Sep 21, 2013 215 comments

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.

Summary

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:

RRSP first
TFSA
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

RRSP
Mortgage
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].

References

2013 federal and provincial tax rates:
http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

Revenue Canada’s RRSP website:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/wthdrwls/menu-eng.html

Revenue Canada’s TFSA website:
http://www.cra-arc.gc.ca/tfsa/

[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.

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Want More?

Benedikt September 21, 2013, 10:10 am

Thanks for this article. I didn’t read it. Before yelling at me to not comment that way ;) , I didn’t read it because I live in Germany.
I like this blog very much, but lots of stuff, especially more specific things, only apply to US readers. So, if you know someone with expertise or experience in Germany, it would be really nice if you could encourage him to write. Me and other German readers will thank you!

Benedikt

Reply
- Deano September 21, 2013, 3:15 pm
  
  Perhaps this will be the start of a series on other countries (remember, Canada is not a state of the US, it is actually a country). That would be quite cool, though I suspect there may not be enough readers from Germany to warrant it. Maybe you could do some translating and writing of new articles for a German site?
  
  Reply
  - Jörg September 22, 2013, 1:04 am
    
    Well, you might be astonished, how big the readership in germany is, as there was some buzz about the MMM Blog in the newspapers here.
    Early retirement should be possible for everybody, specially in a country with a thriving economy.
    
    Reply
    - Sebastian September 23, 2013, 12:44 am
      
      If you have a look around you will be surprised how many german blogs are as well dealing with FI. (Or frugal living)
      But a guest post from a german writer at MMM would be a big boost for this blogs i believe.
      
      Reply
      - Mrs EconoWiser September 23, 2013, 2:25 am
        
        I’d love a Dutch version!
        Things are different for us Dutchies indeed. Since we’re automatically saving for retirement through our employers. And I also don’t know whether the 4% will hold for us plus I’m not so sure about certain tax rules.
        I haven’t found a Dutch blog by someone who is actually financially free and practises the MMM lifestyle. (Hopefully I’ll be that person rather sooner than later ;-)…but a little help and inspiration on the way would be very much appreciated)
        
        Reply
        
        bob September 23, 2013, 8:52 am
        
        You probably want to read Wade Pfau’s blog for research on the 4% rule and specifically how it has worked for other countries:
        
        http://wpfau.blogspot.com/2012/05/may-i-add-part-vi-to-retirement.html
        
        Mrs EconoWiser September 25, 2013, 7:16 am
        
        Ah, thanks Bob! The numbers for the Netherlands are not as impressive as the US ones. However, they aren’t the worst numbers in the bunch either. I guess sticking to a 3% withdrawal rate (and thus bigger ‘stash before reaching FI) will put us in a relatively safe zone.
        
        Carrie Devitt December 2, 2013, 6:04 am
        
        I live in the Netherlands too, Mrs EconoWiser! I’m British, though, not Dutch. I agree that it would be nice to have MMM-type advice for Europe, or for the Netherlands specifically. Maybe I’ll even take up the challenge myself…
Deano September 21, 2013, 10:19 am

I wonder, having a pension as I do (Teacher’s Pension…at one time freaking amazing, now just pretty good, likely to be near non-existent in the future), might I consider weighting things;
1. TFSA (as I’ll have income when I retire, making RRSP’s taxed at a higher rate at that point)
2. Mortgage (I hate debt like Mr. Toque)
3. RRSP (to use as income should I take early retirement before I opt to take my pension).

Thoughts?

BTW, this was awesome, highly appreciated!

Reply
- Lee Lau September 21, 2013, 10:46 am
  
  Deano
  
  I pretty much did the same thing as you except I did RSP contributions and mortgage payments equally as TFSAs didn’t exist when I retired. In “retirement” I put the aggressive side of my investments in TFSAs accepting the fact that I invest with after tax money. Like you I have retirement income as I went the path of MMM active retirement
  
  I paid off the mortgage as, for me, I made clearer minded decisions without the debt spectre. All this was highly personalized of course
  
  Reply
- al September 21, 2013, 10:58 am
  
  Deano,
  
  My wife is in the same boat as you. Your pension contributions count towards the 18% of income RRSP limit so you are already doing ‘RRSP’ investing. Not sure what the payouts will be in the future but I think having a tax free income stream from a TFSA later in life that supplements your pension amounts (that will be taxed) is the better solution. (my opinion)
  
  There is a wrinkle in what is being presented here. Many retirees do not like the fact that you cannot control your withdrawal rate in retirement. At 65, your RSP becomes a RIF (Retirement Income Fund) and depending on your age, you have to ‘consume a defined percentage of your savings. So though you may only need 24K, you will be forced to withdraw more and have that taxed. Still worth doing but it is not possible to income split with your partner 12 K each and then with basic tax exemptions pay nothing in income tax.
  
  This fact makes the tax math a bit closer plus I’m fairly certain that tax rates will continue to rise to pay for the coming boomer hit on pensions and healthcare. I think that people should really be maxing out the TFSA each year even if you’re not maxing out the RRSP.
  
  Reply
  - Rob September 21, 2013, 12:30 pm
    
    Actually, RSPs need only start to be converted over to RIFs by the end of the year that you turn 71. That said, however, one may wish to avoid some of the eventual tax owing on RIFs by converting $14000 at age 65. This I did and each year withdraw $2000 out of my RIF account, claiming the full $2000 Pension Income Tax Credit (Google it to get the details).
    
    Reply
  - Mr. Frugal Toque September 21, 2013, 12:55 pm
    
    It does require a bit of forethought if you are planning to split income before the age of 65 when there is only one wage earner in the house. I’m not quite in that situation, personally, as Mrs. Toque did quite a bit of earning before she took time off for the kids.
    However, ideally, we should have equal amounts of money in RRSPs when we retire. The trick there is that I use my RRSP room to put money into an account in her name, topping it up until the two accounts are equal.
    If you don’t have that luxury because your employer (i.e. the government) doesn’t let you, then you won’t be able to “split income” until you are 65.
    However – big however here – I believe that you still get to claim your spouse as a dependant on your income tax forms. This gives you right about $10k worth of deductions on top of your own basic exemption. We’re already right in the ballpark of paying no taxes on $24k of income.
    But I totally agree that everyone should be maxing out their RRSPs *and* their TFSAs, unless they’re hard core mortgage-killers like we are.
    
    Reply
    - Richard September 21, 2013, 7:12 pm
      
      That’s one of the cool things about the TFSA – you don’t need to think about which spouse is holding it (and currently it’s not too hard to max out two TFSAs anyways).
      
      I like them a lot more than RRSPs (in fact I don’t use my RRSP contribution room). The first reason is that there is no deferred tax. Max out the TFSA for 5-10 years and let it grow for a few decades, and you will have a large source of income that you never need to pay taxes on. With an RRSP, the more it grows the more future taxes you have.
      
      You also run into forced withdrawals at 71. If you are prepared enough and fortunate enough to have a large RRSP account at that age while still being healthy enough to enjoy a few income-generating hobbies, you’ll have trouble moving that money around without incurring taxes. If you plan to leave it as an estate and you don’t live too long you may be able to avoid some of that taxation.
      
      Finally, a true mustachian may not even benefit from an RRSP now. The only situation where an RRSP is unconditionally good is when you’re in the top tax bracket or relatively close. If your expenses aren’t high now, the only reason you would need that income is to save more. I use a corporation in a way similar to an RRSP (until recently it even had a net tax advantage). The corporation only pays me enough to pay my expenses and max out the TFSA, leaving me in a position where I can freely take additional personal income for anything that requires it without having to pay taxes.
      
      Even without having those extra investments in the corporation, an income that’s just enough to fill up your TFSA could be enough to earn sweet mustachian freedom while tossing the middle finger to the taxman. Throw in a few handy deductions and you can avoid taxes for most or all of your life. If you have a mustachian mind with high savings rates, low expenses, and a few hobbies you get paid for, there’s a good chance you can have a higher income after retirement. The TFSA is an ideal tool to protect you in that case.
      
      Reply
      - jamie September 22, 2013, 1:54 pm
        
        I also favor my TFSA over the RRSP but things are far more complicated then made out to be in the original post. Different investments Foreign/domestic/dividend paying/… go into different locations to be the most tax efficient.
        
        I’m expecting much higher tax rates in the future when I’ll be “retired”. I’m hoping at that point my TFSA will be kicking off enough income to live off of tax free.
        
        Reply
  - Nora March 13, 2019, 5:08 pm
    
    Convert rrsp to rif at 71 then it comes out by a specficied amount per year. And you cannot reduce your taxes to zero unless your income is less than 11000.
    
    Reply
- Pepsi September 21, 2013, 11:29 am
  
  I think if you’re a teacher and intend to keep working up to retirement age (or at least within 5 years for the reduced pension) you shouldn’t stress too much about the rrsp. Your retirement income will be such that you risk screwing up your OAS payments, likewise you’re not likely to be in a much lower tax bracket either with a teachers pension. The teachers pension is like a forced savings that guarantees great returns and takes retirement financial stress away from you. It should also be mentioned that if you do save a great wodge in your rrsp you have to withdraw a minimum of 7% each year after the age of 71. That could have serious effects on your stash! If you plan to leave your stash to children, family or charity; then remember that the day you die the money in your rrsp is treated like it is withdrawn in its entirety and your estate will pay tax on it as if it is income! I think tfsa and mortgage are the best and not to forget the resp if you have kids!
  
  Reply
  - Deano September 21, 2013, 3:18 pm
    
    Hi Pepsi, you sound like you might know, what happens if I “retire” from teaching and want to live off of my RRSP’s for a few years? Is that even advisable, is there a benefit to it? It seems counter-intuitive to me, but also a good way to deal with having some RRSP’s, which I do (prior to teaching).
    
    Reply
    - Pepsi September 21, 2013, 4:58 pm
      
      Deano, I’m afraid I only know about these things from reading blogs like this and talking to colleagues. There are plenty of teachers that flame out before reaching retirement. I’m no mustachian and hope to have a full working life but must live with the reality that I may want/need to leave the world of work early. If your plan is to leave early then your stash is really just a bridge until you receive your pension. In this case your rrsp would be a suitable fund from which to pay yourself as you can take funds from an individual directed rrsp as needed but you must pay the necessary income tax on any amount withdrawn. My plan is to go after aggressive returns in my tfsa, safer returns in my rrsp and when I retire withdraw from rrsp first to avoid any clawback of the oas. Withdrawals from your tfsa do not have any implication on oas benefits.
      
      Reply
    - Gerard September 22, 2013, 7:22 am
      
      Deano, the advantage to retiring before your pension kicks in and living off your RRSP withdrawals is mostly that you get to be retired. If you’re living on (say) $24K a year by that point, and have worked long enough to qualify for a $50K pension at age 60, then you could retire (X = amount in RRSP / $24K) years earlier, and pay very low taxes. Or you could pull out $30K a year, pay rather low taxes, and put $5.5K into your TFSA (remember, TFSAs are not income-dependent, and the payout from them is neither taxable nor used in the OAS clawback calculation). Then you’d end up fabulously wealthy at 60, retired on your pension and whatever you want to pull out of your TFSA. This is my current plan.
      (And yes, I know, you could retire even sooner because your RRSP will earn you money before you spend it down…)
      Or, you could retire super-early if you have a lot in your TFSA, and withdraw from your RRSP only the amount that’s tax-free, making up the difference with TFSA withdrawals (which are tax-free no matter what).
      
