Month: April 2020

A Brief Summary of Registered Accounts

Posted on by Chantel Gibbs

A Brief Summary of Registered Accounts

In Canada, there are two categories of accounts for saving money in: registered accounts and non-registered accounts. Registered accounts like a RRSP, TFSA, and RESP are registered with the government and need to follow certain rules in exchange for specific tax breaks or government grants. Non-registered accounts include basic savings and checking accounts and investment accounts. Below is a summary of the main kinds of registered accounts and how they work.

Tax Free Savings Account (TFSA)

A TFSA account allows a person to make investment income tax free. Contributions are made with after-tax money (unlike the RRSP) and the maximum contribution room increases yearly for everyone over age 18. If money is withdrawn one year, the contribution room comes back the next year so they can put the money back in again. It is a great tool for saving for a big purchase or even for retirement. To find your TFSA contribution room, log in to your CRA My Account. If you are a US citizen, you should not open a TFSA because the US does not recognize it and will still tax you on any income made in it.

Registered Retirement Savings Plan (RRSP)

RRSP and Locked-In Retirement Accounts (LIRA) are a way to defer some of your income from your working years to your retirement years. The maximum you can contribute to these accounts is 18% of your earnings up to an amount that the government sets yearly. Contributions are a deduction from taxable income and withdrawals are an addition to taxable income. The difference between the two accounts is that a LIRA or LIF account is a locked-in fund meaning that only a set maximum can be withdrawn every year based on age. An RRSP, on the other hand, has no maximum withdrawal cap and can be drawn from at any time, even before retirement. A RRSP must be converted into a RRIF at the end of the year the person turns 71. After that, a minimum amount must be drawn yearly based on age. Your personal RRSP contribution limit can be found on your notice of assessment or your CRA My Account. If your employer is contributing to a pension plan for you, your RRSP contribution limit will be reduced by those amounts.

 

Registered Education Savings Plan (RESP)

A RESP account allows someone to save for the future education of a family member or even themselves. Government grants are available if the RESP is set up for someone under 18 with a valid SIN number living in Canada. The province of BC also offers a one time grant for children between 6 and 9 years of age. There is a lifetime maximum of $50,000 per child that can be contributed to an RESP. If the child doesn’t attend post-secondary education and there is no sibling to transfer the money to, the plan can be wound up and the money given back to the contributor, but the government grants will need to be repaid.

Registered Disability Savings Plan (RDSP)

A RDSP account is particularly for individuals who qualify for the disability tax credit and have long-term disabilities. The government provides grants to help match what is contributed to the individual’s plan up to a certain amount a year. A lifetime maximum of $200,000 can be contributed to a RDSP. Contributions can be made up until the beneficiary turns 60. Family members’ RRSP accounts can be rolled in to an RDSP account without the usual tax consequences at death, but RRSP rollovers are not eligible for matching government grants.

 

Government Support and Helping Yourself

Posted on by Chantel Gibbs

Government Support and Helping Yourself

If the 2020 coronavirus pandemic has taught us something, it is that many of our jobs are fragile and the government will only offer limited support. Businesses need to be prepared to deal with a sudden loss of revenue and adapt quickly.

If tragedy befell you in your personal life, what kind of support could you expect the government to give? The simple answer is that the government will give you just enough money to sustain basic living. The rest you would need to source from your own assets, your own insurance, or from friends and family.

The CPP Disability benefit is a taxable benefit available up to the age of 65 for severe and long-term disabilities. The benefit is based on how many years contributions have been made to the CPP and how much. There is also a benefit available for the children of a person who qualifies for the CPP Disability benefit.

Employment Insurance (EI) provides a sickness benefit for up to 15 weeks if unable to work due to sickness. To qualify, the person must have 600 hours of work at the job and apply within a short time of stopping work. It is a taxable benefit that only covers part of the salary. Insurance is also available, of course, in the event of a lay-off or loss of work for reasons other than being terminated for just cause. During the Covid 19 crisis, there are EI benefits available for anyone who has been unable to work for 14 days or more.

The Workers Compensation Board (WCB)  pays short term or long term benefits to people who are injured on the job. The payments are intended to cover up to 90% of a person’s after-tax income. Payments are reduced for any other insurance coverage or government benefits you may receive.

On death, CPP Canada will pay a one-time benefit of $2500 to the estate of the deceased. If the person was a CPP contributor, the surviving spouse and children could qualify for monthly support payments from the CPP.

Individual provinces also have their own long-term disability programs that are often asset tested. For instance, BC’s program only allows a person to have a primary residence, one vehicle, and up to $100,000 of savings apart from an RDSP or RESP account to be eligible.

In conclusion, it is best to combine reliance on government programs with your own insurance. This may be partly provided by your employer’s benefit plan, but it may also require buying your own. Most insurers, however, still require you to fund the first few months of loss of income, so you should have an emergency fund in any event.

  • The government will only give you enough in the long term to sustain basic living
  • Short term benefits for sickness are more generous, but still only cover part of prior income level.
  • There is nothing available to businesses to weather an economic storm unless the government specifically sets up bailouts.

 

 

 

 

 

 

Managing Your Taxable Income

Posted on by Chantel Gibbs

Managing Your Taxable Income

 

“Managing your taxable income is important for social benefits like the Old Age Security and to reduce your overall tax expense.”

 

 

 

Many people have the misconception that once you cross into another tax bracket, all your income is taxed at that higher rate. In reality, it is only the income portion that crossed the threshold that is taxed higher. Part of cash flow planning is keeping your taxable income at a consistent level.

Things that could increase your taxable income for the year include draws from your RRSP and the realization of gains on the sale of an investment property or company share.

Earnings that make up ordinary income include employment income, business income, net rental income, interest, pension, RRSP / RRIF withdrawals, CPP, and Old Age Security. Ordinary income is subject to the highest rate of tax.

Dividends received from Canadian companies are taxed lower because the company has already paid some tax on the earnings. For eligible dividends, the company already paid 27% tax, so if the person has taxable income below $48,535, he/she can actually receive a tax refund by earning some eligible dividends.

If you know you will have a large income inclusion in one year, plan ahead to use available tax deductions. For instance, if selling a rental property with a large increase in value, it may be a good idea to keep some RRSP contribution room for that year since RRSP contributions are a deduction from taxable income and can be used to offset the capital gain income inclusion.

Tax credits do not reduce your taxable income, but help to reduce the tax you have to pay. Tax credits include donations, medical expenses, disability, basic personal credits, and many others. Be warned that social benefits like the Old Age Security are based on taxable income, regardless of how much credits you may have.