Canadian Investing with Mr. Frugal Toque: Part 1

An exciting event is coming up in my group of old friends: another one of us is approaching Early Retirement.


Scene from a recent FT Family camping trip

Mr. Frugal Toque, whom you may recognize from his many comments and occasional guest posts on this site, is a software engineer in his mid-thirties living in the high-tech belt of Ottawa, Canada. We survived the trenches of engineering school together in the 1990s, then got jobs just a few cubicles apart in the same big company after graduation. When I greedily took off to the United States in 1999, we inadvertently became a financial science experiment.

Certain key variables were kept constant: age, education, health, industry, graduation date, etc. And others were varied: I moved to a country with slightly higher salaries and lower taxes, while Toque got married and went to a single-income household a bit earlier, had two kids instead of one, didn’t make money on the side through buying and selling houses, and built up a slightly more expensive luxury compound in the woods for himself.

But financial independence is not a yes-or-no concept. Instead, it’s just a matter of time, and here he is roaring towards the finish line with a solid 65 years of freedom to look forward to. The mortage is just about crushed, and the retirement savings accounts have been maxed out every year for  well over a decade. Depending on windfalls, I’m guessing he will be independent within the next 18-24 months.

So this past summer, I challenged him to brush up on his Canadian investing and tax skills, since with he will soon be living off of rather than rapidly accumulating investments. And with Canada being the second largest source of readers, I figured his teachings are well worth a few weekend editions. This is a guy who tends to kick ass at anything he takes up, so I think we’re in for some good learning. First Edition Below.


Oh, Canada! How shall I retire!
(RRSP versus TFSA)

I know that my country has a pretty bad rep when it comes to taxes. I stopped complaining about that sort of thing more than a decade ago when I realized the place has done pretty well by me and I understand that this costs money.

On the other hand, if you’re living in the U.S., you might have a very negative attitude about Canada where taxes are concerned. As a Canadian you might be one of those lamentable few who says that the Mustache family was only able to achieve its goals by moving south because taxes in the Great White North make it impossible here.

I’m here to tell you that this is nonsense, you have a case of Excusitis and are a Complainypants.

First of all, the income tax system is progressive – just like anywhere else – and a good chunk of the money you save in registered accounts won’t get taxed at the top marginal rate.

In Canada we have two major, easy to use options for growing our savings without the burden of taxation:

  • the RRSP (Registered Retirement Savings Plan)
  • and the TFSA (Tax Free Savings Account)

We’ll tackle the RRSP first, because it’s fated to be the road first traveled by a proper Mustachian (more on why in a moment). If you are earning money, you should have an RRSP account with your bank. Every Canadian bank I’ve checked requires you to actually visit a physical branch office and set up this account. For legal reasons, they need to personally assess your financial knowledge and have you sign certain forms. Some of this work can be done over the phone or the Internet, and rules are changing all the time, but you probably still need to do at least one physical visit.

How RRSPs Work

The money you put in to an RRSP account does not count as income for the year in which you make the deposit. This isn’t one of those lame “tax deductions” where you get 15% of the money back at tax time even though your marginal tax rate is 37%. No. The money you put in an RRSP, which is up to 18% of your previous year’s income, does not count as income at all. If your employer supports it, the tax will actually be deducted at source, so you don’t have to wait until March to get your refund.

That’s right. You can literally take 18% of your income [1] and dodge those terrible Canadian taxes you hear about!

But, wait, Mr. Toque. You’re not telling the whole story. Don’t I have to pay taxes on those RRSPs eventually?

Yes, you do. You pay taxes on them when you withdraw, during your retirement. Consider this though. You’re a Mustachian. That means you can support a family of four in luxurious style on about $24 000/year after housing expenses. If you arrange your finances correctly, dividing up your retirement funds with a spouse, the two of you will be in the lowest possible income bracket and end up paying almost no income tax.

That’s right. No income tax! In Canada! The law even allows you to put your money in a “Spousal RRSP” no matter how much your spouse earned. Your spouse withdraws this money during retirement as his or her income, not yours.

Where does the TFSA come in?

Alright. You’re frugal. You’re even wise enough that you set up automatic paycheque deductions so you don’t have to think about your RRSPs. You’ve already paid off your mortgage because you hate debt so much. So now you have even more money you want to ‘stash away. What comes next?

Enter the TFSA. Whereas the RRSP took pre-tax income, skipped over paying taxes, and required you to pay taxes on withdrawal, the TFSA works in the other direction. The TFSA is where you put after-tax income. The money can then grow, tax-free, inside the TFSA and will not be taxed when you withdraw. How much money can you put into TFSAs? It started at $5000 per year and is now up to $5500 per year. It accumulates over your lifetime starting when you turn 18, but the concept was only invented in 2009, so no matter your age, your accumulation can’t start before then.


RRSPs: you put pre-tax income in, it grows tax free, you pay taxes on the way out. (just like 401(k)s in the US)
TFSAs: you pay taxes before you put it in, it grows tax free, you pay no taxes on the way out. (Just like Roth IRAs in the US)

Straightforward? Good.

Now why will readers of this blog prefer the RRSP over the TFSA? Why am I doing that one first?

For the simple reason that a Mustachian is, by definition, a person who has expenses far, far below his or her income. What matters with an RRSP is the difference in tax rates between when you put money in and when you take it out. Thus, you’re in a relatively high bracket while you’re working and you’ll be in a relatively low tax bracket when retired.