      Reply
    - Morning Coffee September 22, 2013, 9:10 am
      
      Hi Deano,
      You have a few options you can consider. My experience is with OTPP so yours may be different – and I’m not and expert, just what I went through recently. Pensions with OTPP can start as early as 50 years old or can be differed until 65. Most won’t have their “factor 85” for full pension at 50 so they would have a reduced pension (penalty based on how far you are from your factor).
      Waiting a few years and living off RRSPs may make sense since your factor will go up if you wait since you’ll be older when you take your pension. But then you loose out on pension payments for those years.
      The best way to figure it out is to call the pension board and request your scenarios. They can tell you what your pension payments would be for a reduced pension at 50 (for example) and unreduced payments when you reach your factor. Then you can figure out your break even point. Don’t forget the CPP clawback at 65. The pension board will give you those numbers too.
      
      Reply
- MikeyP September 21, 2013, 6:14 pm
  
  My situation is similar where Ive got one of the coveted / despised defined benefits pension plans.
  I think your plan of attack is good for folks like us. Anyone have different thoughts?
  
  Reply
- sonofczar September 22, 2013, 9:06 pm
  
  Yes, having a defined benefit pension can actually work against early retirement plans since the money isn’t accessible until a certain age, and there is a pension adjustment that reduces your RRSP room significantly. Because of my pension last year my RRSP room was only 8% of my gross income after the adjustment. I’m not saying my pension is a bad thing, but you have to consider other sources of income until it kicks in. Also, not all banks require in-person meetings for RRSPs. ING Direct doesn’t, and if you invest your money with an online brokerage (which is usually the cheapest way to buy index ETFs), you can do everything to open it online.
  
  Reply
Lisa September 21, 2013, 10:22 am

Thanks for the Canadian perspective. Great advice and priorities.

Reply
James September 21, 2013, 10:28 am

Solid post, although I am currently prioritizing my TFSA over my RRSP as I am only 23 and expect to pay higher income tax in the future.

Also, I completely agree that PC Financial has some of the worst MERs out there. They offer the best daily banking (no fees), however. I recommend Questrade as a broker. You can setup an RRSP and TFSA online.

Reply
- AJDZee September 21, 2013, 12:01 pm
  
  +1 for Questrade
  
  They also don’t charge a commission when buying ETFs!
  
  Reply
  - Ogopogo September 22, 2013, 1:03 pm
    
    Another vote for Questrade, my brokerage of choice. I would add too that because it’s free to buy ETFs, you can technically have a cost-free portfolio (minus MERs of course) if you’re rebalancing annually by just buying more shares, either through dividends or new cash.
    
    Reply
- Mr. Frugal Toque September 21, 2013, 12:36 pm
  
  Yeah, I’m working on constructing a chart of every national bank offering in terms of the MERs on various funds. It’s amazing the kind of spread you can get, especially if the fund is name after someone.
  (I am also with PC for banking, since they’re one of the few places that doesn’t take your money away in exchange for storing it for you.)
  As to your priorities, while I get that you can expect your income to increase between now and retirement, do you think you’ll be *spending* more money in retirement than you are now? Because, if not, you should still be prioritizing RRSPs over TFSAs.
  I know I maxed out my RRSPs from my second year of work onward (since you can’t do RRSPs without a previous year’s salary to work from).
  
  Reply
  - Richard September 21, 2013, 7:19 pm
    
    TD’s e-Series funds and ING’s streetwise funds are easier to manage than ETFs and also don’t require a branch visit to set up. In fact most TD employees aren’t aware that e-Series funds exist, and ING has only a handful of branches across the country. I would recommend ING to a novice investor who wants the best deal, e-Series for an intermediate investors, and Questrade for an advanced investor.
    
    Reply
    - totoro September 22, 2013, 2:12 pm
      
      I use TD e-series and ING too, I’d be happy to hear if there is a better option.
      
      Reply
      - Richard September 22, 2013, 7:53 pm
        
        Not as a mutual fund where you can just send in the money. ETFs are cheaper (not much less than the cost of e-Series) but they also have commissions, the extra time and research to manage them, having to trade during business hours (when you may be at work), managing cash from distributions yourself, and other challenges. I have an ETF portfolio with Questrade because I can handle these, but currently the fees I’m saving every year aren’t a very high payoff for the extra time it takes.
        
        Reply
        
        Mr. Frugal Toque September 23, 2013, 4:52 am
        
        I believe you’re talking about constant trading, are you not?
        My intention, if I’m going to use them for my retirement, is to purchase certain funds (e.g. stock index, bond index, REITs) via ETF and then let ride through to retirement.
        We’re not trying to be market timers here, after all, for the most part.
        
        Gert Berklestein September 23, 2013, 9:06 am
        
        ETFs have a lower MER marginal cost and a bigger fixed cost to buy or sell.
        
        TD eSeries have no buy or sell costs (last I checked), but have a slightly higher MER than do ETFs.
        
        Which one is better depends on how often you want to buy/rebalance (quarterly? biweekly?) and how much you’ve got invested.
        
        I think you could make an argument for doing your every-pay-period saving via TD eSeries and then shifting them into an ETF annually when you rebalance, just to keep trading fees to a minimum.
        
        Clay H September 23, 2013, 11:29 am
        
        @Gert:
        
        Some of the e-series are competetive with the equivalent iShares ETFs – some are .10% more, some are .10-.15% less. I carry a mix of each – but right now I’m just saving up to murder my student loans!
        
        Whisky shots on their graves!
        
        Richard September 24, 2013, 8:21 pm
        
        I prefer monthly additions to a portfolio. Some brokers have free ETF purchases, but if a new investor hears that “ETFs are the way to go” they could end up paying $100/mo in commissions on a $10,000 portfolio. There are many cases where the ETF cost advantage doesn’t hold up. There are far less things that can go wrong with an e-Series or ING account, for a cost that is only marginally higher if you don’t have a large portfolio.
Schmidty September 21, 2013, 10:31 am

First of all, thank you!!!! for the Canadian perspective.

Secondly, I have spent a lot of time thinking about asset allocation among RRSP, TFSA, and non-registered accounts. The conclusion that I originally came to is that it makes most sense to have my bonds in the TFSA because any capital gains (presumably there will be more from equities than bonds in the long run) already receive preferential tax treatment in non-registered accounts. This is eating me up inside right now with bonds falling because capital losses are not deductible in TFSAs. Thoughts?

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- Mr. Frugal Toque September 21, 2013, 1:17 pm
  
  I’m not sure we’re on the same page here.
  Any profits, whether they are dividends or capital gains, are non-taxable inside either an RRSP or a TFSA. This goes for losses, too. That’s just the way that cookie crumbles.
  It is true that capital gains from stock investment are taxed at 50% of your normal rate when they occur in a normal, non-tax-sheltered account.
  http://goo.gl/EHLve6
  Dividends are more complicated. You should totally go and read this page where they explain the multi layer mathematical craziness that leads you to a tax rate that is probably roughly half of what you pay on income from working.
  http://www.cra-arc.gc.ca/gncy/bdgt/2013/qa04-eng.html
  So if you had filled up your RRSPs and TFSAs, you would want to put further non-tax-sheltered investments in whichever type of fund would give you the kind of output that gets you taxed the least (cap gains or dividends). This decision depends quite a bit on what you think your retirement income level needs to be, as the math behind “grossing up” dividends and then getting a tax credit is *not* trivial. At Mustachian income levels, the math could easily favour dividend bearing funds over other types.
  
  Reply
  - Mr. Frugal Toque September 21, 2013, 5:00 pm
    
    On further examination, based on Aditya’s post below, I now understand what you mean by having a low income currently and expecting a higher income in the near future.
    I’m always worried when I hear people making comments like that because it is so often used as an excuse to not save money now (obviously not what you’re doing).
    That said, yes, if you’re expecting to have a huge increase in salary in the near future (not someday way far off, sort of, probably) then it makes sense to save your RRSP space for a future, sunny day … so long as you’re still actually saving money *now* as well. Because that stuff adds up like you wouldn’t believe. :-)
    
    Reply
- Richard September 21, 2013, 7:22 pm
  
  In 99% of cases, using a TFSA or RRSP is better than an unregistered account. Now there are a few differences. For example, if you own dividend-paying US stocks you will lose a bit to foreign taxes in a TFSA while an RRSP doesn’t have that problem. However you need a pretty large portfolio to even worry about something like that.
  
  If you have maxed out your TFSA and RRSP and you’re still saving more, then there are a few obvious choices. Bonds get heavily taxes outside of sheltered accounts, while Canadian stocks have relatively low taxes regardless of where you hold them. If you can, it’s better to have losses in an RRSP than a TFSA but that requires predicting the future.
  
  It can be hard to compare the multitude of options but if you’re at least making a relatively good choice for each part of your portfolio then you’re doing great (not to mention that even having this problem is a good sign).
  
  Reply
CL September 21, 2013, 10:39 am

Thanks for giving us the Canadian perspective! Definitely something I will chew on across the south side of the border.

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- CL September 22, 2013, 3:12 pm
  
  Even though Mr. Frugal Toque has been open and honest about the high Canadian income taxes, he says that the citizens get the tradeoff with cheap higher education and healthcare.
  
  I realized, when going through the $100,000/year example, that I pay a higher effective rate than Canadians making six figures in Ontario do on a salary that’s going to end up around $23,333 gross (I graduated from college in May). Right now, it’s around 28%. I do not get free healthcare or cheap higher education. I live in Madison, Wisconsin, so pretty much everybody takes my lunch. The county, the state, the feds/FICA…
  
  Reply
L.T. Smash September 21, 2013, 10:39 am

Love hearing from Mr. Frugal Toque on this stuff, being Canadian. :)

Only thing I would need to throw into the mix of the above is that if you’re like me, and have a defined benefit pension plan (federal public service of Canada), the 18% contribution limit (based on your earned income) is reduced by however much was contributed to the pension (i.e. you don’t get any advantage over and above others simply because you have a pension plan you’re contributing to through your employer).

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- Schmidty September 21, 2013, 11:39 am
  
  Agreed. This drives me nuts, even though my employer contributes to my plan. The result is that in theory you’ll have more money eventually, but can only access it when you hit the minimum age of retirement as stipulated by your plan (55 in my case). If you want to retire before then you have to work extra hard because in addition to losing the contribution room to your RRSP, your contribution to the pension is deducted from your take-home and locked-in.
  
  Reply
- Mr. Frugal Toque September 21, 2013, 12:58 pm
  
  Hi L.T.,
  Love hearing from you, too. :-)
  I’m not entirely clear on the way those government pensions work, though. Is there a way to cash out from them early without taking too much of a hit? I thought that I heard something about this, but I really don’t have anyone inside either the provincial or federal government who can comment on this.
  
  Reply
  - L.T. Smash September 21, 2013, 2:55 pm
    
    I am still learning about how early retirement will affect my and my wife’s pension (also a ‘fed’). I believe there is an option to have a direct transfer of contributions to a locked in retirement account or other retirement vehicle, though personally I will leave ours exactly where it is. I believe this can only be done upon declaring retirement – not ahead of the game while you’re still working for the Gov’t. The earliest we could begin receiving income from our pension would be at age 50, but the benefit of having it matched to the Consumer Price Index (i.e. inflation matching) provides great assurance. And that is guaranteed for the rest of our lives.
    
