving |
Holding US stocks: dividends are treated differently
This catches many Canadian investors out. The US generally withholds 15% tax on dividends paid to Canadians by US companies.
- In an RRSP, US-listed stocks and ETFs held directly are generally exempt from that withholding under the Canada–US tax treaty, because the treaty recognizes retirement accounts.
- In a TFSA, the treaty exemption doesn't apply, so the 15% is withheld and can't be recovered.
For growth stocks that pay little or no dividend, this matters less. For dividend-paying US stocks, it's worth considering which account they sit in. (Canadian-listed funds that hold US stocks are treated differently again.)
A word on active trading
The CRA can treat very frequent trading inside a TFSA as carrying on a business. If that happens, gains can become taxable even though they're inside the account. Occasional buying and selling isn't the concern; day-trading-style activity can be.
Which comes first?
There's no single answer, but these general patterns are widely used as a starting point:
- If you expect your tax rate to be higher now than in retirement, the RRSP's upfront deduction is often more valuable.
- If your income is lower now, or you might need the money before retirement, the TFSA's flexibility is often more useful.
- Many people use both: the RRSP for retirement, the TFSA for everything else, and the FHSA (First Home Savings Account) if they're saving for a first home.
A registered financial planner or tax professional can tell you what fits your situation.
Official sources
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This guide is for education only. It isn't personalized financial, investment or tax advice, and nothing here is a recommendation to buy or sell any security. Investing involves risk, including the possible loss of your money.