Example: RRSP Benefits

Let’s take a wage earner in the province of Ontario who earns exactly $100k. We’ll say she’s a high tech worker with over a decade of experience, or maybe a high level executive manager of some manufacturing company. She has a non-working spouse, two children and no other deductions.

If she decides to put no money in her RRSPs, she ends up paying tax on her full income, amounting to $15 403 in federal taxes and $8 558 in provincial taxes.

If, instead, she decides to max out her RRSP contribution at $18000, she gets $18000 in her RRSP investment account and lower her taxes to $10928 federal and $5662 provincial.

Her total income taxes went from $23962 down to $16590, a change of $7372.

What this means is that she took back over seven thousand dollars that would have gone to the government and stashed it away. Another way to look at this is that it cost her $10628 to get $18000 in savings. Fabulous!

And again we’re back to the complaint from earlier. Won’t she have to pay taxes when she retires? Of course she does, but she’ll be paying it at much lower tax rates.

Let’s assume she’s living on $24000/a, a perfectly reasonable level of expenses, and plug that into the formula. We get federal taxes of $147 and provincial taxes of $439. So she can either have $17600 in her investment account, which will grow tax free inside her RRSP, or $10700 outside her RRSP, which will be taxed as it grows. You make the call. And before you do, add in the interest. You’ll find it just as relevant as it always is.

This is why Canadian Mustachians love RRSPs.

While my understanding of American financial issues isn’t all that strong, I hear a lot about “early withdrawal penalties” in the U.S. I can not find any sign, on any government or bank website, that this is an issue in Canada. While there are some rules about disposing of your RRSPs when you turn 71, we’re talking about early retirement here, so that shouldn’t be an issue. The only real concern you have is that you ought not to withdraw money from your RRSP accounts in the same year that you had work income. If you do that, the RRSP withdrawal will naturally be taxed at a high marginal rate, since it will be added to whatever you earned that year.

So retire in December and don’t take anything out until January.

Priorities: RRSP, TFSA, Mortgage

Presuming you have a mortgage, an RRSP account and the ability to save in TFSAs, your priorities (logically) ought to be:

  1. RRSP first 
  2. TFSA 
  3. Mortgage 

This assumes your mortgage is at a lower rate than the the 7% average you might expect from a stock index fund.

If, for some reason, your mortgage is up closer to 5%, you might consider the short term, reliable gain of killing the mortgage instead of saving in the TFSA. You’d still want the RRSPs to go first though, because they give you so much back on your income taxes.

The TFSA as a rainy day fund:

The strategy might change slightly if you have unstable work. You might be a seasonal worker, or in an industry that doesn’t reliably keep you employed. In that case, you might consider placing a higher priority on the TFSA. It is slightly easier to take money out of your TFSA than your RRSP, so having money in the TFSA is very much like having one of the those “rainy day” accounts that some financial bloggers go on about. You would still max our your RRSP, but prioritize your TFSA over making extra mortgage payments.

Last of course, are the hard core debt-haters like your very own Mr. Frugal Toque. Even though my mortgage is under 4%, I want that sucka dead. I want to dance a jig on its grave while pounding back a shot of throat-scouring whiskey. So my own priorities are

  1. RRSP
  2. Mortgage
  3. TFSA 

… although we keep some money in a TFSA for emergencies. [2]

The point of all this is that Canada is actually a very good friend of early retirees. The RRSP and the TFSA, with their attendant tax benefits, are very useful tools. How you use them and how you prioritize them, are obviously up to you. But whether you believe in rainy day funds or not, the tools are there waiting for you.

In my next column, I’ll discuss where we can actually put our money and compare the various mutual funds available and the corporations that offer them[3].


2013 federal and provincial tax rates:

Revenue Canada’s RRSP website:

Revenue Canada’s TFSA website:

[1] – If you don’t use the entire 18%, don’t worry, it rolls over and you can use in any later year. But you may sense a Withering Glare coming at you over the Internet. That’s me, wondering what the hell you’re doing saving less than 18% of your income.

[2] – To be honest we keep about four month’s expenses in a TFSA, even though the mortgage isn’t done. As you know, I’ve been laid off once before and the TFSA is a nice way to reserve money for such emergencies while also keeping it employed. It is in a proper Stock Index fund, not one of those “safe” money market funds, so technically it’s making a better payoff than my mortgage anyway.

[3] = Sneak Preview: In my research, I learned that President’s Choice Mutual funds blow. They’re just repackaged %ges of CIBC mutual funds. So you can’t actually get a Canadian Stock Index Fund, you get a series of Int’l mutual funds, all pre-packages in certain ratios. And you pay a 0.95% to 1.15% expense ratio for that privilege.

  • Tim September 23, 2013, 9:33 am

    This is the best explanation I’ve seen on RRSPs and TFSAs. Finally makes sense!

    Thanks Mr. Frugal Toque! Looking forward to your next article.

  • Christine September 23, 2013, 10:45 am

    Thanks for the advice!

  • Megan September 23, 2013, 12:18 pm

    Yay! I so appreciate the advice for me and my fellow Canadians.

    Thank you MMM and Mr. Frugal Toque!

  • Kalen September 23, 2013, 1:20 pm

    ” but you probably still need to do at least one physical visit.”