    Overall, I am not aware of any way of getting out of a gov’t defined benefit pension plan, which means you feel like you’re contributing to something in the mean time that you feel you could better manage yourself (given your goals of early retirement). Nevertheless, it is a very nice ‘safety margin’, as MMM would put it. After all, if all of my calculations prove to be a little off re: early retirement, having an inflation adjusted pension for the rest of our lives starting at age 50 – even if greatly reduced because we retire early – is a great asset and buffer to other investing I will be doing in the mean time to help us retire by age 45 (or sooner – we’ll see how things go ;).
    
    Reply
  - Neil September 21, 2013, 6:49 pm
    
    Every pension plan is unique, but for the most part, once you’re vested, it’s very restrictive what can be done with it. My wife used to be in Alberta’s “Local Authorities Pension Plan,” and if she’d stayed until she vested, the bulk of the value could only have been withdrawn into a “Locked-In-Retirement-Account.” A LIRA can’t pay out before age 50, but is otherwise similar to an RRSP. A small portion that meets certain criteria could still be transferred out to an unrestricted RRSP, though how this share is calculated is murky at best.
    
    She left before it vested, so lost the employer contributions, but could transfer to an unrestricted RRSP. She did get back the RRSP contribution room that the employer share had previously taken.
    
    Public sector pensions are a triple wammy, because actuaries fucked up for basically the entire 20th century, overestimating investment returns and underestimating life expectancies, so today’s contributors are largely funding the last generation’s shortfall, in additional to losing most of their tax benefit to saving for themselves.
    
    Reply
    - Devin September 23, 2013, 9:07 pm
      
      I am living through this right now. They are proposing changes to the retirement age from 55 to 65. They want me to work for 10 more years. In the event that I don’t make it to 65 they take a flat 30% reduction in the value I am eligible for. Currently 35. The way I see it if I don’t plan on receiving anything from the LAPP and focusing on funding my own early retirement, the pension is a super added bonus. 30+ years of work to me is almost as long as I have been alive. Can’t quite believe it. I am at the top of my pay grade and only have 3 positions above me until general manager. So in other words pay my dues and save my 50%. My biggest concern is continuing to grow and learn. Lots of opportunities currently so I am enjoying it. I have to wonder though can that be the case for 30 years. Anyways I will be doing the math to see what my options are once the portfolio starts providing income close to my needs.
      
      Reply
  - Lorri September 22, 2013, 9:36 am
    
    Actually I am a former federal employee who did exactly this…cashed out my pension value before age 50. My spouse, also former fed and I had enough years of service between us to walk away with a very comfortable sum of money both locked-in and cash value. We live very much under our means, and wanted the freedom and control of being financially independent and doing our own investments.
    
    That said, if you do this, expect to take a rather large hit on your cash portion (that part you cannot shelter inside registered investments).
    
    I am curious about what you said about splitting income derived from registered investments with a spouse. I thought you could only do this with CPP and OAS. Do you mean that since both of you would not be working that you could claim the dependent’s deduction?
    
    Reply
    - Mr. Frugal Toque September 22, 2013, 1:43 pm
      
      According to Revenue Canada’s information:
      http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/qlfy-eng.html
      CPP and OAS are *not* eligible, whereas the annuity payments from RRSPs *do* seem eligible since they are “annuity payments” for a “pension fund or plan”.
      The issue with RSP income splitting is that it doesn’t kick in until the person with the pension income is 65.
      “You are not prevented from splitting your eligible pension income because of the age of your spouse or common-law partner.”
      That means it’s not particularly valuable for people like us.
      
      Reply
    - Joannie October 6, 2013, 7:48 pm
      
      I’m very curious to know about this decision, as I need to make it this year. I can commute my pension value in one of my pensions (which I worked age 21-38). Now I have another pension, that I thought I’d keep vested. And commute the first one. How did you decide.?
      
      Reply
Lee Lau September 21, 2013, 10:42 am

Some other points worth mentioning where Can US retirees differ

1. Universal health care that is pretty good also means health issues — generally — do not impact retirement decisions. btw lets try to not dive into political discussions about health care please

2. Lots of Canucks live in cities with decent public transit or car-sharing so even more incentive to ditch the extra cars therefore even more savings

3. University or post-secondary (technical or non-technical) education is still relatively pretty cheap so can get an education without incurring crushing debt

4. Fairly significant Small Business tax break in that below a certain dollar sum you pay low marginal tax (versus say being an employee) so its a ok incentive to take a chance on starting a business

5. Huge advantages in going further north to isolated communities (Yukon, NWT, Northern BC, Northern Alberta) to (i) make more money; and (ii) supercharge getting experience. IMO this applies to those entering workforce and those wanting a change. Of course, this very well might be a short term opportunity but its worth mentioning.

The last one is pretty fact-specific and techie so no more on that one really as it delves into accounting/tax geek talk

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David September 21, 2013, 10:43 am

Thanks! I’d love to see a deeper treatment of tax situations within the various registered accounts. I know that for US distributions, there’s a 15% withholding tax that can’t be recovered in a TFSA. I’d also be interested in a discussion about where to hold equities that primarily produce income vs capital gains vs distributions, and how each of those should be held in registered or unregistered accounts.

I’m currently saving in unregistered accounts after maxing out my RRSP and TFSA, just because my mortgage is only 2.2% right now!

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- Brian Romanchuk September 21, 2013, 7:21 pm
  
  I do not think there is a recovery for US dividend witholding in RRSP’s; but I have not verified that.
  
  It seems that if you have a choice, hold U.S. equities outside shelters and hold Canadian equities inside (so you get the witholding back). Since there is no benefit for capital gains inside the tax shelters, you want to get capital gains outside. And you obviously want to hold any bonds inside shelters. (Dividends get a tax credit, so preferreds should probably be outside.)
  
  I got capital gains from my bonds and income from my equities, so I probably should have kept my fixed income outside the shelters,
  
  Reply
  - Richard September 21, 2013, 7:36 pm
    
    The RRSP has no US withholding, so recovery is not necessary (depending on the fund structure – an RRSP holding a canadian fund that owns a US fund may still leak a bit of tax). But you also need to consider what you’re being taxed on. US stocks have some of the lowest dividend yields since there is a strong preference for capital gains there.
    
    The absolute amount is what makes the difference so it’s better to pay a slightly higher tax on a much lower dividend income if you have the choice.
    
    Reply
Hilary September 21, 2013, 10:50 am

Sorry, I feel compelled to nitpick. Progressive income taxes are NOT ubiquitous. I’ve been living and working in Russia for a few years now, and it’s a flat 13% for earned salary, be it $1000/mo or $10,000/mo (so long as you work as a resident – non-residents pay more). Great for the high earners, not so much for those on the lower end. In any case, 13% ain’t so bad.

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- win September 22, 2013, 6:03 pm
  
  Hong Kong has a progressive rate, but the top rate is 17%.
  
  http://www.guidemehongkong.com/taxation/personal-tax/hong-kong-salaries-personal-tax-guide
  
  Reply
  - Chris C September 22, 2013, 8:12 pm
    
    Hong Kong tax is pretty effectively a flat tax.
    Not really progressive when the top rate of 17% starts at 120k HKD or about $15k USD.
    
    Plus the lack of any tax on dividends, cap gains or anything earned outside of Hong Kong.
    
    Reply
Miss Growing Green September 21, 2013, 11:08 am

Great post! We’ve thought about making the move further north, and it’s really helpful to see some of the options we have if that idea becomes a reality.

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Aditya September 21, 2013, 11:21 am

Glad to (finally) see a focus on Canadians, but I think there are a few issues. First off, I don’t think you need to physically visit a bank to open an RRSP. QuesTrade is a discount broker that operates without having physical locations. I opened my TFSA with them a few years ago, and the closest I had to come to physical interaction was scanning and emailing in some signed forms. I will be opening an RRSP with them soon as well.

In general, for portfolios above $50k in value, it makes more sense to buy ETFs than mutual funds, and that’s where a broker like QuesTrade can help greatly. Plus, they offer free ETF purchases, and their commissions for sales (and regular trades) is quite low too.

I recommend any Canadian Mustachians follow the Canadian Couch Potato blog (no link, because I don’t want to be too spammy—it’s easy to find by googling). The author goes into *tons* of detail about the options available in Canada, with a focus on ETFs, and he also discusses important issues such as asset location (which holdings should go in TFSAs vs. RRSPs vs. taxable accounts).

There are also some interesting things that RRSPs get you, such as the ability to borrow (a limited amount of) money out of your RRSP for the purposes of buying your first house (you have to pay the money back to the RRSP within some fixed amount of time).

I should also point out that, as a grad student, my income in a few years is going to be much higher than it is now, so I’m currently prioritizing my TFSAs over RRSPs. I have however, recently maxed out my TFSA contributions so I will have to open an RRSP this year. (I actually need to do some math first to see if it makes sense to put savings into an RRSP right now, or else save the deduction for higher-income periods.) Others should take this into account before unnecessarily prioritizing their RRSPs; if they expect their income to increase significantly, I think it’s better to get things into TFSAs first.

Lastly, I don’t see the advantage to paying extra to your mortgage so long as the interest rate is low enough. Assuming a 7%/a gain on a portfolio, it’s very unlikely that a fixed amount of money is better off being put into the portfolio rather than towards a much-lower-rate mortgage. MMM has discussed this before, coming to the conclusion that if you’re disciplined enough, it does make sense to invest first; but most people aren’t, so the more broad advice is to put the extra towards the mortgage.

Oh, and also, I have to disagree with Lee above about having access to good public transit systems. AFAIK this is true really only for Vancouver. Having lived in Calgary, Edmonton, and now Toronto (Regina as well, but I was too young then to really have used much transit), I’m pretty unimpressed by the transit systems we have. I’ve heard quite good things about Vancouver. Of course, I don’t own a car—living in downtown Toronto is very conducive to getting everything I need within walking distance, and the weather can get a bit cold but not so cold that I’m off-put from walking (and certainly not as cold as Calgary, Edmonton, or Regina—or even Ottawa). I will occasionally (a couple times a year) rent a car for a day, for less than $40, to make a trip to Costco, and based on the price differential at Costco vs. other grocery stores nearby (even No Frills, which is quite cheap!) this is a trip that’s worth taking. I also sometimes need to go visit Indian stores, as those specialty ingredients can be hard to find at regular grocery stores, and I can fold this into the Costco trip.

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- L.T. Smash September 21, 2013, 3:47 pm
  
  Completely agree: Canadian Couch Potato is a great website, and even provides helpful excel sheets to use to rebalance portfolios across multiple accounts (i.e. RRSPs, TFSAs and normal investment account).
  
