Investments RRSP/TFSA
Protect your Money, Protect your Future
Protect your Money, Protect your Future
Investing occurs when money is used for the goal of making more money. The goal of individual investors is to invest a sum, called “principal” or “capital,” in an investment that will be repaid to the investor plus a profit. That profit is called the “return.”
Many investment options are available for individual investors. Some investments guarantee that the full amount invested will be repaid plus a profit. These investments include Guaranteed Investment Certificates (GICs), and some bonds. Other investments do not guarantee that the amount invested will be repaid. These non-guaranteed investments include stocks, mutual funds, and real estate.
Many forms of accounts are available to meet investment objectives. It is important to align the proper account with the appropriate investment objective.
Here are some forms of accounts available and their purpose:
a) Tax-Free Savings Account (TFSA) - Tax-Free Investment Growth
b) Registered Retirement Savings Plan (RRSP) - Retirement
d) Registered Disability Savings Plan (RDSP) - Income for a disabled dependant
e) Registered Pension Plan (RPP) - Retirement saving for member of a group
These accounts are all examples of registered accounts. Registered accounts are individually registered in the account owner’s name with the Canada Revenue Agency (CRA). The account owner can be an individual or the name of a group, such as ABC Manufacturing Co.
Non-registered accountsare also available for savings and investing. A savings account at a financial institution is a non-registered account. An account with a life insurer may be registered or non-registered.
It is important to recognize that the account itself is like a shopping bag. The bag is empty until savings go into the bag. Savings lead to investment choices and those choices determine account performance. Therefore, a person cannot be dissatisfied with owning an RRSP, for instance, since the RRSP is simply the account type. He can be dissatisfied with the types of investments he has selected within the RRSP because those investments are not performing adequately to meet the retirement objective. Those investments can be removed from “the bag” and replaced with others to achieve the account performance that will satisfy the investment objective.
Tax advantaged Investing
For tax purposes, returns can be classified as interest, dividends, or capital gains. Foreign income, including foreign dividends, is taxed as interest. Interest is taxed at the same rate as income earned from working.
Dividends, paid as a result of owning stock in qualifying Canadian companies, receive a dividend tax credit. They are taxed at a lower rate than interest. Capital gains are also taxed at a rate lower than interest.
The lowest-risk investments tend to pay interest. Those that pay dividends tend to be riskier. Those that generate capital gains are the riskiest. Therefore, the investor who chooses the riskiest investments can benefit from the opportunity to earn a higher rate of return and from the tax advantages of these investments.
In addition to being taxed at a lower rate, another tax advantage for investments that may earn capital gains is capital losses. A capital loss is received by investors if the return on their investment is negative. Therefore, if an investor loses money on an investment, he can receive a capital loss.
Although a capital loss means an investor has lost money on his investment, half the capital loss can be deducted from taxable capital gains on other investments. This reduces the amount of taxable capital gain and tax to be paid on that gain. Capital losses may be used by the investor in the year they are received, carried back to the three previous years, or carried forward indefinitely to be used against capital gains earned in the future.
Tax-free savings accounts (TFSAs) are precisely what their name says: a savings account that is tax-free. That means the investment return earned by deposits to the account (e.g. capital gains), and withdrawals made are NOT taxable.
TFSA contributions
Contributions to a TFSA are not tax-deductible. There is an annual dollar limit for TFSA contributions. However, the amount contributed is not based on earned income (like an RRSP is). Therefore, a person who is not working and receives money can deposit the money to a TFSA. He would not be able to contribute to an RRSP because he did not earn RRSP contribution room.
The TFSA account provides a wide range of investment options similar to those available in an RRSP including GICs, stocks, bonds, mutual funds and segregated funds. Contribution room not used in any year is carried forward, like an RRSP.
