Comparing TFSA’s and RRSP’s – 2019
/in Blog, Family, individuals, Investment, Retirees, rrsp, tax, Tax Free Savings Account /by YF GROUPIf you are seeking ways to save in the most tax-efficient manner available, TFSAs and RRSPs can both be effective options for you to achieve your savings goals more quickly. However, each plan does have distinct differences and advantages / disadvantages. Let’s take a look at their key features:
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While a TFSA can be used for any type of savings, an RRSP is used exclusively for retirement savings.
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You can enjoy tax free withdrawals from your TFSA due to the fact that you make your contributions after you have paid tax, whereas the opposite is true for withdrawals from your RRSP (except in the case of lifelong learning plan and home buyers’ plan)
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TFSA contributions aren’t tax deductible whereas RRSP contributions are i.e. with an RRSP, you can deduct the contributions that you make from your income when you file your tax return.
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It is required that you use earned income to contribute towards your RRSP but this is not the case for your TFSA.
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You can continue to contribute towards your TFSA for as long as you like, whereas you must close your RRSP and stop contributing towards it when you turn 71 and purchase an annuity or convert it to a RRIF with the savings that you have made within the plan.
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You are able to specify your spouse as your beneficiary with both your TFSA and your RRSP, however there is a key difference with how your savings are treated upon your spouse’s death. With an RRSP, there will be taxes payable upon the monies left in the plan by your children who inherit it, whereas with a TFSA, tax is only paid on the increase in the value of the plan since the date of death in the year that it is inherited by your children. What’s more, no tax is payable if the value that they receive is less than the value of the TFSA at the time of death.
In summary, your individual circumstances will dictate which plan is the most appropriate for you, depending on your tax position and withdrawal intentions. The primary difference between both plans is the timing of the taxes payable i.e. if you want to defer the payment of your taxes, particularly if your marginal tax rate will be lower in retirement, an RRSP may be more beneficial for you. Alternatively, if your marginal tax rate will be higher when you plan to make withdrawals, a TFSA may suit you better.
2019 Financial Calendar
/in Blog, Business Owners, corporate, individuals, Investment, rrsp, tax, Tax Free Savings Account /by YF GROUP2019 Financial Calendar
Financial Calendar for 2019 – All the deadlines you need to know to maximize your benefits!
Tax Planning Tips for End of 2018
/in Blog, Estate Planning, Family, individuals, pension plan, Retirees, rrsp /by YF GROUPNow that we are nearing year end, it’s a good time to review your finances. 2018 saw a number of major changes to tax legislation come in force and more will apply in 2019, therefore you should consider available opportunities and planning strategies prior to year-end.
Below, we have listed some of the key areas to consider and provided you with some useful tips to make sure that you cover all of the essentials.
Key Tax Deadlines for 2018 Savings
December 31, 2018:
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Medical expenses
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Fees for union and professional memberships
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Charitable gifts
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Investment counsel fees, interest and other expenses relating to investments
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Student loan interest payments
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Political contributions
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Deductible legal fees
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Some payments for child and spousal support
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If you reached the age of 71 in 2018, contributions to your RRSP
January 30, 2019
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Interest on intra-family loans
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Interest you must pay on employer loans, to reduce your taxable benefit
February 14, 2019
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Expenses relating to personal car reimbursement to your employer
March 1, 2019
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Contributions to provincial labour-sponsored venture capital corporations
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Deductible contributions to a personal or spousal RRSP
Family Tax Issues
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Check your eligibility to the Canada Child Benefit
In order to receive the Canada Child Benefit in 2019/20, you need to file your tax returns for 2018 because the benefit is calculated using the family income from the previous year. Eligibility depends on set criteria such as your family’s income and the number and age of your children and you may qualify for full or partial amount. -
Consider family income splitting
The CRA offers a low interest rate on loans and it therefore makes sense to consider setting up an income splitting loan arrangements with members of your family, whereby you can potentially lock in the family loan at a low interest rate of 2% and subsequently invest the borrowed monies into a higher return investment and benefit from the lower tax status of your family member. Don’t forget to adhere to the new Tax on Split Income rules. -
Have you sold your main residence this year?
If so, your 2018 personal tax return must include information regarding the sale or you may lose any “principal residence” exemptions on the capital gains from the sale and thus make the sale taxable. -
If you’re moving, think carefully about your moving date
If you are moving to a new province, it’s worth noting that your residence at December 31, 2018 is likely to be the one that your taxes are due to for the whole of the 2018 year. Therefore, if your move is to a province with higher taxes, putting your move off until 2019 may therefore make sense, and vice versa if you are moving to a lower tax province.