  One thing: My wife and I are paying down our mortgage to a little less than half of its current value before initiating the CCP strategy for early retirement (in our case). Reason: She is a part of this too, and doesn’t feel comfortable with me investing everything while we still have a full mortgage payment. This is part of the trade off one needs to do at times to keep happily married, but still aiming for financial independence through hardcore saving and investing. :)
  
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- Mr. Frugal Toque September 21, 2013, 4:44 pm
  
  It’s true. My experience with RRSP configuration has always been through employer based plans where the company kicks in 50 cents or 25 cents on the dollar. In order to get this benefit, you have to put your RRSPs into one of a small set of brokerage companies (usually associated with a bank, but now increasingly associated with insurance companies).
  We did borrow money from our RRSPs to make a down payment on our house, which helped avoid insurance fees, but this is generally not a good idea as your RRSPs are usually making more money than paying off your mortgage would get you.
  I hadn’t actually considered the situation where you’re earning very small amounts of money (say, under $20k) and expect to earn very large amounts in the near future. In that case the RRSP room you’re saving would be (18% * 20k = $3600). You wouldn’t pay much tax on that when you’re only earning 20k, but it would be considerable once you’re earning a higher salary.
  I’d been assuming that what really matters is the what you expect to need as retirement income and comparing that to your current income. But in your situation, similar to a comment above, it makes mathematical sense to use TFSAs on income you weren’t going to pay tax on anyway and save the tax deductions for higher bracket income layer.
  Ottawa has a pretty good, if spaghetti-ish, public transit system. But I built “luxury compound in the woods” (haha) just outside this system – a good bike ride outside it, but still.
  
  Reply
  - plam September 23, 2013, 8:51 am
    
    I’ve read that the money you borrow from your RRSP you can arrange to pay back with (tax-sheltered) interest, which can increase the amount in your RRSP. A web search found two options:
    
    http://www.ratehub.ca/rrsp-home-buyer
    
    Not sure if it’s actually a good idea, but there are options.
    
    Reply
- Brian Romanchuk September 21, 2013, 7:08 pm
  
  Why paying of the mortgage can be a good idea: mortgage interest in Canada is not deductible (unlike the U.S.). If you are in the 50% tax bracket (which is a middle class income in Québec), you would need to get double the mortgage rate on an interest paying instrument to get the same return as paying off the mortgage.
  
  You do get tax advantages with stocks (dividend credits, capital gains), which helps. But paying off your own mortgage is a risk-free investment, which makes the comparison to equity returns a bit apples-to-oranges.
  
  Reply
  - totoro September 22, 2013, 2:16 pm
    
    Mortgage interest is tax deductible if you rent out a suite based on a floor space calculation. If you have a low rate mortgage and rental income you may decide not to pay the mortgage down faster, but instead to invest otherwise.
    
    Reply
  - Gert Berklestein September 23, 2013, 9:29 am
    
    Yes, but that’s not valid if paying down the mortgage faster is being done at the expense of TFSA or RRSP contributions.
    
    Reply
- mensa September 22, 2013, 8:19 am
  
  Aditya – as a grad student with low(ish) income, you could contribute to your RRSP now, but not claim the deduction until you have higher income. Simply claim the amount on Schedule 7 when filing your income tax for the year you make the contribution.
  
  Reply
- Meardaba September 22, 2013, 9:57 am
  
  Thanks, Frugal Toque, for the Canadian perspective! I have just started looking at my money from a Mustachian angle (to be fair, this is the first month I’ve ever pulled in an income that will amount to more than $10,000/a). I’ve been lost when it came to what financial independence looks like in Canada.
  
  Aditya: Vancouver’s transit is fabulous, but then so are its bike paths! Victoria’s transit system is pretty great, though its bike paths aren’t. And I’d argue with you about Toronto’s, if you supplement your transit experience with bicycle rides, getting around Toronto is as easy as Vancouver. (Having lived in Victoria, Toronto, Edmonton, Northern BC, Northwest Territories, and New Brunswick without a car, I would 100% agree with your analysis of transit in Canada. Overall it’s pretty bad).
  
  And I’d like to add: Lee Lau, though I may not have hundreds of thousands of dollars in student loan debt, the $50,000 that I do owe is pretty soul crushing when I couldn’t find a job. Perspective is everything.
  
  Reply
- dunny February 20, 2016, 9:50 am
  
  Actually, I find it relatively cheap to run a car and the independence is so important to me. First, I live in the city, which means I walk to most things. My car bought new is 28 years old and in excellent shape (my mechanic advises me to keep it as it is still better than a new car). I love to be able to drive to evening events when it’s raining and cold or when errands take me to opposite ends of town and cannot be otherwise arranged. I run out to nearby farms several times a week in the summer for really great vegetables and fruit. Also useful for Costco runs. I very occasionally take the bus or even a cab when I want to have more than one drink. I don’t need a car for vacations because I fly there and then rent a car.
  
  Reply
Erin September 21, 2013, 11:31 am

What a great post! There isn’t any chance of a similar one from an Australian perspective is there?

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- KM September 21, 2013, 4:02 pm
  
  If MMM ever wants to publish it I am sure there are a few of us that are more than capable of writing one. Leave any questions and someone is sure to answer them if I cannot….also don’t forget to check the forum.
  
  Reply
- jack the ripper September 21, 2013, 5:19 pm
  
  Can we have a guest poster do a follow up for our Australian readers? We are the 4th largest source of readers!
  
  As far as I know, we don’t have ANY tax advantages other than super, and I don’t want to wait until I’m 60 to retire!
  
  Reply
  - KM September 23, 2013, 2:22 am
    
    You 100% right Jack. Super is our only tax efficient vehicle to save tax dollars. There are lots of other non-mustachian methods ie. buy a car/laptop/consume salary sacrificing options but no ISA/TFSA equivalent and as you have pointed out super completely sucks as there is no way to access it until you’re at normal retirement.
    
    From an Aussie perspective there are a couple of things that you can do though to definitely take advantage of some interesting allowances in the system to be much more tax efficient ie. family trusts for income distribution.
    
    This example will work for singles as well as couple, better for couples but beneficial none the less. My wife’s salary is about one fifth of mine. In the Aussie system it is best to have the lesser earning party own the assets (purchased with Mustachian dollars) ie. I gift all my money to my wife and she purchases EFTs/shares/property. She collects the income and will pay a marginal 19% rather than my marginal 45%. Now this is fine until retirement, because then I have 0 income and have $18,000 of tax free allowed. In order to transfer assets back you actually have to sell the fucking things…incurring transfer costs and capital gains tax….this sucks. So the done thing would be to accumulate in my wife’s name and then mine later to reduce tax burden…right????? wrong!!!
    
    We set up a family trust. Instead of giving my wife the money I give it to the trust as an interest free loan and then write it off as a gift the next year. The TRUST then purchases the assets and once a year the trust makes a distribution. Each year it decides who the income goes to. This can be ANY member of your ‘family’. This trust is completely discretionary, there needs to be no work done for income to be considered. This means that when the wife and I decide to have a Mustachian retirement, no assets need to be transferred and we simply fill in the account with 50/50 on the ledger to minimise taxes. This makes a huge difference for capital gains taxes too. It cost $1000 to set up for life and it costs a couple of hundred dollars a year in accounting fees. These fees I will happily pay to reduce my tax burden. The other benefit is a trust is like super, it is protected, a trust cannot be sued and therefore any assets in a trust cannot be touched….for those with rental property this is a blessing because any old idiot could get drunk and fall down the stairs and then blame dodgey stairs (not their drunk state) for their broken arms, legs etc and hey presto you have a lawsuit on your ass and then compo and then you’re bankrupt.
    
    Trusts also allow you to fully claim the rebate associated with franking credits as long as the trust declares an income. Trusts can also have loans and mortgages (you just personally guarantee them).
    
    Franking credits are one of the biggest benefits of Australian companies. If corporation tax is paid the individual doesn’t get double taxed (very similar to the Canadian system from what I am reading). This means that if your only income was from NAB shares and you earned $28,000 in dividends you get a refund at tax time. To earn this would have to own 15556 shares @$1.80 total dividend. Now that is paid to you before tax time but tax has been paid on it already. It is fully franked meaning you were only paid 70% of your income as 30% has been with held. On your tax return you would declare your income including the franking credits at 100% therefore $40,000. Now tax on $40k is $4,747 meaning the government would actually refund you $7,253. Now in terms of what difference has that made….. 15556 shares in NAB in today’s market would cost you $541,815.48 therefore earning $28,000 would be a 5.17% yield, the post tax yield though is 6.51%…a huge difference for compounding income. This is the yield my wife would earn on these shares, to own them in my name we would actually have to give the govt $9,400 back at tax time, hence the trust.
    
    There are not many tax friendly benefits for PAYG earners in Australia but there are some for wise Mustachians. When it comes to Super……….see you when (and if) I get there. I will personally never add a cent to my Super other than the compulsory amounts.
    
    Self employed people can take more advantage of the system, claiming vehicle expenses and lots of ‘life’ expenses as tax deductions, almost every company I have seen other than the majors is owned through a trust structure for the reasons outlined above. However, for everyday Australians not many opportunities exist bar the odd flavour of the month but these are very directed….first home owners savings account/grants come to mind.
    
    Just some ramblings…hope they’re useful.
    
    Disclosure….I do not own or recommend NAB shares, I was merely using them as an example of fully franked shares on the market.
    
    Reply
    - Jim from qld September 27, 2013, 4:18 pm
      
      Good comment, KM.
      
      Thought I’d add that DINKs who are (un)lucky enough to both be in the brackets above 37% may want to consider starting an company that holds investments . The shares of this investment company are then held via the family trust structure you mentioned.
      
      Important to remember this is of maximum usefulness for income oriented shares as the CGT discount isn’t available for company’s that purchase CGT assets. The ability to at your discretion declare dividends from the investment company aids in timing of income for tax purposes.
      
      Looking forward to a post from an Aussie who has made FI!
      
      Reply
      - KM September 30, 2013, 3:55 am
        
        Hey Jim,
        
        I am pretty sure the govt changed the ability of the family trust structure so that the trust can hold cash and carry over to the next financial tax year. This is not too much of an issue right now for us but I still need to do some further research. Another benefit of the company structure you mention is that you can carry a loss forward which you cannot do personally. Very advantageous if you want to bail out of a troubled investment and not wait to book the loss until you have a capital gain…..That’s my limited understanding of it anyway.
        
        We are five/six years from FI. We will get there sooner depending on some investment returns on property projects we’re involved in.
        
        Whereabouts in QLD you from?
        
        Reply
        
        Jim from qld October 4, 2013, 5:11 am
        
        Family trusts can carry forward cash, but can’t carry forward income as retained earnings if that makes sense. They still distribute the income to a beneficiary in any given year, but they may simply not pay it and it becomes an unpaid present entitlement.
        
        I’m only just out of uni so FI is quite distant ATM, but all things are possible in Australia. I’m a tax accountant in brisbane.
        
        Good luck with your goals!
Petari September 21, 2013, 11:43 am

Glad to get a Canadian perspective!
In your next article, please consider addressing these two questions, if you aren’t already:

1. How does the choice of mutual fund vs. ETF change now that Vanguard has introduced several new low-ETF funds in Canada and no-commission ETF purchases are now available at multiple discount brokerages? (notably Questrade, but I think a few others are doing it now as well)

2. How to allocate the ‘stache in a tax-efficient manner? I looked at this page on Finiki: http://www.finiki.org/wiki/Tax-Efficient_Investing but was still kind of lost as to the details of what to put where, especially when as a Mustachian I have much more to save than I have room in tax-advantaged vehicles. The US withholding tax and Canadian dividend tax credit are two subtleties in particular that I’m not quite sure how to manage.