Over-contributions have been known to occur when a withdrawal and deposit are made in a single year. Over-contributions are penalized. There is a charge of 1% per month on an excess contribution until a withdrawal of the excess is made. If an over-contribution is deemed to be deliberate, any investment gains on the excess are taxed at a rate of 100%. To ensure no penalty will be charged, it is best that no deposit be made in the same year as a withdrawal.
TFSA withdrawals
A withdrawal can be made at any time. It can be re-contributed in any year following the year of the withdrawal, in addition to the maximum dollar amount of contribution for that year. No tax is due on the withdrawal.
Income earned in a TFSA and withdrawals from the account do not affect eligibility for federal income-tested benefits, such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).
A TFSA can name a successor holder to continue to receive benefitsof the account if the owner dies and/or a beneficiary. The successor holder must be a spouse or common-law partner. He becomes the account owner and the account continues.
The designated beneficiary receives the account value and the account is closed if a successor holder was not named, if the successor holder predeceased the account owner, or if the successor holder was not a spouse or partner.
RRSPs are a voluntary savings program that were introduced to encourage saving for retirement through tax incentives. They are offered by many financial institutions and may hold segregated funds when offered by life insurance companies.
An RRSP account owner has responsibility for decisions about how his contributions are invested.
There are three kinds of fees that can be charged against an RRSP. Administrative or trustee fees cover the financial institution’s cost of looking after the account. Investment fees can be charged, depending on the investment, for buying, selling and switching. Account change fees may be charged for closing the account, changing the withdrawal schedule and/or making a lump sum withdrawal.
A person can own as many RRSP accounts as he wishes. However, each account may charge an administration fee that is reduced to a single fee if accounts are consolidated. Regardless of the number of accounts, the maximum contribution limit for the year across all accounts cannot be exceeded
An RRSP can reveal many characteristics of its owner:
RRSPs provide the following tax advantages:
Those with RRSP accounts may use the value in their accounts for the HBP and LLP. Both plans allow the plan owner to make a tax-free withdrawal from the RRSP account. The HBP requires the withdrawal to be used when buying or building a qualifying home for the individual or a related person with a disability. The LLP withdrawal is used for the purpose of financing full-time education or training for an adult or his spouse.
Both plans limit the amount that can be withdrawn and specify the conditions for use of the funds and repayment. If repayment does not occur according to the terms of the plan, it can be added to taxable income as a penalty.
RRSP eligibility and contributions
In order to contribute to a personal RRSP, one must:
Available contribution room arises because the account owner has not made the maximum RRSP contribution in a previous year. This is called the “carry-forward provision.”
Contributions can be made to an RRSP throughout the year. The CRA establishes a date, usually 60 days after December 31, as the cut-off date for contributions for the previous year.
The annual contribution limit is the lesser of:
Earned income is income received from salaries and wages, employment bonuses, alimony, rental income and business income. It does not include income received from investments or pension benefits.
An individual’s annual contribution limit is reduced by:
In addition to the sum that can be contributed to an RRSP annually, the plan owner could use carry-forward contribution room that was created by not making the maximum contribution in previous years. A one-time over-contribution of $2,000 is also permitted. The over-contribution is not tax-deductible and grows on a tax-deferred basis. If a plan owner over-contributes more than the permitted $2,000, a 1% penalty tax is applied against the excess contribution.
When funds are transferred into an RRSP from a DPSP, GRRSP or another RRSP, the transfer is not considered a contribution.
RRSP spousal plan
An RRSP spousal or common-law partner plan is funded by a spouse (husband, wife or common-law partner), who has earned income and contribution room, for the benefit of his spouse. This plan is a way to split income for a couple during retirement between one spouse who earns more and the other who earns less. Splitting income reduces total income tax for the couple.
Contributions to a spousal plan are based on the contribution room of the contributor and reduce his RRSP contribution room.
