A Tax Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) are both tax shelters defined by the Income Tax Act enabling Canadians to better save for the future. They have some similarities and some differences.
An RRSP allows one to invest money on which income taxes have not been paid. When one contributes to an RRSP, there is a tax deduction for that contribution which basically returns the tax that was paid on the funds contributed. Funds within the RRSP will earn investment income which is not subject to income tax while it remains in the RRSP. There are a number of eligible investments for RRSPs such as GICs, bonds, mutual funds, and shares in publically traded companies to name a few. When funds are withdrawn from an RRSP, the tax must be paid by including the withdrawal in income for the year.
A TFSA allows one to invest money without paying tax on the investment income. When one contributes to a TFSA, there is no tax deduction for the contribution like with an RRSP. Funds within the TFSA will earn investment income which is not subject to income tax. The same types of investments that are eligible for an RRSP are also eligible for a TFSA. When funds are withdrawn from a TFSA, there are no taxes to pay because there was no deduction when the funds were contributed and the earnings over and above the contributions are considered tax free investment income.
For more information on the TFSA, see the Department of Finance Canada’s page on the TFSA at http://www.tfsa.gc.ca/