Reply
- Mr. Frugal Toque September 21, 2013, 4:05 pm
  
  1. Vanguard ETFs make a huge difference. I used to be upset by any management charge over 1%. I must now get angrier over even much lower numbers.
  2. The dividend tax credit can be quite a big deal for those of us who intend to have low income during retirement, but not a big deal for those who get dividends while still employed. The arithmetic is non-trivial (6/11ths of something multiplied by some other number etc.) but the idea is that corporate dividends are taxed in a way that takes into account the fact that, since they are derived from corporate profit, they have already been somewhat taxed. A lot of this tax credit (given to you, the dividend receiver) depends on your tax bracket.
  
  Reply
  - totoro September 22, 2013, 2:19 pm
    
    Thanks for posting on this. I would like to hear more in a follow-up post. I keep a significant amount of cash in my corporation.
    
    Reply
Lucas September 21, 2013, 11:51 am

Interesting to learn more about the Canadian system. RRSP vs TFSA sounds like the Traditional vs Roth argument here in the states.

I agree with your conclusion on the order but want to make sure you everyone understands that you should not be comparing marginal tax rates in working life with those in retirement! You should be comparing marginal working rates with AVERAGE tax rate in retirement because the money starts off in the 0% tax bracket.

For most of us in the US the total tax burden of the Traditional (T-IRA) and Roth (R-IRA).

Going into savings:
R-IRA tax burden = marginal rate while working
T-IRA tax burden = 0%

Coming Out of Savings
R-IRA tax burden = 0%
T-IRA tax burden = Average Tax rate (because the first $30k+ is pretty much tax free), then taxed at the lowest rate first.

Total tax burden
R-IRA = marginal working rate
T-IRA = average retired rate

My point is that to encourage average people to avoid the ROTH IRAs and make a much better choice of the Traditional IRA or 401K, that it helps to switch the discussion away from comparing marginal tax rates while working to marginal rates in retirement because that is not the reality of how they will be paying taxes. The reality is much much more in favor of the traditional (or RRSP) for anyone even slightly mustachian.

So i also check on how social security impacts this and got the following for the average US resident.

According to AARP (http://assets.aarp.org/rgcenter/ppi/econ-sec/fs224-economic.pdf)
Median social security income is around $18k (2009)- lets go with $20k now.

median household income in retirement:
http://money.cnn.com/2013/06/10/retirement/retirement-income/index.html
is around $37k (well within mustachian limits for living amazingly).

So outside of social security (pension/IRA) the income is roughly $17k.

So according to the IRS you do a income + 1/2 social security benefits calculation to determine if you are going to be taxed on the social security benefits at all (http://www.irs.gov/uac/Are-Your-Social-Security-Benefits-Taxable%3F). So that is 17 + 20/2 = $27k which is below the IRS MAGI limits of $30k for any of social security to be taxable.

So that mean realized income is only $17k which above would result in an average tax rate of 0% on all IRA withdraws.

So i would submit that more than half of all current retirees and almost all mustachians would pay 0% tax on withdraws from IRA, and would be better served by discussing that as the starting point vs Marginal Rates. Of course the higher the passive income stream you have the closer the withdraws get taxed to your marginal rate, but if that is your problem, then it isn’t that bad of a problem to have as you have to have a pretty high passive income

The next question though is how easy it is to get money out of a T-IRA in pre-retirement. The answer is there are a couple hurtle to go through, but it is actually not that bad at all. You can pull a substantial amount out the SEPP withdraws.

SEPP withdraw calculator (unfortunately only goes down to age 35).
http://www.calcxml.com/calculators/72t?

But doing my own calculations at age 30, I can pull anywhere between 2-3% of my IRA balances out every year depending on how i set it up. Which is just below the safe withdraw rate and will likely go up as the Applicable Federal Rate increases due to easing of monetary policy through the Fed. In a couple years though this will cover ~50% of my income needs. For those wondering you can’t stop a SEPP once you start it (say if your passive income is higher then you expected), but you can re-contribute money back into a different IRA (Traditional or Roth) effectively offsetting the withdraw.

Reply
- Lucas September 21, 2013, 11:52 am
  
  FYI I had this same discussion with the author of http://www.welfaretowelloff.com if anyone is interested in seeing more of that discussion.
  
  http://www.welfaretowelloff.com/roth-iras-are-stupid-for-your-family-heres-why/
  
  Reply
Green Money Stream September 21, 2013, 12:21 pm

Informative post. Two comments from an American:
First, not having the early withdrawal penalty is great for those aspiring to early retirement and makes me a little jealous. Here, we cant’t withdraw before age 59 1/2 without penalty, which is not so early retirement to me.
Second, my understanding is that Canada has the advantage when it comes to healthcare. If I retire at age 45, I have to pay for private insurance which would probably mean high deductible, high limit coverage. Still working all this out on my end, but how does the health insurance aspect work in Canada for early retirees?

Reply
- Mr. Frugal Toque September 21, 2013, 12:45 pm
  
  Your healthcare is covered in Canada, but your pharamaceuticals are *not* covered until the age of 65, at which point the government takes over. Many defined benefit pension plans used to include drug coverage up until 65 for that reason.
  Other than that, yeah, the fact that you can retire and not worry about anything but drug care is rather nice.
  
  Reply
  - Green Money Stream September 21, 2013, 1:30 pm
    
    That is nice. I would say that healthcare is the biggest consideration I have in the US, the item that I’m most “worried” about in the whole early retirement plan.
    
    Reply
    - Dan September 21, 2013, 8:14 pm
      
      A high deductible health plan in the YS is very cheap, plus there is always medical tourism as well if you prefer cheaper quality care combined with a vacation. However, the cheapest healthcare is eating healthy and excercising daily, like biking to work :)
      
      Reply
  - Sandra Burkholder January 31, 2016, 6:01 pm
    
    We do pay health care premiums in Canada. When I lived and worked in Ontario OHIP premiums were paid by the employer. In BC (where I grew up and returned to) our MSP premiums are paid by tax payers. Granted, there is a diminuitive sliding scale…but at $30,000 or more (line 150 on the return) a family of three or more pays a flat rate of $150/month for “free” health care. It doesn’t matter if you earn $30,000 or billions, you’ll pay $150. Below $30,000 there is a sliding scale of premium assistance and Mustachians may benefit simply because our governments don’t expect its citizens to live a rich, luxurious life on less than $30,000 (especially with children). Our family has proven them wrong for many years. $150 might not seem like a lot but it is a cost for BC citizens and one that we have to include in our budgeting. The flip side, is that my hip replacement in 2015 (at age 48) cost me exactly $28 for the percocet (and that was the co-pay from our break-even extended health care plan). In the last few months, the heat has been applied to Christie Clark’s Liberals (let’s call them Conservatives though)…many are demanding a better scale of premiums and there is some talk afoot of moving to premiums paid by employers much like Ontario does (or did, I’ve been away too long to know anymore).
    
    Reply
- Concojones September 21, 2013, 5:56 pm
  
  The solution is to withdraw from your taxable accounts first. You know, you’ll be withdrawing at a sustainable rate of say 4% of your total net worth, but you’ll be withdrawing that amount from your taxable accounts, thus rapidly depleting them but that’s not a problem since the growth of your non-taxable accounts is making up for it.
  
  Reply
- Lucas September 22, 2013, 6:02 am
  
  72(t) or SEPP withdraws accomplish early withdraw without penalty from IRAs. These are definitely something everyone should understand – you can pull between 2-3% easily a year from your IRAs under a SEPP plan.
  
  Reply
Bryce September 21, 2013, 12:26 pm

Thanks so much for this series. I’m in a position to take pretty immediate action on these recommendations. Can’t wait for volume 2.

Reply
- Mr. Frugal Toque September 21, 2013, 1:00 pm
  
  You’re welcome!
  But I’d better write the second article really quickly so we can justifiably call it a “series”. :-)
  
  Reply
seth September 21, 2013, 1:02 pm

> 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.

If you contribute via payroll deductions this will be automatic.
If not, you can still get payroll taxes reduced by sending a T1213 to the Canada Revenue Agency. Some people say you’ll need to attach proof of a preauthorized payment, but I just write how much I expect to contribute to my self-directed account, and my requests have always been approved.

Normally you should send a T1213 for the next year around October or November (bike to a CRA office and mail it for free while the weather’s nice). Once you give the approval to your payroll department, they’ll basically divide the refund for each applicable year over all the (remaining) paycheques for that year.

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James September 21, 2013, 1:03 pm

Thank you for the fantastic article for the Canadian Mustachians!

I have been working for years (as a highschooler) to save for University and begin investing. Now I am in University and looking for an internship to help with my employability and financial situation. The CIBC ‘index’ tip will come in handy when I am finally able to legally invest!

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Debt Blag September 21, 2013, 1:07 pm

Oh wow. Canadian retirement options almost perfectly align with their U.S. counterparts. Thanks for the info; never hurts to know a little bit more :)

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Beth September 21, 2013, 2:37 pm

AWESOME to get some clear Canadian info! I really appreciate it and look forward to future posts.

I also keep a rainy day fund in a TFSA – I don’t even really count it as part of my portfolio. It’s just in case something odd goes wrong, so the rest of my plan/finances don’t get affected unless things really get bad. I had a friend who was sued by a disturbed ex-boyfriend – totally frivolous ridiculous case- and although she did get her legal costs awarded back to her by the courts, that was more than 2 years after it all started, and it turned out he didn’t have the money to pay her anyway… so out of the blue, out of her control, she’s out 8K in legal fees and may never get it back. That’s the kind of thing I like having a rainy day fund for…

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matt September 21, 2013, 3:07 pm

Hi there, I just wanted to say thank you for the great post. The one thing I want to mention is QuesTrade is not the best discount broker out there.

I used to use QuesTrade, but switched to Qtrade. Once you get to $50K the trade cost is only around $10. Qtrade has a lot of EASY to use tools that did not exist in QuesTrade. I particularly love their alert system. They were ranked #1 for six years straight as per the Globe and Mail rankings.

However, the most Mustachian broker in Canada, and the new number 1 as per the Globe and Mail, is Virtual Brokers. Their lowest trading comission is $0.99. ETFs are free.

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jlcollinsnh September 21, 2013, 3:12 pm

Very nicely done, Mr. FT.

In fact, I just added addendums linking to this on two of the posts in my stock series:

http://jlcollinsnh.com/2012/05/30/stocks-part-viii-the-401k-403b-ira-roth-buckets/

http://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/

Since investing outside the USA is beyond my pay grade, it is great to find quality info to pass along.

Looking forward to part II.

Thanks!

Reply
Jon_Snow September 21, 2013, 3:18 pm

As a 41 year old soon to be retiree, this topic is pure gold. We have set our lives up in such a way that we can live on Canada’s breathtaking west coast quite nicely on 24k or less (with long stretches in the Mexican Baja).

I already knew most of what Mr. Frugal Toque covered here, but it is nice to have it reinforced that Canada is ER friendly in many aspects.

Reply
- Greg September 21, 2013, 6:47 pm
  
  Can you suggest some great places to live in BC on $24K/year? My wife wants to move to BC but I was always worried it would be too expensive. Are there any nice places near or in Vancouver for reasonable prices?
  
  Reply
  - Meardaba September 22, 2013, 10:05 am
    
    Have you thought about Vancouver Island? If you live anywhere outside of Victoria or its bedroom communities, the price of homes and the cost of living is way down. Especially on the west coast of the island (though maybe not in Tofino).
    