If the spouse who has received funds into his RRSP from the other makes a withdrawal from the plan in the year the deposit is made or the two calendar years following that year, the amount of withdrawal (up to the amount contributed) will be added to the contributing spouse’s taxable income in the year of the withdrawal. In other words, if the withdrawal is a combination of contributed money and growth on that money, only the contributed portion of the withdrawal is attributed back to the donor spouse, not the growth portion.
Having a spousal RRSP can extend the tax benefit of contributions past age 71 if the recipient spouse is younger. Contributions can be made until the younger spouse reaches the end of the year in which he turns 71, at which time his RRSP matures.
RRSP withdrawals
Withdrawals can be made from an RRSP at any time. The financial institution holding the account is obligated to hold back a portion of the withdrawal in a withholding tax. This represents an advance payment and not the full amount of tax that will be owed on the withdrawal. There may be more tax owed in addition to the withholding tax, the balance will be calculated when the income tax return is field.
RRSP maturity
At the end of the year in which an RRSP account owner turns 71, he must transfer the funds in the account to continue tax deferral. Otherwise, he can cash out the RRSP and pay tax on the proceeds.
Transfer options, also called “maturity options,” include a registered retirement income fund (RRIF) account. Investments in the RRSP can be transferred in kind, in which case they are simply switched from the RRSP to RRIF without having to be sold. The investments in the RRSP can also be sold and the cash transferred over to the RRIF.
The other transfer options at maturity are a term annuity to age 90 and a life annuity. Either option requires the investments in the RRSP to be sold so the cash can be used to pay for the annuity.
Death of RRSP owner
A beneficiary should be named for the RRSP account. If a beneficiary is not named, the value of the account is included on the final income tax return, and it will be included in the calculation of probate fees in the provinces where they apply.
Naming a beneficiary eliminates probate fees on the value of the account.If the beneficiary is the spouse, a financially dependent child or grandchild younger than 18, or any financially dependent child or grandchild who is infirm, then the RRSP can roll over tax-deferred to a registered plan in the name of the beneficiary.
If certain conditions are met, the RRSP may be rolled over on death of the account owner to a Registered disability savings plan (RDSP).
Registered retirement income funds (RRIFs) are a maturity option for RRSPs.The purpose of an RRIF account is to pay retirement income (even though income can begin before retirement). An RRIF is usually funded by transferring the value of an RRSP account. An RRIF continues tax deferral on the RRSP account.
Like an RRSP account owner, an individual with an RRIF account has responsibility for decisions about investment. The same options are available in an RRIF as an RRSP. An RRIF owner is required to make a minimum annual withdrawal from his account. There is no withholding tax on the minimum withdrawal, but it will be entirely taxable when filling the income tax return. A withholding tax applies to any amount of withdrawal in excess of the minimum.
All withdrawals are fully taxable as income.Regardless of how the account has been invested and whether capital gains and losses,
The minimum withdrawal does not need to be taken in cash. The account owner can take the investment “in kind” and transfer it to a non-registered investment account or tax-free savings account (TFSA). For instance, a mutual fund in the RRIF could be transferred into the TFSA. However, taxation applies as if the transferred sum was taken in cash.
A Registered Education Savings Plan (RESP) is a registered plan to encourage savings that will pay towards costs of higher education. Although typically used for children, they can be used for a person of any age.Savings in an RESP account grow tax-deferred and are supplemented by contributions from the federal government for children 17 and younger. The person who opens the plan is called the “subscriber.” The person who receives payments from the RESP is called its “beneficiary.”
Individual and family RESPs are available through financial institutions. An individual plan has a single beneficiary. Anyone can open the plan and contribute to it. A family plan can have more than one beneficiary and each beneficiary must be related to the subscriber.
RESP contributions
There is a lifetime private contribution limit per beneficiary, regardless of whether the RESP is an individual or family plan. Contributions are not tax-deductible.
The Canada Education Savings Grant (CESG) is a grant of money paid by the federal government that tops upindividual contributions. It is not repaid to the government if the beneficiary pursues post-secondary education. The application for the CESG is made by the financial institution in which the RESP account is opened.