    This is false for a RRSP. It can all be done over the internet sending in copies of the appropriate papers.

  • Iron Maiden September 23, 2013, 1:29 pm

    First, Canucks can check out Garth Turner’s blog, greaterfool.ca. It’s mostly an ascerbically witty real estate blog, but the articles he has done on when and how to invest in an RRSP are good, and should be mandatory reading for any Canadian. In fact, here they are:

    “There are seven reasons to RSP. None of them have anything to do with retiring.” In other words, use it as a legal tax avoidance strategy. Pay particular attention to “finance a baby”.

    Further uses, and which investment vehicles are better for RRSP vs. TFSA vs. open funds, by nature of the rates the investment income is taxed at.

    Mr Frugal Toque, you may wish to pay attention to this one:
    “Seven. So, you decide to retire at 38 with a fat RSP. What now? How do you avoid being taxed when you take money out, after enjoying all the tax breaks when you put it in? Simple. Melt your RSP down.” Read on Mr FT.

    • Roy September 24, 2013, 9:37 am

      That strategy 7 point sounds too good to be true. Anyone care to point me at a detailed walkthrough with actual numbers?

  • Mr.Minsc September 23, 2013, 2:03 pm

    Thanks for the article Mr. Frugal Toque! As a Canadian it’s great to see it. Looking forward to the next one.

  • henrigolo September 23, 2013, 6:27 pm

    Thanks Mr. Toque for this quite excellent review of Canadian investment vehicles.

    The Spousal RRSP you quickly mentioned is one awesome thing. My wife and I started using this baby last year. We both have similar income, but since she is a school principal, she should have an indexed defined benefit pension when she retires. On the other hand, I am a software engineer in the private sector, so I will have zilch. She contributes and gets the tax deduction today, but I am the beneficiary. So when the money is withdrawn, it will be taxed at my rate in retirement, which should be way lower than hers.

    Also, it has been mentioned in previous comments, but it is worth repeating that the RRSP is ideal for holding US assets, since the 15% withholding tax on dividends is waived. But be careful, if you hold the recently introduced Canadian version of Vanguard’s Total Stock Market index ETF (VUN) in your RRSP, the withholding tax will be deducted before you receive the distribution, and you will not be able to recover it. This is because VUN is structured as a wrapper around VTI (the dividend is first paid by VTI to VUN, where withholding happens, and then passed on to you). You should therefore check whether it costs you more in withholding taxes holding VUN, or in currency conversion to buy the equivalent units of VTI in US dollars.

  • Peter September 24, 2013, 6:51 am

    If we are asking for our wish list on future posts I would like to see a realistic budget for a Canadian resident in say Ontario for living on these lower numbers of 20-24k a year. AND having some enjoyment of retirement. That means one modest vacation a year and money for some activities (golf or other sport, hobbies, something!)

    Best I can do in my estimates is about 42k before taxes that assumes 10% for charity which we want to be able to do. Even if you take that out we would be at 38k.

    • Bullseye September 24, 2013, 7:00 am

      Real budget for Ontario couple, based on actual annual costs;

      $6,000 Groceries
      $3,400 Property Tax (GTA)
      $2,700 Electric, natural gas, water
      $2,400 Car fuel
      $1,100 Car insurance
      $3,000 Annual savings for car repairs and replacement
      $2,000 Annual savings for home repair/renos
      $1,200 Restaurants and alcohol
      $600 Internet (antenna for TV, streaming all other content)
      $600 Cell phone
      $1,000 Gifts
      $600 Clothes
      $1,000 Gear for hobbies (cycling, hiking, swimming)
      $2,000 Vacations (camping, road trips)

      $27,600 Total

      • Peter September 24, 2013, 7:10 am

        You numbers are close to mine for most things – my property taxes are a little more. Car costs are more because I am basing in on insuring two drivers. I also give myself a little more for vacations and hobbies – but that is not all the difference.

        You do not have, savings I budget $2400 a year for misc (need a new appliance, furniture, housewares etc. Maybe that is high. Your home repairs budget is low based on my experience.

        For me I also budget for a modest gym membership I know that is not advocated by MMM but we only spend $40/month for two and it is worth it for our health. Nothing for medical expenses and that is only going up as we get older! Home insurance is missing too.

        Based on this I think real spending is more north of 30k instead of significantly south of 30k,

        • Bullseye September 24, 2013, 7:20 am

          I did miss home insurance, that is $600. Insurance is for two drivers as well.

          The $2k for home repair/reno includes furniture and housewares, everything in the house is from Craigslist, so very cheap. Do repairs on own.

          Grocery bill could easily be cut down, if needed, House could be downsized (which would reduce taxes and utilities, and bolster investment account), or switched to RV/Boat living for a massive drop in spending. We’re flexible people with minimal needs.

          Even assuming $30k/year, any couple that spent most of their working lives in Canada making a middle class income would get that amount of money from CPP/OAS alone at 65/67. I know two couples doing just that right now, they had zero savings at 65, but a paid off house, and are living just on CPP/OAS, and enjoying life.

          • Christine September 24, 2013, 8:56 am

            I personally need a little more than some of these numbers. A good Internet speed costs me more than $50/mo after taxes for instance.. and we do use an antenna and stream all our content.. hence the speed of Internet becomes more important.. plus I’m a web developer. I’d put $65-$70.. unless you can get an antennae to pick up on free Wifi around your area and then its free.