    Reply
  - Lee Lau September 22, 2013, 10:47 am
    
    Greg
    
    “Near” is a relative term. You didn’t really ask this question but housing costs tend to factor into retirement.
    
    Mission, Abbotsford have relatively affordable housing costs and are relatively close and you could live on $ 24k/year there.
    
    There’s nothing in Vancouver for reasonable prices if you factor in housing prices. If you don’t factor in housing and you’re just talking about living expenses then you could live in Vancouver for 24k/year.
    
    Sorry if this is too long but was trying to parse the question
    
    Reply
  - Jon_Snow September 22, 2013, 11:33 am
    
    When I say that I can live on 24k or less in B.C. that is taking into account we are now mortgage free and without debt of any form – no kids either. We have 5 acres on a small island in the Salish Sea where we can grow much of our own food. And of course we can catch all the fish and crab we can handle. That 24k funds a pretty amazing lifestyle – and we have a place to stay in the Baja that is dirt cheap. Our life isn’t typical, certainly.
    
    B.C.’s housing costs are the most prohibitive factor to moving here, but thankfully we have those beat…. it is an amazing place to live though.
    
    Reply
    - Tgod September 23, 2013, 11:14 am
      
      The Comox Valley is a great area and includes a number of communities. There are also a number of islands to consider, Bowen, Cortez etc, have are pretty affordable real estate and are awesome if you’re retired since you wouldn’t have to worry about commuting to Courtenay or Comox for work. Real estate isn’t cheap if you want to buy acreage or waterfront, but just regular homes in city limits can be pretty affordable. We just moved here from Port Alberni, which has even cheaper real estate (we are selling a reno’d house on 5 acres for less than we bought our .6 acre non-updated house in Courtenay…course the new place is a 5 minute walk from the beach which was the selling feature.) It rains a lot more in Port Alberni though and is often fogged in during the winter months, so that’s the trade-off. I found the MMM site AFTER we moved from Port Alberni, if I’d found it earlier we might have made a different decision and stayed, since I feel that we were financially farther ahead (lower property taxes, lower house insurance etc), but sometimes the decisions aren’t all about finances.
      
      Reply
- Chris September 21, 2013, 9:39 pm
  
  Jon Snow , that is my exact goal right now . Looking at how to make a move to Nanaimo work right now…MMM and MFT are making the plan to do it easy.
  
  Reply
Patty September 21, 2013, 3:31 pm

I have been following MMM for a while now and am happy to see more Canadian investing info. I am in the category of looking forward to a pension that can only be accessed at age 55, 2 years from now if I decide to retire then.
I came late to teaching however so will have a very small pension. Luckily hubby’s will be better (fellow teacher who has taught longer while I stayed home with kids).
This pension cannot be taken earlier than 55, and employees have no control over how the money that is deducted for it is invested.
While it’s a little late for me, it would be great to hear more about how one can retire early when faced with the “pension scenario” which is designed more for the standard age 65 retirement, and somewhat limits options for early retirement.

Reply
v September 21, 2013, 4:47 pm

I don’t own a home, but hope to buy one in the not too distant future, at a time when I expect (hope?) my income to be higher than it is now. At that point, I’ll be throwing all of the savings I can towards the purchase. Because of that, I stopped contributing to my RRSP when I hit the limit that I can borrow for a home purchase (though I have a maxed out TFSA).

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Micro September 21, 2013, 5:01 pm

Always interesting to read about how things work in another country. Any exciting plans for when you can finally call it quits?

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- Mr. Frugal Toque September 22, 2013, 10:01 am
  
  I can only assume that my desires will line up with what happened when I was laid off for three months last summer: lots of cycling, camping, visiting family and friends, abundant exercise and home-cooked meals, plenty of time to write, build a few things out of wood, train in a martial art or two.
  Mostly, I can look forward to having a lot more time and energy available for my wife and kids.
  
  Reply
Concojones September 21, 2013, 5:47 pm

Mr Frugal Toque, you’ve laid it out beautifully and simply! Should be mandatory reading for every Canadian.

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M September 21, 2013, 5:50 pm

Can I dive in from a US-Canadian dual perspective? There are millions of us here in Canada. Tax season is an incredible time of stress, matching Canadian returns to US returns and then vice versa. I’ve found that TFSAs are a poor choice for we dual citizens since there isn’t a US-CDN tax treaty. But there is for RRSPs. So invest wisely. And RESPs are treated as “foreign investment” thus scrutinized by the IRS. I’m sorry to come off as a complainypants but the tax consequence for our cohort is brutal. Still I don’t plan on renouncing my US citizenship.

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Greg September 21, 2013, 7:04 pm

Let’s say you put an extra $5,000 into an RRSP and you get back $1,000 in tax refund. Then when you’re 50 years old, and you’re reitred with no other income, you withdraw the $5,000. The withholding tax is 10%, so $500. Does that mean you’ve come out $500 further ahead than you would have with the TFSA option? If so, I’m definitely going to reduce my TFSA contributions and start pumping up the RRSP.

Reply
- Mr. Frugal Toque September 22, 2013, 9:49 am
  
  The withholding tax is the government’s best guess as to how much tax you will end up paying when you fill out your forms at the end of the year.
  Withholding taxes can be incorrect, in which case you will get a refund or have to pay extra.
  Don’t think of the withholding tax as the *actual* amount you owe. If your total income for that year is only $6000 (because you’re living off TFSAs or what have you) then you will get that money back in March.
  Also, in this case, your $6000 in your RRSP account has increased in value by about 7% per year, which means that the $1000 you got back in taxes has grown too. Don’t forget that in your calculation.
  
  Reply
  - Peter September 24, 2013, 6:08 am
    
    Mr FT I would be skeptical about throwing out 7% per year as an expected investment return. Over the last 5, 10 or 15 years a typical Canadian investing in ETFs with a globally diversified portfolio would not have made those returns.
    
    These days most investment advisers (not to lump you in with them) would be wise to use 3% after inflation meaning 5% before. And we know that 2% difference is huge.
    
    Reply
    - Mr. Frugal Toque September 24, 2013, 5:45 pm
      
      Ah, you’ve hit upon one of MMM’s greatest pet peeves – using local distortions of the space-time-stock market continuum as representative of the whole universe.
      I’m not even 40 yet.
      People in my family live into their 90s.
      I’m living a far more healthy live than they are, so I’m looking at the stock market over the next 6 to 7 decades. If we look *back* in time the same distance, we’ll see that – with considerable perturbations – the stock market does indeed tend to return about 7% per year.
      This allows about a 4% safe withdrawal rate with a safety margin of 3% for inflation and wibbly wobbly timey wimey stuff.
      
      Reply
ABC September 21, 2013, 8:09 pm

“I know that my country has a pretty bad rep when it comes to taxes.’
This is laughable. Being from “communist light” = Scandinavia, your tax situation is favorable AND how lucky you are to have RRSP AND TFSA. Sure there are benefits to the stronger welfare system but I don’t know anyone retiring early.

Reply
- Mr. Frugal Toque September 22, 2013, 10:45 am
  
  Canadians, when trying to view themselves from the outside, tend to compare themselves to Americans. In that respect, we’re often seen (somewhat melodramatically) as a Soviet Canuckistan (actual quote!). Compared to many European nations, however, he seem to be in a rather pleasant sweet spot.
  
  Reply
- henrigolo September 23, 2013, 9:55 pm
  
  Correct me if I’m wrong, but I always thought Scandinavian countries had very high sales taxes, but lower income taxes.
  
  This is a win for all Mustachians and their (way) lower than average consumption rate.
  
  Reply
Dr Frugal September 21, 2013, 8:26 pm

Thanks for this post, since I am Canadian it is very relevant and it is nice to have some content for us on this blog as there are a lot of us that follow MMM.
I will be very interested to learn from your next article on investments if there is anything similar to the Vanguard Total Stock Market Index Fund (VTSAX) available in Canadian Dollars with a MER 0.05%.
I haven’t been able to find anything that even comes close.

Reply
- henrigolo September 23, 2013, 10:23 pm
  
  Vanguard Canada recently introduced a new Exchange Traded Fund which holds the exact same positions as VTSAX and trades in Canadian dollars on the Toronto Stock Exchange, under the ticker VUN. It has a management fee of 0.15% (MER is not yet published since it is so new, but should be below 0.2%).
  
  Being an ETF, it trades like a stock, which in general means you have to pay commissions every time you buy and sell. However, some discount discount brokers now offer commission-free trading on ETF’s. Personnally, I use Questrade, which offer (almost) commission-free buys. You still pay $5 for selling. If you take liquidity from the market e.g. your buy limit order gets executed at the ask price, you get charged a liquidity fee of $0.0035 per share. As a bonus, they allow you to hold both CAD and USD assets in registered and non registered accounts, without fees other than currency conversion (1.25% in non-registered account, 0.5% in registered i.e. RRSP and TFSA). If you want to pay lower conversion fees and understand what you are doing, google Norbert’s Gambit.
  
  Reply
sleepyguy September 21, 2013, 9:21 pm

Cool article! We’ll have to look into this further as our current strategy is,

RRSP
Mortgage
TSFA
Non-Reg

Actually looking to get out or physical home ownership in the future and just use REIT as our allocation. I have the DW read this article and see what she thinks. Tks MMM.

Reply
insourcelife September 21, 2013, 9:29 pm

Another one about to retire in their 30s… time to step up the game! Definitely not there yet!

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Chris September 21, 2013, 9:50 pm

Wow…simply amazing article on how to help me mass up a huge FU Canuck Buck stash! The amazing duo of MMM and MFT is the perfect combination where I learn kick ass skills on daily saving and living a life on reduced spending and then MFT gives me the Canadian twist on saving. I just recently started hammering into my TFSA this year , so would the max be around $25000 right now if I haven’t contributed before? And as a rainy day fund or to transfer at tax time to a RRSP , what is the repayment rules to get back to the max? I currently let my low mtg chug along at 3.5% and invest into market exempt RRSP, 5% pay employer match Sunlife RRSP and then index funds in the TFSA . Bought a rental property last year too after reading MMM and wanting diversified passive income. My goal right now is to possibly relocate the family across the country to a better Vancouver Island climate and set myself up better for retirement while I a still amped on working full time. Thanks for this amazing blog and for us MMM die yards some of the best content is hidden in the reply comment section. Fellow mustachians you all rock!

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- plainjane September 22, 2013, 6:56 am
  
  Your TFSA contribution max is $25,500, because the amount available went to $5500 in 2013 (and going forward).
  
  If you transfer money out of your TFSA, do _NOT_ replace the money that year. Wait until the next calendar or you may be dinged for some massive tax penalties.
  
  https://www.rbcadvicecentre.com/the-rules-for-withdrawing-from-your-tfsa seems to have written up the basic scenario pretty well, but I don’t know about the more complicated ones.
  
  Ditto to the person above who mentioned that US/Canadian dual citizens are screwed on the TFSA until they figure out how to align the tax codes. However, if you have a partner who isn’t dual, you can at least max out their TFSA, because any withdrawals will not go against income. So you can still even out your incomes from a tax perspective and ignore the misalignment on that one account.
  
  Reply
  - M September 23, 2013, 1:03 pm
    
    That was me. My family are all dual citizens because we immigrated from the US to Canada about 15 yrs ago. Really, we have the best of both worlds, but this tax stuff is incredible. Our accountant believes that since the TFSAs are relatively new, favourable tax treatment by the IRS is years away. The cost of simply documenting our TFSAs every year just didn’t make sense so we closed them. And to remain compliant with the IRS (particularity with FATCA appearing next year) we’re consolidating/simplifying our investments so as not to raise any red flags.
    
