Since late 2015, Credo has been monitoring the usage of tax-advantaged investment vehicles by Canadian investors. In particular, we have been watching investor usage of TFSAs and RRSPs. We have noticed a number of remarkable trends and situations.
In a Nutshell
- Any Canadian with money is interested in tax-advantaged investment solutions like TFSAs and RRSPs.
- The usage level of RRSPs and TFSAs has all but topped out. Almost everyone with some money to save has at least one of these two vehicle types at this point.
- RRSPs are as long-in-the-tooth as their users are either unengaged or concerned about their financial circumstances. Having an RRSP only… and not an TFSA also… is a red flag. These are the people who need guidance.
- The use of TFSAs indicates an engaged investor… to a far greater degree than the use of RRSPs does.
- TFSAs are used in a very different way than RRSPs by different segments of the investing population. Younger, engaged investors see them as the constructive tactical investment solution that they are. Older users recognize that when the RRSP’s time is up, TFSAs are still a valuable play.
- Both instruments certainly create value and investors who aren’t using them are missing the boat.
- There is a clear, positive relationship between financial literacy and the use of tax-advantaged investment vehicles.
Into the Details
TFSAs are the relative new kid on the block. They have been of such interest to investors that they now have penetration that rivals the long-in-the-tooth but really important RRSP. Most investors who have some money to spare are now using both of these tax-advantaged instruments.
Tax Advantage Clearly Drives Usage
Consider what is going on as investors opt to use RRSPs and TFSAs. It isn’t rocket science. These investors have developed a clear appreciation that these instruments provide them with a tax advantage. And Canadian investors are very concerned about taxes. In fact, Taxes are among the top five financial matters that concern Canadians (See the graphic above.) Approximately 1 in 5 Canadian investors identifies taxes as either a 9 or 10 on a scale where zero connotes no importance at all while a ten connotes extreme importance.
Age, Tax Advantaged Instrument Use and Feelings of Taking Advantage of Tax Advantaged Opportunities
Credo asked thousands of investors whether or not they use RRSPs or TFSAs. In a related line of questioning, we explored whether or not they feel that they are taking advantage of the tax-advantaged opportunities that are available to them. We broke investors into a number of categories (by age) to examine investor sentiment.
At every age group level we identified, we found that investors are more likely to agree that they take advantage of tax advantages if they are using RRSPs or TFSAs. The two graphics presented below each show two curves. The first graphic relates to investors who have RRSPs. The second similar exercise relates to investors who have TFSAs.
The two red curves in the bottom portion of the graphical analysis above are wide apart; one sits to the left, the other to the right. The one that sits to the left represents investors at different life stages (defined by age group.) These investors do NOT have RRSPs. The curve that sits to the right represents other investors who are similar in every respect to the first group except these investors DO have RRSPs. The significant gap between the two curves represents a significant difference in sentiment about whenter of net theyse investors maximize their tax-advantaged investment opportunities.
Similar to the previous analysis, above is a graphic that looks at investors who have TFSAs. Again we see two curves and again the gap that exists between the two curves represents the difference in sentiment about maximizing tax-advantaged investment opportunities. The sole difference between the investor groups is their use of TFSAs.
Wealth Level and Usage
Consider various subgroups of the population. Three, in particular:
- Smaller Investors have less that $250K in investable assets
- Mid-tier investors have between $250k and $500k
- Lager investors have more than $500k of investable assets
Let’s begin with investors who have relatively small asset bases – investable assets of less than $250k. Within this segment of the population 30% have not taken advantage of RRSPs or TFSAs at all; they use neither of these vehicles. Many of these Canadians live too “hand-to-mouth” and too “day-to-day” to have given thought to managing their investments and tax status. Even still, some 70% of these investors have taken the initiative to begin using either an RRSP or a TFSA. And, half of these small investors (i.e., 35% of these investors where 70% are using at least one of the two vehicles) have recognized that both an RRSP and a TFSA have their advantages. They have wisely taken steps to use both as a part of their investment strategies.
Usage of Tax-advantaged Investors among Canada’s Smaller Investors
When we look upstream slightly, to investors who have between $250k and $500k in investable assets, we immediately see the effect on product usage of having additional wealth/resources for investment. Whereas with smaller investors 30% had not begun using either an RRSP or a TFSA, once we begin looking into the nature of the mid-scale investor we see that the vast majority are taking advantage of tax-advantaged instruments. Only about 8% of mid-scale investors don’t have either an RRSP or a TFSA. Some 77% of mid-tier investors are using RRSPs and 76% are using TFSAs. Impressively, 62% of mid-tier investors use both of these tax-advantaged vehicles. About 14% have opted for a TFSA and not an RRSP while 15% have taken the RRSP route rather than the TFSA.
