Where to Put Your Extra Dollars – RRSP, TFSA, Mortgage Pay-Down?

February is the one month every year when most Canadians think about how to invest their hard-earned money.  For many years, the big question has been, “Should I contribute to my RRSP or pay down my mortgage?”  Now, there’s an added flavour in the mix – the tax-free savings account (TFSA).

The answer is not a simple one.  It will vary depending on your personal situation and expectations about rates of return and future tax rates.

There are many issues that will affect your personal choice.  Here are some factors to consider and some guidelines to help you with the decision.


From a pure “dollar savings” perspective, the choice between RRSP and TFSA depends on your current marginal tax rate compared with the marginal tax rate that will apply when you withdraw amounts in retirement (rates of return should be the same in the TFSA and RRSP).

If you are currently taxed at a high marginal tax rate and expect your marginal tax rate will be lower in retirement, the RRSP is generally preferable.  The immediate tax savings will be greater than the tax you’ll pay on withdrawal.

However, if you’re currently in a low or middle tax bracket, and you expect a higher marginal tax rate in retirement (perhaps it’s early in your career or you’re starting a new business), the TFSA contribution may make more sense.  But you should consider that, unlike RRSP contributions, TFSA contributions do not reduce current income, which could affect your eligibility for the GST credit and the Canada Child Tax Benefit.

If you expect your personal marginal tax rates to be the same in retirement as they are today, there may still be a benefit in using a TFSA.  TFSA withdrawals do not increase taxable income, and therefore they do not erode income-tested credits and benefits such as the age credit, Old Age Security, the Guaranteed Income Supplement and the GST credit.  In addition, TFSAs have added flexibility in that amounts can be withdrawn at any time and used for any purpose.  Even if you intend to use your TFSA for retirement, you can also use it as an emergency fund – for example, in the case of job loss – and you can recontribute all withdrawn funds at a later date.  RRSPs generally don’t make a good emergency fund, since withdrawals are fully taxable and contribution room cannot be resurrected.

What About Paying Down Your Mortgage?

The RRSP versus mortgage debate has been going on for years, and there is still no consensus.

If you’re taxed at a high marginal tax rate and have a low-rate mortgage, and you can earn significant returns in an RRSP, the RRSP is probably the better approach.  This is particularly true if you use any tax refund from the RRSP contribution to pay down your mortgage.

On the other hand, if you’re taxed at a lower marginal tax rate, the decision is more complicated.

Comparing paying down a mortgage with a TFSA contribution is a little simpler than the RRSP/mortgage choice.  It largely depends on which investment provides the better return.  In this case, the return on the mortgage payment is the interest saved.  With current low mortgage rates, many believe they can earn a significantly higher rate of return in a balanced investment fund.

But keep in mind that paying down a mortgage provides a risk free return.  If you hold equities in your TFSA, not only is the return not guaranteed, there is a risk of loss.

Even if the TFSA return is the same as your mortgage rate, you might consider making TFSA contributions for a few years and then withdrawing the funds to pay down the mortgage.  The benefit here is that you will have grown your TFSA contribution room by the amount of income that was earned in the plan before the withdrawal.  Not only can you recontribute any withdrawn earnings.

The Mechanics of the TFSA Are Simple

  • Canadian residents aged 18 and older can contribute up to $5,000 annually commencing in 2009.
  • If you contribute less than the maximum amount on any year, you can use that unused contribution room in any subsequent year.
  • Income and capital gains earned in the TFSA are free of tax.
  • You can make withdrawals at any time and use them for any purpose without attracting any tax.
  • Any funds you withdraw from the TFSA – both the income and capital portions – are added to your contribution room in the next year.  This means you can recontribute all withdrawals in any subsequent year without affecting your allowable annual contribution.
  • You can contribute to a spouse’s or common-law partner’s TFSA, and your TFSA assets are generally transferrable to your spouse’s or common-law partner’s TFSA when you die.
  • Permitted investments for TFSAs are the same as those for RRSPs and other registered plans.  Life RRSPs, contributions in kind are permitted.  But be aware that any accrued gains on the property transferred to a TFSA will be realized and taxable, while losses are specifically denied.


If you have any questions regarding Where to Put Your Extra Dollars or any questions on any income tax or business issues do not hesitate in calling Joe Truscott at 905 528-0234 ext. 224 or e-mail Joe at joetruscott@josephtruscott.com.