    Reply
- Brian Romanchuk September 22, 2013, 5:54 pm
  
  If you have not made a contribution, and you were above 18 for the past five years, I believe your limit would be $25,500. ($5000 for the first 4 years, $5500 for 2013.) You can query CRA to get your contribution room via their website (you need an account set up).
  
  If you make a withdrawal from the TFSA, the documents I have seen indicate that you can re-contribute (the amount is added to your contribution room the next year). It might be best to talk to your TFSA provider to see how they handle the process, as they may add some steps.
  
  Reply
Allison K September 21, 2013, 10:06 pm

Thanks for the Canada-specific information, really appreciated! Looking forward to the next in this series.

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David G. McKenna September 22, 2013, 6:51 am

Perhaps this is coming in part 2, but I’m really interested to hear about strategies for getting money out of an RRSP.

Do you advise waiting until you are required to convert it to a RIF and withdraw?
Or is it better to draw the money out when you or your spouse are not earning very much and thus draw the money out over a longer time, with less tax incurred.. but more tax incurred on the resulting income generated from the withdrawn money?

Specifically, my wife will likely stop working within the next 1-2 years, for a 5-10 year period. I will continue working for the next 10 years.

Once I stop working (hopefully at 45), would it be good to start drawing down the RRSP? and 3 years later have my wife start drawing down the spousal RRSP?

Assuming I live to 80, this would give 25 years to draw it down.

Reply
- bobbie September 22, 2013, 12:35 pm
  
  You can use RRIF income to claim the pension tax credit ($2000) once you’re 65, so starting a small RRIF by then is a good idea if you don’t have a pension.
  
  Reply
RetiredAt63 September 22, 2013, 10:16 am

Mr. Frugal Toque is right on with his advice – I speak from experience. I am now retired at 63 ;-) I worked mostly in Quebec, I am retired in Ontario. More aspects to think about:

RRSP’s – if you have work pension, your RRSP room decreases – the most I ever was able to put in was $3500, all the room I had left. This is not really an issue for those of us with work pensions, since the RRSP was started to allow those without a work pension to save up for retirement. So those who do not have a work pension SHOULD be using the full 18%, that is what it is for! (and quit complaining about our defined benefit pensions, we paid for them, no freebies here) And you should have the money, those of us contributing to work pensions have the money – it is just easier for us because it is deducted at source and we never see it. RRSPs can also be deducted at source, and your employer can then deduct fewer taxes and your investment is working for you sooner, so that is a win-win situation. Remember that any time you get a big tax refund, you have lent the government money for free for all those months. My goal is to get back or owe less than $100 each year. Plus RRSPs are a lot more flexible than work pensions. My pension formula is based on age and years worked (defined benefit, not defined contribution) so no matter how well the pension fund does, I don’t benefit.

Gordon Pape wrote a great little book all about TFSAs, it is required reading. He subtitled it “How TFSAs can make you rich”, so you can see he thinks highly of them. He does address the dual Canadian/US tax situation in it. Like so many things, whether TFSAs work for you depends on your particular situation. He explains it well.

Pensions do have wrinkles – mine drops at 65 when I am “expected” to take Canada Pension Plan, so my total pension income stays the same, just the sources change. This is not adjustable, but with the changes in CPP, there is a lot of calculation required to see whether to take CPP early, at 65, or later, given the new penalties and incentives. Plus if I take CPP now, it will be lower, but the drop in pension at 65 can be at least partly covered by OAS. There is no return of capital with the CPP, like there is with my pension if I die early, so why wait? I will probably start it when I hit 64.

Using the RRSP – if I die, my RRSP (or RRIF) is considered sold and there are capital gains. This would not be true if it were going to a spouse, but it is not. I had a long meeting with my financial adviser, and I am turning my RRSP into a RRIF starting in January – I will not have any earned income in 2014 (I am retired, after all) and my minimum required withdrawal is a lot lower (3.85% in the year I turn 64 versus 7.38% at age 71) . I don’t need that money for general expenses – it is going to my mortgage and a TFSA. That means whenever I do die, there will be less in the RRIF to be tax vulnerable, and more in my principle residence and TFSA, which is tax safe. One other point – when people hold off on a RIFF until 71, they start their 7.38% withdrawal on a higher base amount, so they have more income, and that is usually when the claw-backs really kick in. My RRIF will probably be somewhat depleted by then (money tucked away elsewhere) so I won’t have a big jump in income at 71. Evening out the income flow is a worthwhile planning goal. If I need the TFSA (say I end up in an expensive nursing home) it is there, and if not my daughter gets it with no hassles.

From a more general perspective, I thought my living costs would not go down a lot, when I retired since I did not have an expensive job in terms of clothes, lunches, etc. But I am doing fine on my pension, COL does go down. Once I have done the full transition, I will do an analysis of my spending changes. I know my electricity use is higher, I am at home more. Heating may also go up a bit, since I turned the heat way down while I was at work, and I will now be at home. Slippers and wool socks and fingerless gloves and polar fleece wraps will only get me so far this winter.

One thought on health insurance in retirement – if you had group insurance at work through a union or professional association, your union may have set up a group plan for its members who have retired. That is what mine did, so my premiums are group instead of individual. I am paying $134/month for my health coverage, it will go up at 65 because of drug plan changes. If you don’t have this, look at your alumni associations – they also have group plans, which are great for both retirees and people who are running their own businesses and therefore have to provide their own health insurance somehow. That would have been my health insurance route if I did not have the good plan from work. That may also be something people in other countries can take advantage of. Even Costco has member group insurance here.

Basically, your financial life can be a roller-coaster – high now and low later – or more even, live on less now, save, and still be comfortable later. But we all know that as readers here!

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- henrigolo September 23, 2013, 9:38 pm
  
  I am not one to complain unnecessarily, but in all fairness, assuming you worked in the public sector, you still have to recognize that taxpayers probably paid for a significant fraction of your pension:
  
  1 – They paid your employer’s portion of the pension contributions (generally half of total).
  
  2 – Given, the defined benefit aspect, taxpayers assumed the investment risk. If actuarial estimates call for an 8% return, but management fails to achieve it, taxpayers must step in to cover the shortfall.
  
  That being said, I cannot complain because my wife is scheduled to have a defined benefit pension, so I will benefit as well. Congrats on your retirement.
  
  Reply
  - Green Money Stream September 24, 2013, 4:42 am
    
    It is not entirely true that taxpayers pay a significant portion of the benefit, not at all in fact . First as you mention employees contribute in public plans sometimes 5% and more of pay. But more significantly is that investment returns actually do account for 80% and more of plan assets. No one was complaining in the 1990’s when plans were getting double digit returns every year.
    
    Reply
  - Mr. Frugal Toque September 24, 2013, 5:47 pm
    
    In some case, the pensions are entirely held by the government. In other case, perhaps sensing a future lash out at public employees, some unions took charge of their own pensions.
    Indeed, the government as their employer kicked in dollar-for-dollar, or 50 cents-per-dollar (just as some private companies do), but the rest of the responsibility rested entirely with the investing arm of the pension – which is notably not backed up by the gov’t.
    
    Reply
- Sylvie from Montreal April 6, 2017, 9:39 am
  
  Lots of interesting points to ponder, clearly stated. Thank you Retiredat63!
  
  Reply
Tracey H September 22, 2013, 10:28 am

For those with now-low incomes that will go up, you can contribute to an RRSP now and not claim it as a deduction until years in the future (whenever you choose to). In the meantime, your investments grow tax-free (until withdrawn in the future). Just put them down as a contribution on your tax form, but don’t claim them (they’ll show up on your Notice of Assessment as unclaimed RRPS and you will have to claim them eventually, but wait until you have a high-income year and don’t claim more than you need to to bring you down to the very top of the next-lower income tax bracket…rinse, repeat until you use them up).

As for the comment that everyone should be putting money in their RRSP, this isn’t true. If you’re lower-income and anticipate you always will be, you’re far better off using a TFSA. If your employer does some kind of matching in the RRSP, then it’s likely best to contribute, but you might want to keep an eye on it, especially if you change jobs. It might be worth withdrawing that money in low-income years (job loss, maternity leave) so that it won’t affect your gov’t benefits when you retire.

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MesAlberta September 22, 2013, 11:32 am

Thanks for writing from the Canadian perspective! It’s always interesting to read from US—but being Canadian good to have to actual comparisons. more on the start of my journey-but no debt, no mortgage, max RSP/TFSA-working on increasing investment knowledge/savings %

Thanks to both of you, and always lots of great comments

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wendi1 September 22, 2013, 11:49 am

Thank you, Mr. Frugal Toque!

I, too, live in Ottawa, and am happy to see the Canadian perspective represented here.

However, I disagree with putting the mortgage second or third – for most of us, having a paid off house is very liberating indeed.

Strictly speaking, once you are spending way less than you make, whether you take your extra income and save it or use it to pay down the mortgage makes no real difference to your bottom line.

However, mortgage interest in Canada is NOT a tax deduction. So, do you pay interest to the bank with after-tax dollars, or do you kill that sucker? The low interest rates lately make the question a little foggier, but that will not last forever. And no matter how low interest rates are, the first few mortgage payments are almost all interest.

At least, use your tax return money to pay it down, especially in the early years.

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- Mr. Frugal Toque September 22, 2013, 1:52 pm
  
  I can’t argue with an ardent desire to destroy all the debt you have. I’m doing that myself when we should (logically) be loading up the TFSA with $51k of tax free employees.
  That said, however, we did have to draw the line at RRSPs. When you’re in a high enough tax bracket, the comparison is between putting $1 into your mortgage at 4% vs. putting $1.50 into your RRSP at 7%, the RRSP wins so hard that it can’t be ignored.
  The math is slightly different for TFSAs, because it’s $1 at 4% (mortgage) vs $1 at 7%(TFSA). There I can gloss over it and and say “I really want my mortgage gone even though I’m taking a 3% hit”.
  It’s important to point out that this depends on your tax bracket. As your income goes down, the tax benefit of the RRSP wanes and it’s starts looking more and more like the TFSA comparison.
  
  Reply
  - Frugal Bugg September 24, 2013, 9:17 am
    
    I wanted to mention that for the RRSP investing of pre-tax dollars versus post-tax dollars with the TFSA, unless your employer is automatically making RRSP tax adjustments on your paycheck, the benefit of additional money available for the RRSP investment only holds true if you reinvest your entire tax refund into your RRSP immediately after receiving it in March.
    
    Otherwise, if equal dollars are invested, depending on your marginal tax rate, TFSA most likely will come out ahead.
    
    Another thing worth while pointing out is it’s possible that even a non-registered investment may do better than RRSP due to being taxed at your capital gains rate instead of regular income.
    
    All my points are likely not important to any true “staches” but if you’re giving advice to a non-mustachian, you may have to mention these considerations.
    
    Reply
    - Mr. Frugal Toque September 24, 2013, 5:50 pm
      
      Yes. The assumption around here, stated (I think) just a couple of posts ago, was that windfalls of money exist so you can purchase more freedom (by saving) not so you can blow it on plastic crap and hedonistic vacations.
      But if we’re dealing with non-mustachians, that is worth mentioning.
      It’s also why I like paycheque deductions. In that case, for those with weaker willpower, the correct decision only has to be made once per place of employment. You just tick the “18%” box and it’s done.
      
