Tax Shelters For Every Canadian

Owen Winkelmolen

Advice-only financial planner, CFP, and founder of

Work With Owen

When you think “tax shelters” you probably picture some Caribbean island. But did you know that the average Canadian has access to 2-3 tax shelters of their very own?!?!

The average Canadian family can shelter 32% of their gross income every year! They can do this in accounts that either defer or avoid taxes.

What is a tax shelter? In the broadest sense….

 “A tax shelter is a financial arrangement made to avoid or minimize taxes.”

But let’s clarify something for a second, avoiding taxes is completely legal and it’s an important financial planning strategy.

What isn’t legal is tax evasion. Tax evasion is the illegal underpayment of your taxes. Tax evasion is basically when you ignore tax rules and use some tax-saving scheme. This is done through shady accounting practices or stashing money in offshore accounts in tax-havens like the Caribbean.

Every Canadian has access to a few different tax-sheltered accounts to help them legally minimize their taxes.

Tax-sheltered accounts are extremely useful because they help you delay, reduce or even avoid paying taxes all together. Using these accounts in the right way can help you avoid paying thousands of dollars in taxes and can even help you boost your government benefits!

Reducing taxes is an important component of any financial plan. Unfortunately, most Canadians don’t maximize their tax-sheltered accounts.

The average Canadian family can shelter 32% of their income each year in accounts that either defer or avoid taxes*. In this post we cover the three common tax-sheltered accounts of which every Canadian should be aware.


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Tax Free Savings Account (TFSA)

TFSAs are the new kid on the block. They were introduced in 2009. Presently you can deposit $5,500 of after-tax dollars each year into a TFSA. This amount increases with inflation each year but gets rounded to the nearest $500. Contributions grow tax-free and you don’t pay any tax upon withdrawal.

TFSAs are amazing! They form the core of any good financial plan. Using TFSA’s alone can provide for a comfortable retirement. They’re also very flexible because any withdrawal will just increase your contribution room for the following year.

(We’re planning to amass $1,000,000 in our TFSA’s for retirement)

A TFSA is a tax shelter because investment gains within the account aren’t taxed. This makes them perfect for holding investments like stocks and bonds. Don’t be fooled by the name “tax free savings account’, many common investments can be held in your TFSA.

Personally, we use Questrade for our TFSAs. Questrade is an online discount broker. The best part about Questrade is that ETF purchases are free. This makes it very inexpensive to make frequent small purchases (like buying a few ETF shares each paycheque).

Relative to other tax shelters TFSAs are easiest to understand. Therefore, it’s our #1 tax shelter for the average Canadian.

But TFSA’s aren’t perfect. There are drawbacks to the TFSA too. Learn more about the benefits and drawbacks of the TFSA before you choose a TFSA over an RRSP.

Registered Retirement Savings Plan (RRSP)

RRSPs have been around F-O-R-E-V-E-R. They are THE main retirement vehicle for Canadians without a pension. They’re an important part of retirement tax planning but there are both benefits and drawbacks when using an RRSP.

Contributions to an RRSP are made with pre-tax dollars. They are considered a tax deduction. On your tax return an RRSP contribution will lower your net income. This decreases the income tax you owe to the government.

If you make contributions with after-tax dollars this means you’ll get a tax refund when you file your taxes. What a great incentive!

A big tax return is a good psychological “reward” but the best way to use an RRSP is to make pre-tax contributions. This means the government never takes any tax, It means your tax refund will be smaller but it also means your money will start working faster.


Avoiding Income Tax With An RRSP:

RRSPs are tax-sheltered because they help delay taxes and let your investments grow tax free. If used in the right way they can also help you avoid taxes too.

Generally, RRSPs should be used when your income today is higher than your income when you start making withdrawals.

For example if you live in Ontario and your income is $95,000 today you would be in the 43.4% tax bracket. If you estimate your income will be $50,000 in retirement you would only be in the 29.7% tax bracket.  Making an RRSP contribution now and withdrawing it in the future would save you 13.7% on your income tax! Making a $1,000 contribution would save you $137 on your lifetime tax bill. Essentially free money!

