Numerous Types of Accounts Offered in Canada
There are many types of account types that Canadians can structure, some of which have significant tax incentives.
Some of the more common ones are described below:
- Cash Investment Account
- Margin Account
- Registered Retirement Savings Plan (RRSP)
- Tax Free Savings Account (TFSA)
- Registered Retirement Income Fund (RRIF)
- Registered Education Savings Plan (RESP)
- Locked-in Retirement Account (LIRA)
- Life Income Fund (LIF)
- Locked-in Retirement Income Fund (LRIF)
Cash Investment Account – a regular investment account that can be used for any savings goals or just to build and sustain wealth. Investments are purchased with after-tax dollars and taxes are applicable on interest, dividends and capital gains.
Margin Account – same structure as a cash investment account but this type of account allows you to use leverage in your investing. This simply means you can borrow monies against the investments in your account to buy more investments. You can borrow up to 70% of the value of some stocks and up to 96% of some bonds. You pay borrowing rates by the institution you are dealing with and have a risk at a margin call if the underlying assets you own fall in value (have to sell off some of your investments or add more cash).
Registered Retirement Savings Plan (RRSP) – a tax sheltered registered account for retirement planning. Investors must be under age 71. There are tax incentives as all monies you put into a RRSP can be written off as a credit on your tax return the year it was contributed for. All income is not taxed and there are annual contribution limits. Unused portions can be carried forward. You may contribute to your RRSP until December 31 of the year in which you reach age 71. The following limits and deadlines apply annually.
Maximum Annual RRSP Contribution Limits
Your allowable RRSP contribution for the current year is the lower of:
- 18% of your earned income from the previous year, or
- The maximum annual contribution limit for the taxation year, or
- The remaining limit after any company sponsored pension plan contributions.
Earned income includes salary or wages, alimony received, and rental income, among other income sources, but does not include items such as investment income. There are locked-in RRSP’s (LRSP) where pension values were rolled into the plan.
Tax Free Savings Account (TFSA) – a tax free investment account available to eligible Canadian residents. You do not receive a tax benefit on any contributions to it but the investment income within the TFSA is not taxed. This is a good structure for savings for a major purchase or retirement. The plans started in 2009 with the maximum annual contribution being $5000 per year. Unused portions can be carried forward.
Registered Retirement Income Fund (RRIF) – tax-sheltered, registered accounts for investors over the age of 71 who previously help an RRSP, LRSP or LIRA. A RRIF can be set up early than age 71 if monies are needed by the holder. All monies pulled out are taxable in the year they are received. A minimum withdrawal formula is utilized once the holder is passed age 71. All investment income within the RRIF grows tax free.
Registered Education Savings Plans (RESP) – a tax sheltered account created specifically for investors wishing to save for their children’s or other recipient’s education. Contributions are non-tax deductible, but investment income grows tax free in the account. Under the Canada Education Savings Grant program (CESG), the government also contributes a certain amount to plans for children under 18. Once enrolled for post-secondary education, the subscriber begins to withdraw the funds. The portion of the original contribution is received tax free. The portion of the withdrawal that is accumulated income (including the grant) is taxed in the child’s name, generally no tax given their marginal tax rate.
Locked-in Retirement Account (LIRA) – it provides income during retirement, with no requirement to convert the fund to an annuity like a Life Income Fund. There are specific limits for withdrawal. This account is set up by rolling over a pension into this structure, usually if you leave a company.
Life Income Fund (LIF) – also provides retirement income. Funds from a LIRA and LRSP can be transferred to a LIF so that investments can continue to grow tax-deferred until withdrawn. Each year, a minimum amount must be withdrawn and taxed to the recipient. Also, there is a maximum annual withdrawal amount. In some provinces, a LIF must be converted to an annuity when the investor reaches 80.
Locked-in Retirement Income Fund (LRIF) – this structure provides income during retirement. It has no requirement to convert the fund to an annuity. There are withdrawal limits that are calculated differently than a LIF.