      Reply
  - Yukon Marianne May 29, 2014, 12:40 am
    
    Oh man! I am making my way through the archives and finally landed here…and my head is swimming! We are just getting ourselves sorted out (33 year old couple with 2nd baby coming in July) and we have RRSPs and TFSAs. But we have NO idea what’s in them. Just opened them online (with PC financial) 5 years ago and have been blindly contributing. But I’m thinking that’s not going to cut it anymore. D I need to hire a financial advisor to hold my hand through all this or is everyone self taught…how to invest, what the hell quest trade is etc? I can earn and I can save but all this talk of EFTs and 7% is well and truly addling my brain. Where to start when you need basic education on the nuts and bolts outside of general mustachian living? I feel like I’m listening to fluent speakers of a language I just started learning on the the bus. Ou est la bibliotheque? The pen of my aunt is on huge desk of my uncle….help!
    
    Reply
    - 9 O' Clock Shadow May 29, 2014, 10:00 am
      
      Naaaahh… Spend 30 minutes a night understanding terms, accounts, and contribuitions. If you do that 5 nights a week for 2 weeks, you will be mentally fit enough to talk to an advisor if you still want to. The hurdle is building the initial confidence that you can understand your financial picture.
      
      We just went through a massive cleaning of files/accounts etc – it took 10 days start to finish. We’re in much better shape now.
      
      Seriously – 10 days of this and you will be caught up by years. You and your partner will go from the financial literacy of “Voulez vous de beurre?” to “La bibliotheque est dans ma tete!”, and give a 2 finger “Flocons de Mais!” to the stress of financial uncertainty.
      
      Bonne chance!
      
      Reply
      - Yukon Marianne May 29, 2014, 2:50 pm
        
        Merci 9 O’Clock Shadow! C’est vrai c’est un cas de confiance…! Thanks for your comment. I think I was a bit panicked that I was saving in an RRSP (PC no less) and maybe screwing myself over when I thought I was making progress. But you’re right, slow down, read the internet, and start where you are. Nowhere to go but up. High fives all around, much appreciated! Bonsoir!
        
        Reply
- dunny February 20, 2016, 9:39 am
  
  You can make some of the interest on your mortgage tax deductible by renting out a basement suite as mentioned by previous commenter or borrowing with house collateral to invest in the stock market (see Smith manoeuvre). Also, when you sell a principal residence, you pay no capital gains tax.
  
  So buying a nice house in a very good neighbourhood in an expensive city so you can rent a suite to high quality tenants, deduct a percentage of housing expenses, accrue large tax-free capital gains over the years, and reduce or eliminate monthly housing expenses with the rental income makes the most sense to me.
  
  All the money I save doing this, I invest in RRSP, TFSA, and taxable accounts — all directly into stocks with a cash hedge using a discount broker. So I generate good cash flow, good NW increases, minimize taxes, and still live very well.
  
  Paying off the mortgage makes no sense to me, although with low interest rates, the principal is going down. My mortgages are variable rate with the longest possible amortization to reduce monthly expenses to the minimum.
  
  I do however have a high percentage of equity in the house which translates into a feeling of security and lower mortgage and LOC rates at my credit union.
  
  Any and all windfalls, tax refunds, always go to the investment accounts.
  
  This strategy (not paying down the mortgage) means I now easily live on about $15,000 basic expenses without deprivation (not including the housing costs covered by rental income and travel) in the middle of a lovely city and travel a lot every year.
  
  My spreadsheets tell me that I will have a higher NW in the future and still enjoy quite a nice income without working or paying much in taxes and will still be able to travel quite a lot.
  
  Meanwhile, my RRSP is still growing which eventually will mean hefty taxes on the mandatory withdrawals, but it won’t matter because my after tax income will be much higher than it ever was when I was working. I am working with various scenarios to minimize taxes, and maximize NW and spendable income at this stage. The newly lowered TFSA contribution limits will have a substantial negative impact on my ability to offset the high taxes I will be paying.
  
  And I am single and do not enjoy the security of two incomes, two pensions, or tax advantages.
  
  As a previous writer said, I am thankful to Canada for the tax advantages we have and the almost free medical system. I am very happy with how things have turned out. The two main secrets as all mustachians know are the knowledge of how to live well on small income and how to save and invest money.
  
  Reply
Sandra September 22, 2013, 11:58 am

Thank you MMM and Mr. Frugal Toque for the Canadian content.

I have often wondered about RRSP v.s TFSA and this has confirmed that I am on the right track. Right now, I am using one year’s worth of TFSA for my emergency fund.

Thanks again Mr. Money Mustache you have changed my life and my husband’s life.

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Kestra September 22, 2013, 2:46 pm

Nice article. This first part was nothing new to me, but it’s always nice to read something that applies to my situation. I’m especially looking forward to the next installment(s). I’m trying to introduce my husband to index fund investing, so I will get him to read your whole series. I also feel justified that you are prioritizing the mortgage over the TFSA. Numbers-wise, I know it doesn’t really make sense, but I don’t want that mortgage hanging over my head longer than necessary. Getting that mortgage paid off also reduces the mandatory monthly expenses, which should help with our early retirement.

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Nadia Lewis September 22, 2013, 3:17 pm

Thank you, Mr. Frugal Toque!

Vancouverite reader here, saving for schooling in the US (which is kind of like a mini-retirement period). RRSPs all the way for me, then since my M1 student visa won’t let me work during the schooling.

N

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Jay September 22, 2013, 8:01 pm

Reader from Canada here as well. I suggest googling “desjardins tax 2013” and download the PDF of taxes if you live in either province of Quebec or Ontario. From that table you see that if you can live off 11,000$/year or 22,000$ for a couple, you would pay 0% taxes. The idea is to get as much of your revenues from a TSFA account then add to it some withdrawals from RSPS that stays below the 11,000$ line or not too much over it. I am planning on living a good life with my wife and two kids on a 17,000$/year revenue to pay my half of family expenses. That is conditional to having money stashed to clear mortgag and pay for studies of the two kids. 17,000$ / 5% = 340k$ needed to generate the income. Plus pay off mortgage plus future studies of the kids plus public transportation for the kids until they are 20. I end up believing that I can retire with a net worth of around 550-650k$, at age 35. But then, I do I explain to my kids that I do not need to go working every morning? I still wonder how I will do it. I still have a few months to think about it.

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- Roy September 24, 2013, 8:28 am
  
  I’m in a similar situation, but am going to hang in for a few more years until the kids are done high-school. A little extra financial padding will make me sleep easier at night…
  
  Reply
- Li September 27, 2013, 12:14 pm
  
  Thanks for the Desjardins link – a nice quick way to estimate taxes at different levels.
  
  Reply
jennilee September 23, 2013, 12:10 am

Very happy to see CanCon on MMM. Looking forward to part 2!

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MoneyAhoy September 23, 2013, 5:22 am

Kinda makes me wish I lived in Canada :-)

In all seriousness, the US needs a system similar to this. I know a lot of employers support 401Ks, but some do not and the folks that take jobs at these employers have an uphill battle trying to save for retirement. Something like the RRSP could really help them out.

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Bullseye September 23, 2013, 6:11 am

A simple rule of thumb starting point for TFSA vs RRSP is this: If tax rate while contributing to RRSP is same as tax rate when withdrawing it later, then RRSP and TFSA are dead even in terms of impact, mathematically. If withdrawl tax rate is lower, then RRSP’s come out better. Then you need to start factoring in other things, the big ones are RRIF’s, and the full taxation on withdrawl when you die with an RRSP issue.

Another major factor for lower income Canadians (especially parents) is the massive benefit RRSP contributing can have if you take into account the tax/benefit goodies given that can mean you essentially get back 50% of every dollar you contribute. I have links to forums posts on this that explore it in detail, if anyone is interested.

Essentially, Canadian Mustachians need to really read up and learn all facts about our very convoluted tax system to fully maximize it for their early retirement/financial independence. The process can be long and brain busting, but the benefits of being able to tailor your own plan that pertains to your own situation are amazing. General advice like above is a good starting point, but every situation is so different that you need a custom plan.

Reply
- Iron Maiden September 24, 2013, 9:00 am
  
  I’d be interested in those links. Thanks!
  
  Reply
  - Bullseye September 24, 2013, 9:39 am
    
    Of course, now that I actually look for those links, I can’t find them! They were discussions on the Financial Webring forum, but a few different searches didn’t turn anything up.
    
    The gist of it is was that if you are a low income parent, you will qualify for things like the the child tax benefit and HST rebate, and will also not pay any health tax, meaning you could use RRSP deductions to get your income down even lower, and achieve a 50% refund.
    
    For seniors, there are some huge clawbacks on taxable income above $10k for GIS (50% of every dollar), $31k for the age credit (15% of every dollar)
    
    This link has some useful info;
    
    http://www.financialwebring.org/forum/viewtopic.php?f=30&t=113138&hilit=50%25+marginal+tax+rate
    
    Reply
    - Richard September 24, 2013, 10:01 am
      
      Interesting… it’s hard to see that as a 50% gain though. I think the maximum GST rebate is a few hundred dollars per year (maybe more in an HST province) and I haven’t heard of the child tax benefit going too high either. Maybe it’s just for small RRSP contributions that this works.
      
      Reply
      - Sandra Burkholder January 31, 2016, 8:26 pm
        
        GST rebate maximums go higher than a few hundred per quarter. It is based on family income and number of family members (dependents being under 19 years old) At one point ours was $256 per quarter. And, depending on income and # of kids, your CCTB can be out of this world. We have friends with 11 kids under 17 and they live quite frugally (with a low income) and benefit by both the GST rebate and child tax benefit. If a family earns less than about $24,000 the amount of monthly child tax benefit for three children is about $860 (taken from the CRA websites). Each child after that is another $270 per month.
        
        Reply
        
        Sandra Burkholder January 31, 2016, 8:26 pm
        
        The CCTB is tax free.
        
        Sandra Burkholder January 31, 2016, 8:28 pm
        
        And if I recall correctly when BC had HST (until April 2013) the GST rebates were the GST portion only.
Reue September 23, 2013, 6:19 am

Almost didnt read this article as im from the UK, however glad I did as it turns out the UK system is almost exactly the same!

Instead of RRSP we have “defined contribution pension scheme” which, exactly like RRSP, is counted as lowering your income and so avoids paying tax on. Here we have a horrific 40% income tax rate (+ 10% national insurance) for higher earners.. so a 50% tax rate! All the more reason to pump as much as you can into the pension schemes.

And on the flip side, we have ISAs instead of TFSA. Taxed income is paid into an ISA however no tax is then paid on any ISA gains. You pay into the ISA, invest the ISA money into shares and then not owe tax on the gains.

The only difficulty for the UK system is that you cannot withdraw from your pension before age 55 and so must have the ISAs to bridge the gap if you retire early.

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Peter September 23, 2013, 7:32 am

I too am very interested in the second post talking about investing options in Canada. I have read JLCollins series and one of the biggest problems we have here are the high cost of investment products compared to the US. I have argued that this makes investing easier in the US, first because your home currency and markets are the worlds dominant one. Second because you could chose to put all your investments in 2-3 vehicles and have all the bases covered for diversification.

Reply

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