The answer as to why the TFSA can be better comes down to flexibility and simplicity. With TFSAs, you have the flexibility to make deposits and withdrawals throughout the year without tax consequences. The only caveat here is that capital withdrawn cannot be recontributed until the next calendar year. But perhaps more importantly is how withdrawals from RRSPs and TFSAs are accounted for. Withdrawals from an RRSP are considered income for tax purposes. Withdrawals from TFSAs are not. So in the event that you have to make a large, emergency withdrawal from your TFSA you don’t have to worry about the tax consequences. That is certainly not the case with RRSPs where you would be taxed on the whole amount as if it were regular income. Even if you wait until retirement to withdraw funds from your RRSP there could be some implications as RRSP withdrawals are also considered income when the government assesses eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit. This means that your right to these benefits may be reduced simply because you saved capital in your working years and wisely invested it in an RRSP. However, TFSA withdrawals are not considered income in this case either and theoretically you could make and withdrawal millions of dollars from your TFSA with no impact to these benefits. This may be the single biggest advantage that the TFSA has over the RRSP.
The TSFA is truly one of the best tax free structures for Canadian investors – ever! Now you just have to fugure out what to put in it.