Managing Your Investments
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Use up your TFSA contribution room
If you are able, it’s worth contributing the full $5,500 to your TFSA for 2018. You can also contribute more (up to $57,500) if you are 27 or older and haven’t made any previous TFSA contributions. -
Check if you have investments in a corporation
The new passive investment income rules apply to tax years from 2018 and you therefore need to plan ahead if the rules affect you. They state that the small business deduction is reduced for companies which are affected with between $50,000 and $150,000 of investment income, therefore the small business deduction has been stopped completely for corporations which earn passive investment income of more than $150,000. -
Think about selling any investments with unrealized capital losses
It might be worth doing this before year-end in order to apply the loss against any net capital gains achieved during the last three years. Any late trades should ideally be completed on or prior to December 21, 2018 and subsequently confirmed with your broker. Conversely, if you have investments with unrealized capital gains which are not able to be offset with capital losses, it may be worth selling them after 2018 in order to be taxed on the income the following year.
Estate and Retirement Planning
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Make the most of your RRSP
The deadline for making contributions to your RRSP for the year 2018 is March 1, 2019. There are three things that affect how much you may contribution towards your RRSP, as follows:-
18% of your previous year’s earned income
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Up to a maximum of $26,230 for 2018 and $26,500 for 2019
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Your pension adjustment
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Remember that deducting your RRSP contribution reduces your after-tax cost of making said contribution.
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Check when your RRSP is due to end
You should wind-up your RRSP if you reached the age of 71 during 2018 and your final contributions should be made by December 31, 2018.
Other Considerations
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Make your personal tax instalments
If you pay your final 2018 personal tax instalment by December 15, 2018, you won’t pay interest or penalty charges. Similarly, if you are behind on these instalments, you should try to make “catch-up” payments by that date. You can also offset part or all of the non-deductible interest that you would have been assessed if you make early or additional instalment payments. -
Remember the deadline for making a taxpayer-relief request
The deadline is December 31, 2018 for making a tax-payer relief request related to the 2008 tax year. -
Consider how to minimize the taxable benefit for your company car
The taxable benefit applied to company cars is comprised of two parts – a stand-by charge and an operating-cost benefit. If you drive a company car, it’s worth considering how to potentially minimize both of these elements. The taxable benefit for operating costs is $0.26 per km of personal use, therefore you should make sure that you reimburse your employer where relevant, by the deadline of February 14, 2019.
Contact us if you have any questions, we can help.
The Importance of a Financial Plan
/in Blog, Business Owners, Families, Financial Planning, Investments, Savings /by YF GROUPWorking with us to create your financial plan helps you identify your long and short term life goals. When you have a plan, it’s easier to make decisions that align with your goals. We outline 8 key areas of financial planning:
- Income: learn to manage your income effectively through planning
- Cash Flow: monitoring your cash flow, will help you keep more of your cash
- Understanding: understanding provides you an effective way to make financial decisions that align with your goals
- Family Security: having proper coverage will provide peace of mind for your family
- Investment: proper planning guides you in choosing the investments that fit your goals
- Assets: learn the true value of your assets. (Assets – Liabilities)
- Savings: life happens, it’s important to have access to an emergency fund
- Review: reviewing on a regular basis is important to make sure your plan continues to meet your goal
Passive Investment Income Limit
/in Blog, Investment, life insurance, tax /by YF GROUPMorneau’s federal budget announced earlier this year informed us how the government will treat passive income in a Canadian Controlled Private Corporation. (CCPC) The government’s main concern was that under the current rules a “tax deferral advantage” exists since tax on active business income is usually lower than the top personal marginal tax rate. Therefore if the corporate funds were invested for a long period of time, shareholders might end up with more after-tax amount than if it was invested personally.
Limiting Access to the Small Business Tax Rate
A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000 (also known as the adjusted aggregate investment income). This new regulation will go hand in hand with the current business limit reduction for taxable capital.
The time to act is now, since these changes will be effective January 1, 2019, a discussion and plan should be prioritized now, since 2018 will be the “prior year” of 2019. To avoid the reduction of income eligible for the small business tax rate, business owners need to minimize or keep the amount below $50,000 of the “adjusted aggregate investment income” (AAII) in 2018.
We’ve listed some solutions on how to do this:
1) Corporate Owned Insurance: Exempt life insurance does not produce passive investment income unless there is a disposition. Put a portion of the corporation’s passive investments into a life insurance policy and reduce passive investment income and limit the erosion of the small business limit. Insurance concepts:
● Insured retirement program: Provide additional retirement funding through transferring excess corporate funds into whole life or universal life insurance. The funds inside the policy grow “tax free” to create significant cash value. At some point when there is a need for cash, the policy is pledged as collateral for a bank loan. The bank loan doesn’t need to be repaid until the life insured dies and the death benefit is used to repay the loan. Any remaining death benefit is paid out.
