With the beginning of the 2026
registered retirement savings plan
(RRSP) season, I’m reminded of a gathering a few years in the past. I met with a shopper who was eager about studying extra a couple of
sometimes called an “fast financing association.” The plan includes leveraging the money worth of a everlasting life insurance coverage coverage to offer fast entry to capital, sometimes for funding or enterprise functions.
The shopper liked the idea, and requested me if I had any extra “nice” tax concepts for him. I began by saying that I assume he had absolutely maxed out his RRSP contributions, at which level he interrupted me, and stated, emphatically, “
.”
I used to be dumbfounded. Didn’t consider in RRSPs? It’s not prefer it’s a faith. So, I requested him to make clear.
He went on to clarify that, in his view, RRSPs had been “ineffective” as a result of once you withdraw the funds in retirement you must pay tax on the total worth of the quantity withdrawn. And if you have to be so unfortunate as to die with a big RRSP, or its successor a big
registered retirement income fund
(RRIF), then the federal government takes greater than half of it in most provinces (for values above $258,482 in 2026).
After I calmed down, I patiently tried to stroll the shopper by
why the RRSP should be a no-brainer
for almost each Canadian, the one potential exception being taxpayers with restricted funds to contribute and who could favor a
(TFSA) over an RRSP.
Though the shopper was right in that
you do pay tax on RRSP withdrawals
, it’s essential to remember the fact that you additionally obtained a tax deduction once you contributed. In case your tax charge is identical within the yr of contribution that it’s within the yr of withdrawal, an RRSP supplies a very tax-free charge of return. In case your tax charge is decrease within the yr of withdrawal, you’ll get a fair higher after-tax charge of return in your RRSP funding. In actual fact, even when your tax charge is increased within the yr of withdrawal, as I’ve proven in my report
Just do it: The case for tax-free investing
, given a protracted sufficient interval of tax-free compounding, you might be nonetheless be forward of the sport with an RRSP over investing in a non-registered account.
As an instance the hands-down benefit of an RRSP over non-registered investing, take into account the next instance. Let’s assume you earned $3,000 of employment earnings in 2025, have a 33.33 per cent marginal tax charge, and your investments develop at 5 per cent over the course of the yr. Should you invested in an RRSP, you wouldn’t pay tax in your earnings so you’ll have the total $3,000 to take a position.
Development of 5 per cent would improve the worth of your RRSP funding after the primary yr by $150 ($3,000 instances 5 per cent) to a price of $3,150. Should you had been then to money in your RRSP by withdrawing the funds, you’ll pay tax of $1,050 (33.33 per cent on the total $3,150 withdrawn from the RRSP), leaving you with $2,100 after-tax.
Now, let’s evaluate that to the non-registered account, which some taxpayers consider is a more sensible choice since capital positive aspects are solely 50 per cent taxable. If as a substitute you selected to take a position your $3,000 of employment earnings in a non-registered account, you’ll pay upfront tax of $1,000 ($3,000 instances 33.33 per cent) in your $3,000 of earnings, leaving solely $2,000 to take a position.
On the identical 5 per cent charge of return, your non-registered funding would have grown by $100 ($2,000 instances 5 per cent), making your account value $2,100 on the finish of the yr. Should you had been to then money in your non-registered funding, assuming that the 5 per cent progress was within the type of a 50 per cent taxable capital acquire, you’ll pay tax of about $17 (50 per cent instances $100 instances 33.33 per cent), yielding $2,083.
As we will see, the worth of non-registered funding ($2,083) after-tax, is value lower than the worth of the RRSP ($2,100), which means your RRSP has successfully given you a tax-free return of $100 (5 per cent) in your “web funding” of $2,000 (being the $3,000 you contributed much less the 33.33 per cent tax you paid).
One other method to think about it’s to contemplate your RRSP a partnership between you and the federal government. Retired Ottawa accountant Paul Rastas has greater than 50 years’ expertise in Canadian tax planning and compliance, and for years has been making an attempt to assist Canadians higher perceive the mechanics of the RRSP. As Mr. Rastas places it, “Opposite to common perception, your RRSP assertion doesn’t report your funding ‘worth’ in actual Canadian {dollars}. It’s in ‘RR$P {dollars}.’ RR$P {dollars} are analogous to a international forex and should be transformed to actual Canadian {dollars} earlier than being spendable. The trade charge is your particular person, private, marginal tax charge.”
Mr. Rastas offers an instance of somebody who contributes $10,000 to an RRSP. Whereas their RRSP assertion could present $10,000, this really represents (at a 30 per cent marginal charge) a $7,000 funding, plus $3,000 of what he refers to as “pre-paid tax,” as a result of CRA upon withdrawal. (The instance assumes your tax charge within the yr of contribution of 30 per cent is identical as your charge within the yr of withdrawal).
If that $10,000 was invested at 7 per cent, a decade later the RRSP can be value almost double, or virtually $20,000. This $20,000 steadiness represents the preliminary $7,000 funding, plus $7,000 of progress, plus the unique $3,000 of “pre-paid tax,” plus $3,000 of progress on that. The online $7,000 funding doubled, tax-free, and is now value $14,000 after-tax. As proof, if the RRSP value $20,000 is cashed in, tax of 30 per cent, or $6,000, can be paid, leaving $14,000 after-tax.
As a reminder, the 2026 RRSP contribution deadline is Monday, March 2, 2026, if you wish to declare a deduction in opposition to your 2025 earnings.
Jamie Golombek,
FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto.
Jamie.Golombek@cibc.com
.
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