Our Love Hate Relationship with Government

The easiest job any person can have is to be a critic. It takes no actual experience or training. You simply look for flaws in any plan and attack away. We love to criticize everything. Lately the brunt of our criticisms is centered on hot topics like inflation, government debt, and taxes.

A Love-Hate Relationship with Taxes

When it comes to our affairs with the government we truly have a love hate relationship. Let’s face it, we all resent the fact that our governments at all levels (Federal, Provincial and Municipal) have the power to impose taxes on us. Our hard earned money is taxed before it even gets to us as the Federal government gets their share immediately. The Provincial Government gets a cut at tax filing time and the Municipal government imposes land taxes for the privilege of living in their community.

Once the money gets to your bank account you may think it’s now safe but there will be a sales tax waiting for you as soon as you purchase something. It’s easy to become discouraged when your efforts to keep more of your income are constantly being threatened by governments who’ve taken on debt or made promises they simply can’t afford.

Tax Sheltering and Retirement Savings

So, where exactly is the love in this relationship? Well when it comes to sheltering money from taxes or saving for retirement our government has actually given us opportunities. Imagine being able to set aside money for retirement, using that amount to reduce your yearly income and even getting a tax refund as a bonus. The Registered Retirement Savings Plan (RRSP) does just that and any gains made on the money you invest are tax free.

Eventually the love expires though, and when you cash money out of your RRSP it must be declared as income and you’ll be taxed on that amount. The advantage here is simple. Put money into an RRSP when you are working and in a high tax bracket and take the money out when you retire and are in a lower tax bracket. The difference in tax rates is your long term advantage. Also that yearly tax refund from your RRSP can be reinvested into next year’s RRSP and you’ll be releasing the power of compound growth.

TFSA vs RRSP

The Tax Free Savings Account (TFSA) works in a slightly simpler manner. Money put into a TFSA is automatically sheltered from taxes forever. All gains on investments in a TFSA are also sheltered from taxes. You can withdraw money and it won’t be added to your income for that year.

So what’s the downside to this relationship? Unfortunately the money put into a TFSA can’t be used to reduce your yearly income. There will be no accompanying tax refund to look forward to. In fact money put into a TFSA has absolutely no impact on your yearly income tax filing. It’s a tax shelter, plain and simple, without the extra tax incentives offered by the RRSP.

Underutilization of TFSA and RRSP

Many people will spend their lives lamenting the unfairness of taxes and their ability to save for the future. In reality there are opportunities to reduce taxes, shelter investments from taxes, and even get a yearly tax refund. The only limiting factor is learning how to use these opportunities.

Statistical Insights: TFSA and RRSP Adoption in Canada

In 2019 it was estimated that 57% of Canadians had a TFSA while 52% had an RRSP. These programs are underutilized by half our eligible population who continue to criticise the system and ignore the benefits available.

In my E-books (“Water Barrel” & “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.