            Honestly I have trouble keeping my grocery budget down to $500/mo and we do go to Costco for bulk items and cook our meals. Soon we’ll also be shopping at an ethnic grocery store which has better prices but we were shopping at No Frills before.. its nothing extravagant! I’d say $600 is a little more realistic to me.

            I’d imagine that a Canadian budget would be more like $35K.. its still low but gives a little more wiggle room. It looks to me that everything has to go perfectly to maintain that budget. Just a tad too tight.

            • Gerard September 28, 2013, 7:34 am

              I guess a lot of it comes down to where and how you live. I spent last year in Toronto and my annual budget was something like this:
              groceries 4200
              condo fees 5500
              mortgage 4320
              bike 550
              transit 300
              restos, liquor 1200
              dentist 800
              gifts 500
              vacation 1000
              internet 480
              cell phone 170
              clothes 150
              property tax 890
              insurance 180

              …for a total of just over 20K (16K once the mortgage is gone). Once you’re in a city with big ethnic supermarkets, and if you have a love of cooking, it’s hard to spend much on groceries (my grocery budget actually includes a fair bit of other discretionary spending). And owning a car in the city just doesn’t make sense.

  • Iron Maiden September 24, 2013, 8:55 am

    I tried to post yesterday, but my post did not go through, and I don’t believe it was offensive. So I’ll try again.

    Here are two good posts on how to use RRSP’s *strategically*. It’s all in the planning. I like this site, not just for its ascerbic humour, and have seen one or two friendly references to MMM in the comments. Naturally, one size does not fit all, and you should follow up with your financial advisor on what options best suit you and your particular situation.

    Seven strategies for RRSP planning. Mr. Frugal Toque, you may find point seven interesting: “Seven. So, you decide to retire at 38 with a fat RSP.”


    Some further discussion worth reading on the RRSP, such as which type of investment vehicle goes where, based on how they are taxed.


  • Subversive September 24, 2013, 12:48 pm

    I didn’t read every single comment, so apologies if someone else has already said something like this, but TFSA is a far superior option as well if you’re self employed and earn most of your money through a corporation, as I, and many of my peers in the IT industry, do. Since most of the tax is paid inside my corp, there is very little personal tax to do away with, so it makes sense to first max out the TFSA.

    So, the order for me and those like me would go as follows:

    RRSP (enough to kill any personal taxes)

    One other comment on something that your article doesn’t address. There’s a fairly good chance that marginal tax rates will be significantly higher by the time I retire, owing to the structural deficits our country (and others) are faced with, to go along with the aging population and shrinking workforce/tax base. If marginal tax rates are higher, it could seriously impact RRSP withdrawels. Just something to consider.

  • Roy September 24, 2013, 1:11 pm

    This was a terrific article, and I’m looking forward to Part II. If you’re looking for a suggestion, Mr Toque, how about some commentary about how to minimize the tax hit when drawing down an RRSP. I’m in a position where my RRSP and TFSA have been maxed out, the mortgage is long gone, and the kids’ post-secondary schooling is covered. I’m pretty much ready to retire, and am trying to gather all the info I can about how to manage my finances most efficiently when I jump…

  • CashCadet September 26, 2013, 5:06 am

    UK edition :-) pretty please.

  • julie sunday September 27, 2013, 11:39 am

    i would actually really love to see a version of this type of article that addresses those who have pensions! i can’t decide if i should panic and take the funds out lest the pension fund disappear or leave it there to received a defined benefit when i reach the determined retirement age (not for a long time).

  • Yossarian September 27, 2013, 1:05 pm

    I’d like to add that a retired couple in Canada can live income-tax free in retirement with ~40k of yearly income (which is above mustachian levels)

    A couple each maxing a TFSA yearly and maxing an RRSP yearly can be a pretty decent savings rate. Not the best, there’s no way to shelter a 50+% savings rate, but anyway…

    Withdrawing 10k from the TFSA and RRSP each per year in Ontario, you’d have virtually no income tax on the RRSP (basic personal exemption of ~10k) and the TFSA isn’t treated as income upon withdrawal. That’s pretty damn good. It’s what I plan to do.

    Also, I’d love for Mr. Frugal Toque to post a Canadian cost of living article (yearly budget and example grocery list&cost or something similar) so I have something to compare myself to. You can call me a complainypants all you want, I just don’t think the MMM level of spending is possible here, at least not with the same quality of life. Hell, I live car-free in a bike-hostile city (Sudbury, ON) because car insurance alone would cost as much as MMM’s property tax on his OLD house.

    • Bullseye September 30, 2013, 4:09 am

      Doesn’t this ignore CPP and OAS? A couple who work most of their lives in Canada at a middle income would qualify for $15k EACH per year, eating up all of your tax-free income room in retirement. To get the RRSP money out tax-free, you’d need to retire before starting CPP/OAS and draw it all down.

      • Patrick September 30, 2013, 9:41 am

        Yes, it completely ignores CPP and OAS. I don’t count on those being present when I retire since I’m 23 (yes, I’ve heard the “reports” that it’s financially sound for 70 years or something). If they are around, then I’ll pay some tax but end up with more money than anticipated. It’s not a make-or-break deal, basically. It’s just extra money.