Usage of Tax-advantaged Investors among Canada’s Mid-tier Investors
When we examine Canada’s larger investors – those who have at least $500k in investable assets – we see a situation that is similar to mid-tier investor in some respect, but different in others. A striking similarity is the fact that the vast majority of larger investors (94%) are using TFSAs or RRSPs. Only 6% of larger investors are not, for one reason or other, using either of these tax-advantaged instruments
Where we see some small differences is in the distribution of usage of these instruments. Among larger investors, fully 70% have elected to use both types of tax-advantaged instrument. This is a significantly higher proportion than the 62% we observe using both instrument types among mid-tier investors. This difference is driven by a confluence of age and investable asset levels. Asset accumulation is a journey and the mid-tier investor is on his journey to becoming a larger investor. As investors grow from mid-tier to larger tier, the probability of their usage of TFSAs increased from 76% to 83%. And as they grow from mid-tier to larger investor, the probability of their usage of RRSPs increases from 77% to 81%.
Usage of Tax-advantaged Investors among Canada’s Larger Investors
Another subtle but significant difference between the mid-tier investor and the larger investor’s use of TFSAs and RRSPs is the fact that the larger investors lean slightly towards TFSAs while the mid-tier investor leans slightly toward the RRSPs as tax advantaged instruments. This is to say, among larger investors who have only one of the two tax-advantaged vehicles we’re considering here, they are 18% more likely to be using a TFSA than an RRSP. By contrast, among mid-tier investors who have opted for the use of either a TFSA or an RRSP, they are about 7% more likely to be using an RRSP than a TFSA. A principal driver of this subtle but real difference is the governmental age restriction on holding an RRSP. By age 71, these have to be collapsed into income instruments. Accordingly, the usage of RRSPs falls off a cliff among older investors as they convert their RRSPs to other holdings. This drives down the usage of RRSPs among members of the older and wealthier members of the population. If this regulatory requirement were not in place, this peculiar leaning towards TFSAs among larger investors would not be quite so pronounced.
Usage Trends Over Time
The use of TFSAs have been growing. At this point, more than 80% of investors who have at least $250k in investable assets have set up a TFSA. Even 52% of investors who have less than $250k have established a TFSA. This tax-advantaged instrument has gained popularity very quickly among Canadian investors and is now effectively as well used as RRSPs.
In the graphical analysis above, we have mapped the usage of TFSAs (in orange) and RRSPs (in blue) on a monthly basis among Canadian investors. (Why are the lines so scraggly? It’s because of variability/noise in the sample-based measurements because we survey 1,000 investors monthly… and not the whole population.) What we see by looking at a trendline for each of these two tax-advantaged instruments is that the usage of RRSPs appears to be declining while the usage of TFSAs seems to be on the increase. We should appreciate that the rates of change are gradual and that the penetration levels of these two instrument types are currently very close to one another. This is visible in the graphic below where we have adjusted (read: zoomed out) the scale of the analysis in order to offer a more full perspective.
Since the inception of our study in October of 2015, RRSPs have been used, on average, by 57% of Canadian investors. This is seen in the graphic above, where the lines across the page show usage of these two instrument types on a monthly basis; it’s average position in the graph is 57%. And it looks pretty flat, really… because it is.
The RRSP’s trend line (the dotted blue line) has been descending very moderately over this time; interesting but we believe there is good reason for this. As time progresses, people are getting older. (Pretty obvious, right?) Add to this the fact that RRSPs are an instrument that an investor is allowed to hold only until they are 71 years of age, we begin to appreciate that as the Canadian investor population grow older, the proportion of investors who have the right to continue using RRSPs declines.
We mentioned earlier in this article that RRSP usage falls off a cliff among investors whose age is 65+. The graphic below shows this clearly.
RRSP usage grows until the 55-64 age category, then it falls off with the 65+ age category as investors collapse their RRSPs into income streams of one form or other. The same is not at all the case for TFSA usage. In fact, TFSA usage is at its highest level among investors who are 65+. This is seen in the graphic below.
