1. Get your T4, T4A and T4E forms together
As part of your tax filing prep, you’ll need to get your T4, T4A and/or T4E forms in order. These government documents will help to determine your income. On your T4A, you can also see how much you’ve saved for retirement throughout the year via your registered retirement savings plan (RRSP), if you contributed.
“The T4, or Statement of Remuneration Paid, is a tax slip that employers issue to employees after each calendar year. It includes your earnings, deductions and tax paid so far. The T4A is another tax slip, issued by payers of other amounts related to employment (pension payments, annuities, self-employed commissions, retiring allowances, scholarships, bursaries, research grants, etc.).”
Learn more about these documents: What are T4, T4A, and T4E forms?
2. Investing as a tax-savings strategy
Should you put your money in a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP)? The answer depends on your financial situation and your goals.
“With a TFSA, you pay tax on money you’ve earned before you make a contribution; and with an RRSP you get a tax refund now on money you contribute, but will have to pay tax later, on money you withdraw from the plan. This difference, along with your income, your investment timeline, and other factors will all contribute to making the right decision for your investment dollars. You may find that you can use both vehicles simultaneously.”
More on the differences between these investments here: TFSA vs RRSP: How to decide between the two
3. When are TFSAs and RRSPs actually taxable?
When investing inside a TFSA or an RRSP, know that tax plays a role in your portfolio construction and returns.
Any income earned in the TFSA, even when it is withdrawn, is tax-free. Any interest, stock dividends and capital gains earned in your TFSA aren’t subject to income tax. But, your TFSA contributions won’t reduce your taxable income the way RRSP contributions do. Withdrawals from your RRSP are taxable based on your income bracket.
“The tax treatment of RRSP and TFSA withdrawals should motivate investors to choose their asset allocation wisely between not only types of stocks, but also stocks and bonds. It may be beneficial to hold more fixed income in an RRSP and more stocks in a TFSA. That way, growth could occur primarily in a tax-free TFSA, instead of a tax-deferred RRSP that will someday be taxable.”
Learn more: When are TFSAs and RRSPs actually taxable?
4. Avoid RRSP overcontributions
RRSPs have contribution limits based on your income or an annual limit set by the Canadian government. Overcontributing to your RRSP can cost you in penalties and interest charges. Here’s how to determine if you have overcontributed.
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