        • Richard September 30, 2013, 9:56 am

          The CPP is well-funded at the moment. The reason is that a large portion of today’s contributions are used to pay back past shortfalls, while the rest is enough to fund the future benefits. One risk is that as the CPP investment portfolio grows larger, it may have lower returns (this is very common in mutual funds that reach 1/20 of the CPP’s assets). It’s only been around for about 15 years so for most of the time it was much smaller. We can only hope that benefits will be limited when necessary to keep the plan sustainable.

          If you start planning when you’re young, the CPP benefits may be a small portion of what you can earn on your own by that age which is a good enough reason to ignore it.

    • Joannie October 6, 2013, 8:36 pm

      Ditto! I’d love to see toronto numbers. Housing is a challenge here for a family. You really can’t buy for under 800,000 and be near good transit. This house price translates for 8,000 property taxes. Car insurance 2,000 in toronto. Home phone and internet- 90$. It just seems that my numbers are all higher, we are at 50,000 family of three, just basic living- and that’s NOT eating out, buying new clothes, or buying stuff, lattes, movies, gyms, LCBO.
      If people are doing it cheaper, I’d love to hear about it. But I’m hitting my head against the wall trying to find cheaper ways.

      Awesome post! Thanks everyone!!!

      • Mr. Money Mustache October 6, 2013, 9:32 pm

        How is the rent in Toronto? With prices and taxes at those levels, renting (and living in a small place as they do in Manhattan) is usually wise.

        But as long as the salaries are appropriately higher, you could still win the Toronto game. With living costs about $20k higher than they might be in a normal town, you just need $20k extra after tax to break even.

        And if your family income is, say, $100k more than average due to the Toronto effect, you save it all and then when retiring, relocate to an inexpensive area. Many TO residents could sell appreciated houses right now and have enough to retire elsewhere, a course of action I highly recommend while the housing bubble is still puffy.

        • joannie October 8, 2013, 1:36 pm

          Thanks for this good question! Rents for a family would be $3000-4000 close to the subway and in proximity to both our work places. My spreadsheet tells me that I could take my proceeds from the sale, invest, pay tax and have enough to cover that.

          You are SOOOOO right to say “sell now and run!” I would!! I would!! but I love my tenured university job and not interested in a commute and gotta get daughter through Univ…..and im scared of a bunch of ‘what ifs’ that 48 year old would ask herself about re-entry, if it doesn’t work out.

          Even with a million invested, its not enough for a family to live in Toronto- without touching principal.. I think….without feeling you are suffering living in a building that has intermittent heat/ no air and sketchy elevators and surrounded by concrete and nowhere near a subway. If someone knows of a cheap but nice place to live in Toronto, let me know!!

          It seems so simple to everyone else – why cant I see the Toronto solution?

          BTW –we are longtime “Your money or your life – frugal tightwad” disciples from the old days, Congratulations— for spreading the message more broadly.

          ALSO____Is there a way to start a place in the forum for

          1) “how to leave in an expensive city” AND

          2) “how to MMM in Canada” ?

          I think MMM readers are savy and have lots to share in the details of executing the lifestyle. :-)

          Thanks for all you do!

          • Daniel December 19, 2014, 3:36 pm

            I’m sorry but I think this idea of a 3-4k monthly rent in a bit of complainypants. I’m saying this from living in toronto where there are some excellent rental deals to be had. It is so easy to get sucked into the hyper luxery market here but I’m hoping this encourages you to realize you have 800k tied up in an investment that may drop rapidly over the next decade based on rent vs. own analysis.
            Best of luck to you and congrats on already being a millionaire.

          • James December 27, 2014, 8:53 pm

            Check out Guildwood. Nice homes on nice lots…just stay south of the railroad tracks and south of Kingston Rd and you will be in a nice area.

  • ellequoi September 29, 2013, 4:04 am

    Great post to have.

    Will you be covering the First-Time Homebuyer’s Plan option in the next post? I’m 24 and was planning on using my RRSP for a down payment, so that would be interesting and relevant.

    • Richard September 29, 2013, 10:00 am

      The homebuyer’s plan is like a 0% car loan or a bonus prize in a lottery – those who get excited about it are thoroughly un-mustachian. Aside from the main issue of giving up potential gains on the investments you withdraw, there are few other disadvantages for young people using it:

      – You either run the risk of needing this at a time when the markets are down (meaning you have less assets available) or sticking to low-return investments (meaning there’s little gain to be had from putting them in the RRSP).
      – You have to contribute to an RRSP in the first place, which won’t save you much in taxes unless you have a high income. A TFSA has higher savings potential for most young people and is more flexible (but also suffers from the first issue).
      – If you don’t make the minimum repayment each year afterwards (or you don’t make it to the right account – I’ve seen people who don’t know what qualifies), it will be taxed as income. If your income rises this means you could potentially pay a tax higher than the initial refund you got! At best, it means you contribute to your RRSP but you don’t get a tax refund even if your income is higher.

      If you are capable of planning more than a year ahead you can do as good or better by saving for a down payment in a regular savings account and then adding to your investments once you have enough.

      • Gerard November 10, 2013, 8:08 pm

        Richard, I don’t think it’s quite as terrible as you suggest. All savings vehicles (RRSP, TFSA, taxable savings) are going to end up with low returns in the scenario you suggest. So, somebody earning (say) $60-65K a year and putting 20K into a down payment RRSP (assuming available headroom) will get an $8K tax refund, and maybe $300 in tax-free savings. If $28.3K down payment gets them over a mortgage insurance threshold (like, to 11% instead of 9%, or 20% instead of 16%), then the $2.4K in premium savings make the deal a little more attractive. Or am I missing something here?