An additional CESG may be paid into an RESP account, based on net family income. Low-income and middle-income families receive enhanced CESG payments. Income brackets increase annually. There is a maximum amount that can be received from the grant over the entire period of account ownership per beneficiary. If the total amount of grant for any one year is not received, it accumulates and can be carried forward until the end of the year in which the beneficiary turns 17.
Low-income subscribers may receive an additional grant from the federal government in the Canada Learning Bond. The provinces of Alberta and Québec also offer savings incentives for post-secondary education costs.
Contributions in the plan account can be invested according to the products offered by the financial institution that holds the account. A wide variety of investment options are typically available. Tax is not paid on the value of the plan, including investment growth, until withdrawals begin.
RESP withdrawals
An RESP beneficiary receives withdrawals from the plan as Educational Assistance Payments (EAPs). EAPs are paid only when the student is enrolled in a qualifying educational program.
An EAP consists of a portion of the Canada Education Savings Grant, the Canada Learning Bond, any amount paid under a provincial education savings program and the earnings on the money saved in the RESP. Withdrawals are taxed in the hands of the beneficiary. Since most students have very little income, the EAPs are usually tax-free.
Contributions are returned to the subscriber or beneficiary tax-free during the withdrawal period of the plan or when it ends.
The registered disability savings plan (RDSP) is a registered savings plan introduced to help parents and others save towards long-term financial needs of a child or person with a severe and prolonged impairment in physical or mental functions.
RDSP eligibility
A disabled person is eligible to be a beneficiary who:
RDSP contributions
Contributions are not tax-deductible. There is a lifetime private contribution limit for an RDSP. There is no annual limit, up to the lifetime limit. Private contributions result from regular savings, lump sum contributions such as an inheritance or life insurance policy death benefit, or a rollover from a deceased individual’s RRSP, RRIF or RPP.
The federal government may pay a matching Canada Disability Savings Grant of up to 300%of private contributions, depending on the amount contributed and the beneficiary’s family income.
There is a maximum annual grant and a lifetime limit. Grants are paid into the RDSP until the end of the calendar year in which the beneficiary turns 49.
RDSP payments
Only the beneficiary of the RDSP or his or her legal representative may receive payments. There are two types of payments that can be taken from an RDSP.
The first type of payment is the Disability Assistance Payment (DAP). The DAP is a single payment. It can be received only if private contributions to the plan are greater than government contributions.
The second type of payment from the plan is called the “Lifetime Disability Assistance Payment” (LDAP). The LDAP is a series of payments. Once the plan beneficiary requests an LDAP, these payments are made to the beneficiary at least annually until plan termination or death. This payment must begin no later than the beneficiary's age 60.
Investment income earned in the plan accumulates tax-free. However, grants, bonds and investment income earned in the plan are included in the beneficiary's income for tax purposes when paid out of the RDSP.
An employer-provided pension is commonly called a “company pension” or “private pension.” Its purpose is to reward employees by paying a future pension income. There are a number of forms a pension plan can take. These pensions are generically called “registered pension plans” (RPPs).
Main types of RPPs are:
The plan sponsor, usually the employer, establishes and maintains the RPP. Once an employer registers a pension plan, it can offer the plan to qualified employees. However, a pension plan can be converted from one type to another or it can be terminated. The decision belongs entirely to the sponsor. If an employee leaves an employer before retirement, he has the right to receive all his contributions plus investment returns earned on those contributions.
Please contact us for more details and assistance to get your money invested and secure your financial future. We are more than happy to serve you.
Helpful Links
RRSPRegistered Retirement Savings Plan (RRSP) - Canada.ca
RRIF - Registered Retirement Income Fund (RRIF) - Canada.ca
RESP - Registered Education Savings Plans (RESPs) - Canada.ca
RDSP - Registered Disability Savings Plan - Canada.ca