This is why RRSPs are a great way to delay and avoid taxes. You can make contributions at a high tax rate, get a big refund, and make withdrawals at a lower tax rate, paying less tax.


Increase Government Benefits:

Avoiding income tax isn’t the only benefit of RRSP contributions, they can also help increase your government benefits.

RRSP contributions lower your net income, a number that is used to determine many different government benefits. Higher RRSP contributions mean lower net income and higher government benefits.

Married couples and families with children are usually the ones most affected by government benefit claw backs. If you’re in this situation you may be able to receive an additional 5% to 40% of your RRSP contribution back through increased benefits.


Your Marginal Effective Tax Rate Is Important:

When you combine your income tax rate with your benefit claw back rate you get your Marginal Effective Tax Rate (METR). If you receive any government benefits then you should calculate your METR. If your METR today is higher than your METR in retirement then RRSP contributions will help you reduce your overall lifetime tax bill.

RRSPs allow you to shelter up to 18% of your gross income per year (this maxes out for high income earners who make above ~$145,000 per year)

The one drawback of the RRSP tax shelter is that it’s less flexible. RRSP withdrawals are taxed at your marginal tax rate. Withdrawals get hit with a withholding tax that is paid upon withdrawal. The withholding tax isn’t a penalty, think of it as pre-paying a portion of your taxes.

RRSP withdrawals also destroy that contribution room permanently. Withdrawing $5,000 means you lose $5,000 of tax sheltered room forever. This is ok when you’re making withdrawals in your 50’s and 60’s for retirement income but not when you make withdrawals in your 20’s, 30’s and 40’s.

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“Tax-sheltered accounts are extremely useful because they help you delay, reduce or even avoid paying taxes all together.”

Registered Education Savings Plan (RESP)

RESP are another type of tax shelter but they’re only available to families with children. The goal of an RESP is to save for a child’s education but the account can also be used as a tax shelter.

Using an RESP as a tax shelter was more common in the past, before the introduction of the TFSA. Now RESPs should only used as a tax shelter after TFSAs and RRSPs have been maximized.

Although RESPs are very limited, especially when compared to a TFSA or RRSP, they can still be an interesting tax shelter.


A Quick Primer On RESPs:

The maximum lifetime contribution is $50,000 per child. These contributions are made with after tax dollars. Investments grow tax free within the RESP. On top of this the government matches 20% of contributions up to a max of $500 per year (double that if you’re making catch up contributions) and a lifetime max of $7,200.

The first rule to know about RESPs is that a child can decide what to withdraw. They can withdraw contributions tax-free. Or they can withdraw investment growth plus government grants. The latter is called education assistance payments or EAPs, and is taxed at the child’s marginal tax rate. Or they can withdraw a mix of the two.

Having a child only withdraw EAPs will transfer the tax burden from a high-income parent to a low-income child. Typically, this helps reduce the overall taxes owed. This is why an RESP can be a good tax shelter.

The second rule is that contributions can be withdrawn by the parent (subscriber) without penalty. This means that if an RESP has grown larger than what the child needs for education, the money isn’t stuck inside the RESP. Contributions can be withdrawn at any point and only EAPs can be left in the RESP for the child’s education. A parent can strategically fund an RESP up to the $50,000 max, allow the investment growth to avoid taxes, and then at any point take back up to $50,000 in contributions without penalty.

Reduce Your Taxes With A Tax-Sheltered Account

Tax-sheltered accounts are amazing! From a personal finance perspective they are extremely useful because they help you delay, reduce or even avoid paying taxes all together.

For someone who needs $1M in savings for retirement (about $40,000 per year in retirement income) tax-sheltered accounts can easily save you $100,000+ in taxes over your lifetime. Using tax-advantaged accounts the right way can not only help you avoid paying thousands of dollars in taxes, they can even help you boost your government benefits!

Start using your tax-sheltered accounts today to get the maximum benefit!

* Assume median income of $80,940 for a family, plus two adults earning $5,500 of TFSA contribution room each.

Owen Winkelmolen

Advice-only financial planner, CFP, and founder of

Work With Owen


Join over 250,000 people reading each year. New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...



Join over 250,000 people reading each year. New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...



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