  • Stephen September 30, 2013, 4:13 am

    Damn, after reading this I’m seriously considering a move to the “high tax” Canada. The rates you highlight here are pedestrian compared to over here. 100k there nets ~76k, over here 100k nets 58k. Our sales taxes are much higher and the closest we have to your retirement funds is tax relief on contributions, but we can’t touch those funds until reaching the government determined retirement age (now 68). It gets worse in that we also have a levy on the capital balance of the funds, and my first occupational pension had a 5% contribution charge as well as 5% management fees.

    • MP October 3, 2013, 8:20 am

      Are you located in the USA? If so, I’m surprised you come to this conclusion, as many Canadian professionals I have known actually are tempted to move to the US for jobs mainly due to the lower taxes. I also thought that it was much more advantageous to live in the US from a strict taxation point of view.

      It is also important to mention that there is a big difference in taxes depending on which province you live in. Here in Quebec, the marginal tax rates are quite high compared to Alberta, for example. Then again, we have cheap daycare centres and many other social benefits/perks which others don’t have.

      • Stephen October 3, 2013, 8:47 am

        Ha no, should have said. I’m in Ireland.
        The US could easily be better than Canada tax wise. From what I’m reading, both are miles better at building a wedge than here, although we are slowly getting better I guess. The lowest investment fund I can access is now down to 0% entry with a 1% management fee, and yes its a passively managed fund.

  • Joan October 6, 2013, 8:06 am

    Hello! Thank you for Canadian Content! I risk being a ms complaint pants here. I live in Toronto and pay for it because I have a job that offers no alternative – and I love my job. I do save almost 50% of my after tax income via: mortgage payments, rrsp and tfsa contributions. Setting aside ideas about percentages, im interested in strategies about actually expense payout. how little could i live on in toronto. I am in awe of how little MMM pays for property taxes (mine are 6000$) utilities (mine are 4000), insurances (4000), home telephone/Internet (88/month), – it does seem that things are cheaper stateside. It be interested to hear how others in toronto reduce their basic living expenses- things that arent optional (more or less).

    • Amanda October 17, 2013, 8:56 am

      My husband and I lived in Toronto while going to grad school. A 1 bedroom apartment was $975/month incl utilities. We loved the location too – Cabbagetown. We walked and took transit instead of paying for a car. If we needed a car we would rent one. We shopped at Food Basics which was beside our apartment. Our total monthly expenses (minus tuition) were approx $1400. More obviously if we splurged to rent a car. You can live cheap in Toronto. Owning a home and car are choices remember :-)

      • Mr. Money Mustache October 17, 2013, 9:01 am

        This is a great point. If I ever had to live in Toronto, I would also stay central and avoid commuting at all costs. Heck, our whole family could share a bedroom if necessary with one of those 2-and-1 bunkbeds, or the adults could use a pullout couch in the main room while the boy had the bedroom, which could double as the office. It’s all about efficiency, and I’d choose a bunkbed over a commute on the 401 any day.

  • Gili October 31, 2013, 3:26 pm

    Thanks for this excellent and helpful post. I hope to see part 2 soon?

    • Hut November 20, 2013, 8:44 pm

      I am looking forward to part 2 as well. I keep checking back to no avail.

  • Rick January 6, 2014, 1:28 pm

    Absolutely love this blog MMM, and Frugal Toque you’re awesome too!

    I am also a canuk in the Toronto area and wondering your thoughts / advice in RESPs as some family members have graciously given us a few grand over the Years as gifts to invest in our kids education (who are 4 and 7). So I need to move the cash from a Canadian tire savings account to an RESP and don’t know where to start. I have read up on the can gov reap info site and don’t fully understand how taxes are paid on the money invested. It seems like there is no tax savings in the money you put in the RESP and you don’t pay taxes on the the interest earned or grants that canada may throw in if you’re kids spend it the way canada wants on the approved schooling at the approved speed / increments. But if they don’t go to school you can pay income tax on the interest and grants go back? Speaking of interest do you simply invest the RESP like you would and rsp and thus gain interest or lose accordingly? And what are the commission fees since it seems a company must manage the RESP? What’s your thoughts on RESPs are they crap or what!

    • OttawaCFP November 7, 2014, 10:52 am

      RESPs are a great tool for saving for your kids’ educations. For every dollar you invest up to $2500/yr per child, the government throws in 20%, no matter what your income level. There are additional grants available if you are a low income household.

      You can invest within an RESP much the same as you would within an RRSP – with mutual funds, stocks,bonds, etc. You don’t get any tax break for making a contribution, but the investments grow inside the account tax-free until withdrawal. Then when you take money out for your kids’ education costs, the capital comes out tax-free and the grant and income portion is taxed in their name – not yours. If your kids have low incomes at the time, which most students do, they may not end up paying any taxes at all on the grant & income.

      There are lots of options for accessing the money if your kid doesn’t pursue any kind of post-secondary education. I could write several paragraphs about that. But my main advice is to set up the RESP through a financial institution, such as your bank or an investment company. DO NOT use a “group RESP” provider. These companies are the ones that only sell RESPs (no other financial products) and often have “scholarship” or “trust” in their name. They are (in)famous for having really high fees and a lot of restrictions, and the people who sell them are not licensed financial advisors, but just commissioned salespeople.