The usage of TFSAs is interesting in that it is not linear with age; there is a swelling in usage of TFSAs among younger investors. While RRSPs have traditionally been the instrument of choice for investors who are focused on saving for retirement, the heightened penetration of TFSAs among younger investors implies that younger investors are leveraging these instruments for their tax advantage but likely not for retirement savings. They are seen and used by younger investors as a tactical tax-advantaged instrument rather than as a long-term investment vehicle. Among the 18 to 24 age group, 42% use TFSAs but only 18% have set up an RRSP. In our next age group, the 25 to 34 year olds, the same is the case. RRSP penetration is at 51% while TFSA penetration is at 54%. The prevalence in use of TFSAs among these younger investors likely driven by the perceived time horizon associated with the vehicle. Indeed, both are tax-advantaged, but one provides that advantage in a more near-term, tactical way while the other has its sights set on a timeline that is decades away.
Financial Literacy and The Use of Tax-Advantaged Solutions
Credo found a clear link between knowledge and the use of RRSPs and TFSAs. Simply put, people who don’t have financial knowledge are likely not taking advantage of the opportunities available to them. In the graphical analysis below, we present data from more than 4,000 investors, all of whom have more than $250,000 of investable assets.
What we see is that the investors who are using either RRSPs or TFSAs (or both of these tax-advantaged instruments) score significantly higher on a test of financial literacy than the investors who have neither of these investment types. People clearly need knowledge and understanding to make good, efficient financial decisions. Good financial advisors play a critical role in developing knowledge and understanding among Canadians.
Advice and The Use of Tax-Advantaged Instruments
Credo also found a clear and significant link between investors’ use of tax-advantaged instruments and their use of financial advisors. In fact, the probability of a Canadian investor using either an RRSP or a TFSA doubles if they are working with a financial advisor. The graphical analysis below shows that, among investors who have neither a TFSA nor an RRSP, 73% do not have an advisor, too. Among investors who have set up both of these tax-advantaged vehicles, only 32% don’t have an advisor. This is clear evidence that advisors bring value to the investor by guiding the investor with respect to tax matters.
Of course, with such a high penetration level of RRSPs and TFSAs among Canadian investors already, it’s quite clear that the simple offer of these instruments as solutions is mere table-stakes for any advisor; most investors already know and use these tax-advantaged solutions.
How These People Think
Do you have a good understanding of the financial matters that are important at your current life stage?
In trying to connect with investors, insights about their mindset regarding financial matters are particularly important. Credo asked more than 3,500 investors who have more than $250k in investable assets whether or not they feel that they have a good understanding of the financial matters that they currently need to address at this stage of their lives. Here’s what we found.
- Investors who have neither an RRSP or a TFSA are significantly less likely to indicate agreement. These people need help… and it’s likely deeper help than simply the offer of a tax-advantaged solution.
- Investors who have an RRSP only are marginally better off than the investors with neither. Further investigation shows that investors in this category who are 55+ in age are in a relatively bad way with respect to understanding key financial matters. These individuals should be prime targets for advisors wanting to deliver value.
- Investors who have TFSAs or both a TFSA and an RRSP indicate that they have a relatively good handle on the financial matters that they are currently facing. These investors are more engaged in financial matters and have taken initiative to develop their understanding of the financial matters they need to address.
Do you have the knowledge you need to build your financial security?
Not all Canadian investors feel that they have the knowledge they need to build their own financial security. Those who have taken the time to learn about and leverage TFSAs score well against this “feeling of adequate knowledge” dimension. By stark and interesting contrast, however, RRSP-only users feel no further ahead from a financial knowledge perspective than investors who have opted out of using tax-advantaged instruments altogether. This creates clear opportunity for financial advisors to build an investor’s confidence and create commensurate value by helping investors who have only an RRSP and not a TFSA.
An advisor has to be careful with their approach to investors who have RRSPs only. Credo has found that this group of investors tends to be less interested in matters of personal finance.
Matters of Personal Finance are of No Interest
When we asked investors about their orientation to personal financial matters in general, those who had TFSAs were least likely to indicate that personal financial matters were of no interest to them. Investors who had neither an RRSP nor a TFSA were significantly more likely to agree with this concerning statement. Investors with an RRSP fell between the two extremes. Credo infers from several of these analyses that TFSAs – the relatively newer tax-efficient instrument on the landscape – are instruments that are being employed by more engaged investors.