RRSP or TFSA? Whatever type of account you decide to use, it’s never too early or too late to start saving for your future.


Time to start thinking about your retirement savings? Whether you are planning for retirement or already retired, Canada has some great options that can help you save money for the future. The most common type of account used to save is called a Registered Retirement Savings Plan (RRSP).

But did you know there is another way to save tax-free in your registered account and that savings can grow tax-free? This other plan is called the Tax-Free Savings Account (TFSA), and it may be a better option for you, especially if you own a small business or work as an independent contractor.

What is an RRSP?

An RRSP is a type of account set up with a financial institution, usually a bank or a credit union. You can save up to 18% of your earned income for retirement and receive a tax deduction on that amount because the contributions you make into the account are not taxed. Depending on your income level, you may also receive additional government benefits from these contributions being made into an RRSP.

What is a TFSA?

A TFSA is also a type of account set up with a financial institution. The money you put into your TFSA can be invested, so it will grow over time, tax-free. If the investments in the account earn income or dividends, these amounts are not taxed whether you withdraw the money later on or not. One of the great things about a TFSA is that you can withdraw and replace the money in your account whenever you like without paying any penalties or taxes (unlike withdrawals from an RRSP).

How Does a TFSA Work With a Small Business?

If you own your own small business or work as an independent contractor, the best thing about a TFSA is that it can be set up to benefit from tax credits or deductions when filing your income tax return.

If you are self-employed in Canada, you may already know that it can be extremely beneficial to set up your own business. You can deduct expenses that are necessary for your job or business, including the cost of goods sold (and depreciation on equipment). Business owners may also be able to claim credits for hiring certain types of people.

However, there is one more benefit for small business owners who use a TFSA – the ability to withdraw and replace money from your account. If you set up a TFSA correctly, with an experienced advisor, you can plan your withdrawals so that they do not affect your income tax return. A properly structured TFSA can reduce or eliminate taxes payable by self-employed individuals or small business owners on eligible investments that are withdrawn from the TFSA.

So, What’s the Best Option for You: An RRSP or a TFSA?

That depends on your personal circumstances and goals.

Generally speaking, if your net income from self-employment or other sources is less than $60,000 per year and you receive the Working Income Tax Benefit, a TFSA is most likely the better option for you.

If your net income from self-employment or other sources is less than $40,000 per year and you do not receive the Working Income Tax Benefit, an RRSP may be most beneficial for you.

If your income is above these amounts, you are probably better off with an RRSP.

If you’re looking for an experienced accounting partner who will help take your business to the next level, contact us for more RRSP or TFSA information. Visit our blog for more articles, news and updates about small business accounting, tax planning, CRA audits and bookkeeping.

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