  • Brad Mc August 23, 2014, 12:04 pm

    This is a great article, and I absolutely love the Canadian perspective, being from Calgary myself. I have a renovation company, which is a limited liability corporation. My wife does not have an income. My business pays me essentially in dividends because of some tax savings, (like Canada Pension Plan for example.) My question for you would be this:

    Do you know much about Holding Companies?

    My accountant is advising me that I should consider opening up a holding company. That way, as my business earns more than I pay in dividends out to myself, I can safely transfer the money from that business into the holding company. (This is a tax free, business to business transaction – of course taxes are paid at the corporate level on the profits in the primary business.) Once the holding company has the profits from the operating company, it protects the profits of the operating company. When money sits in an operating company, it can become a target for liability – lawsuits, etc. Once the money is gone to the holding company its protected.

    What I’m wondering is if I should just put that money into the holdings company instead of an RRSP. It works very much the same, with a key few differences I believe. We put profits in, it holds it, can invest it, and grow it, and we only take out what we need, when we need it, and we only pay the taxes then. Since the pay outs would be dividend payments, any shareholders could be paid out as much as $42k a year with almost zero tax to pay. In theory, my wife and I could take out 84k in a year paying under $1000.00 tax on that. I was told that many business owners use holding companies like retirement funds. I was wondering if you could explain any potential benefits or drawbacks to them, if you have knowledge of them. Thanks!

  • Chandy August 27, 2014, 8:22 am

    Great advice, MFT. I’m very grateful for a Canadian-in-Canada perspective on MMM’s advice. Adjusting RRSP contributions now! I haven’t read Part 2 yet, but we might even consider working with our employer’s payroll team to adjust our per-pay tax deductions to reflect our effective income after deducting our full 18% entitlement. Optimized tax payments mean zero refund at tax time, but more money in our pockets year-round to put to work! Keep it up, guys.

  • Ck December 10, 2014, 3:24 pm

    If I want to live off my RRSP contributions from age 55-60 only, how does it work?

    Let’s say my income is $0. Can I take out 35K a year or must I open up a RRIF at a certain age etc…

  • Kelly January 21, 2015, 11:48 am

    So, for us 25 year old, aspiring Mustachians… would priorities be 1) TFSA, 2) RRSP?
    And , I should use the money within my TFSA as investments, potentially earmarking one as my contribution to RRSP that I’ll eventually withdraw and contribute to RRSP?

    Would love some thoughts for our lower-end earners (I’m at 50K), and how best to invest in Canada with that in mind. Thanks! :)

  • Mark February 25, 2015, 8:09 am

    I disagree with the idea that someone should use an RRSP before a TSFA. The TSFA is the single best growth vehicle the Canadian government has deemed to bestow on its financially cloudy brained citizenry. Don’t even think of taking the money you put in there (AS GROWTH or YIELD INVESTMENTS only, NO cash holdings) until you are ready to retire. That money compounds tax free ad infinitum. You won’t see the benefits strongly in 4 years or 5 years. You will start to see it in 10 and if you go to 15 or (at worst) 20 years – you should be able to draw on that money without need for an RRSP to support a comfortable Mustachian retirement. Nevertheless, both are good retirement vehicles.

  • Geraldine April 23, 2015, 1:25 am

    Call me a complainypant, I don’t care, but living in the country with the highest taxes in the world (Denmark) i can tell that high tax levels do affect your saving ability.
    My AVERAGE income tax is 47,8%, I pay 25% VAT on food, 180-230% taxes on cars, 78% tax on gas, property tax PLUS capital tax on my house, extra tax on sugar, alcohol, etc… and believe me this has an impact. There is a reason why Denmark has the most indepted households in the world while most people here maintain a rather modest lifestyle measured by US standards, taxation in Denmark it’s freaking fucking insane.

    Well, but then you get world class public service like ‘free’ health care, right? Haha, my ass, public service is so lousy here that more than 2/3 of all Danes sign extra private health care plans in order to be able to access private hospitals to get decent treatment, you pay your dentist bils yourself, 1/4 of all children go to private schools, public transport is more expensive per mile than driving in a car, … well I better stop rambling :).

    Also salaries are much lower than in the US, our household income is above Danish average, but transferred to PPP dollars it’s around 40% of the MMM household’s income at their prime time.

    So my point is not about how awful Denmark is, but I really disagree with the statemet that where you live should have no impact on your saving ability. From what I read here on the blog, early retirement seems much more achievable in the US than for example here in Denmark. Not to say that it is impossible, it’s just harder to achieve.

  • Tony August 6, 2015, 7:02 pm

    I realize this is an older post however I have been fast forwarding through time as I read this blogs history – great stuff! I am Canadian and haven’t taken full advantage of my RRSP contributions…as a result I have quite a bit of room on my RRSP deduction limit. Would you recommend getting a loan to purchase a lump sum of RRSP’s now then use the tax rebate to pay down the loan? It seems like a good way to get caught up but I am not sure. I should add that as a result of reading this blog it has given me a lot to think about…especially since my satellite is now gone and my home phone cancelled. My extra time has allowed me to use my backyard gym (aka my shed), and my last vacation saw me build a deck, a pantry, install an outside tap, amongst other work while still enjoying my family and not spending a ton of cash. Many people I know are not nearly as prepared for retirement as we are so we thought we were doing pretty good and following the standard retirement method….THEN this blog helped me realize that we have actually been chasing a very low standard by comparison. Keep up the noble effort because you are making a difference.

