A tax shelter is a vehicle that can be used in order to minimize or decrease tax owed. Knowing what tax shelters are available and how they work can help you save thousands of dollars, increase government benefits, and improve your financial health. In Canada, registered retirement savings plans (RRSPs) and tax-free savings plans (TFSAs) are both considered tax shelters.
RRSP’s shelter any contributions and growth by deferring tax until the funds are taken out at a lower tax rate. When the funds are withdrawn the grants and growth are taxed to the beneficiary who, being in school, is most likely in a lower tax rate than the contributor. TFSA’s do not offer a tax shelter on the contributions but does allow that money to grow tax-free in the plan. You also do not have to pay taxes on the funds when you take them out.
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