  • mark December 15, 2015, 2:17 pm

    I don’t know if this was mentioned, but people who have set themselves up to be under total income of about 16,000 dollars in Canada are eligible for GIS you DO NOT WANT ANY money in any rrsp if you think you may receive some GIS income from government. All income is not taxed the same, nor is some income counted as income when applying for GIS look at the rules, you should be putting no money in a rrsp if you will receive or might receive GIS. There is over 7 grand that a person is eligible for through GIS. Off the top of my head things not deemed as income and therefore not penalized for GIS credits are…paid off home, maxed out TFSA, Dividends get preferential treatment in NON-REGISTERED account for Div credits lowering your tax rate, wack of cash earning minimal interest affects minimally the GIS credit, shift your investments to take advantage of government programs.

  • mark December 15, 2015, 2:30 pm

    Oh by the way OAS in not considered income for GIS credits!

  • mark February 1, 2016, 10:49 am

    Dont invest in any RRSP if your going to get any government money from programs, it counts against you.
    GIS in particular.

  • Sarah De Diego August 31, 2016, 9:29 am

    Great article discussing the basics. A few questions before I head off to find Part 2.

    1. What about those of us that have no mortgage, debt, have maxed out our RRSP (spousal and otherwise) and the paltry $5,000 (was as high as $10,000) TFSAs?

    2. Do you have any good book recommendations that are Canadian specific. I really liked “The Wealthy Barber”. Even though it wasn’t totally relevant to my lifestyle, it provided the basics for a solid foundation (as has this article) and it’s always nice to have a reminder that I’m on solid ground.

    3. I have a balanced stock portfolio and will be adding 100% of the proceeds of my mortgage free home to it later this year. Should I just buy more of the same?

    Besos Sarah.

  • andy February 20, 2017, 5:12 pm

    There are major penalties for taking money out of an RRSP early. If you take any amount out, there is at least a 10% withholding tax taken by Canada Revenue. The percentage amount depends on how much you withdraw. If you take out more than 15k, the penalty is 30%. Then on top of that, the money you do get is considered ‘income’ and is further taxed when you do your annual taxes.

    • Mighty Eyebrows Boy November 26, 2018, 11:35 pm

      I know I am replying to a year-old post on a 5 year old article, on page 2 of the comments, but this is just wrong. In case anyone else is digging through the old comments looking for RRSP information:

      Any withdrawal from your RRSP is taxed at your current marginal rate. The withholding is just CRA’s best guess and is balanced out when you file your taxes. This is NOT double taxation.

  • Jerome B April 6, 2017, 1:48 pm

    Hello I am a little late to that party but maybe mr MMM will read this comment and hopefully other canadians will and use this idea:

    I am already mortgage free, me and the wife are already maxing out our RRSPs and have been slow to get in the TFSA but we are getting there ans will max it our in a year or 2. We use questrade to invest all of it with help from fool.com stock advisor us ans canadian version.

    But we have 3 kids and another thing i am using to create weakth is putting a bunch of money (max 50 k per kid i believe ) in a registered education fund and get a 20% grant from the canadian gov. !

    As you know a university degree is pretty cheap here and most of that money is gonne come back to me tax free in the end… since my kids are gonna be raised as mustachiens of sort…


  • Buxtehude September 18, 2018, 7:57 pm

    I’d like to have some opinions on my thoughts for how to manage different investment accounts in retirement. Usually what I see is a lot of strategy for the accumulation phase but an oversimplified view of the retirement phase. For example, “withdraw from your non-registered account first”

    I’ve done a lot of thinking and calculations and this is what I’ve come up with:

    Lets assume that you are a very early retiree. TFSA and RRSP are both full. You also have a fair amount in the non-registered account. You want to be as frugal as possible in the first years of retirement so that your portfolio can grow more over time.

    The TFSA is completely tax free so it seems clear that it should be the last one to withdraw from.

    The real question is between the RRSP and non-registered account. I believe this depends on your income and even then, withdrawing from a mixture of both might be the best option.

    While the RRSP is the best account in the accumulation phase, it is the least tax efficient account in the retirement phase, even more than the non-registered account.

    Everything in the RRSP is 100% taxable at your full income tax rate. That means, the longer you let the money grow, the more fully taxable income you will have to realize.

    The non-Reg, however, only charges 50% tax on capital gains, and at low income level, can even pay a negative tax on eligible canadian dividends.

    I think if income is sufficiently low in the early years, you could benefit from gradually drawing down the RRSP and reinvesting in the non-registered account.

    Another option if you income is very low is tax-gain harvesting. Every December I would do an assessment of what my tax liability currently would be. Then I would calculate what it would be if I realized all of my capital gains in the non-reg. If it didn’t amount to much, I would realize all of my capital gains for the year. Doing this every year when income is very low can reduce any deemed disposition on your assets in the future.

    I also intend to expatriate to country with no/low capital gains tax when income increases, and at that point I would have to have a deemed disposition on all assets in the non-registered account, which would be a huge tax liability if I defer it all.

    Any thoughts? I don’t feel like going back and editing so I hope it’s not too messy.



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