● Estate bond: Transfer corporate wealth to the future generation by utilizing whole life or universal life insurance. Essentially replace taxable investment with life insurance, increase funds for a future generation upon death, reduce tax and create a strategy to move funds out of the corporation tax free (through the Capital Dividend Account.)
● Corporate held Critical Illness with Return of Premium: Purchase corporate owned critical illness, since it doesn’t produce any investment income.
2) Pay enough salary/dividends to maximize RRSP and TFSA Contributions: A salary of $145,722 will allow the max 2018 RRSP contribution is $26,230 (18% of $145,722). Make sure you also pay enough salary/dividend to maximize your annual $5,500 TFSA contribution.
3) Individual Pension Plan (IPP): The corporation contributes to the IPP and income earned in the IPP doesn’t belong to the corporation. This should only be considered when the AAII is over $50,000.
4) Deferred Capital Gains: Capital gains are 50% taxable and are only 50% included in the AAII.
Talk to us, we can help you figure out the best solution for your unique situation.
Getting the best from a financial advisor
/in Blog, Business Owners, Charitable Gifting, corporate, disability, Estate Planning, Family, Group Benefits, health benefits, individuals, Investment, life insurance, long term care, pension plan, Retirees, rrsp, tax, Tax Free Savings Account, travel insurance /by YF GROUPWorking with a professional to help you to make sense of your finances can be a wise move, but for this relationship to work effectively it is important that you understand what to expect from your financial advisor.
What can your financial advisor help you with?
- Defining your financial goals and creating a step by step plan or strategy to achieve them.
- Planning for the future, including for retirement, future education or housing needs.
- Choosing the mix of investments and assets that suit your goals, lifestyle, time horizon and appetite for risk.
- Building a solid estate for your family to inherit in the future.
- Choosing the most tax-efficient methods of saving and investing.
What should your financial advisor inform you of?
- The range of services that they offer and how much and by which method you will compensate them.
- Your mutual responsibilities and obligations towards each other.
- What the planning process will look like and the documents that they will provide you with.
What will your financial advisor need from you or need to ask you about?
- What your financial goals are.
- What your personal circumstances – such as your marital status, any dependents, your job, earnings and tax situation.
- Any investments or assets that you currently have – such as registered accounts, workplace pensions, property etc.
- Your appetite for risk and investment preferences.
- Information on your income and also your outgoings, including debts such as mortgages, loans or credit cards.
- Whether or not you have a will, and its contents.
- Your estate and inheritance planning situation.
If you’re looking to achieve your financial goals, talk to us. We can help.
Paying for Education
/in Blog, education, RESP /by YF GROUPPost-secondary education can be expensive, however having the opportunity to plan for it helps with making sure that you’re capable to meet the costs of education. In addition, when you have a plan, it’s easer to make financial decisions that align with your goals and provide peace of mind. In the infographic, we outline 7 sources of funds for paying for post-secondary education:
- Registered Education Savings Plan
- Tax Free Savings Account
- Life Insurance
- Scholarships, grants, bursaries
- Personal Loans, Lines of Credit
- Government Student Loan
- Personal Savings
How to Make the Best of Inheritance Planning
/in Blog /by Russ YoungHow to Make the Best of Inheritance Planning
Inheriting an unexpected, or even an anticipated, lump sum can fill you with mixed emotions – if your emotional attachment to the individual who has passed away was strong then you are likely to be grieving and the thought of how to handle your new-found wealth can be overwhelming and confusing but also exciting. One of the best pieces of advice in this situation is to give yourself some time before making any binding financial decisions. The temptation to quickly put the money to so-called ‘good use’ or to rush out and spend it can be strong but you must allow the news to sink in and also take some time to consider your options before you embark on the process of dealing with the inheritance. In the short term, put the money away in a high interest savings account and take time to research and think carefully about your financial goals and objectives and how this inheritance can help you to secure and maximise your financial future in the best way.
Although there is no one-size-fits-all approach to dealing with larger sums of money, here are some useful ideas of where to start.
Reduce your debt burden
If you have significant or high-interest debts, one of the safest options of all is paying this debt down. Not only will you achieve a guaranteed after-tax rate of return of your current interest rate, it can also add to your feeling of financial security and potentially offer you a more consistent financial picture. Debt often carries with it a significant interest rate – particularly on credit cards and overdrafts for example – so in many cases, eliminating this burden should be considered as one of your main priorities.
However, you may like to take careful note of the option below regarding investing the money instead as much depends on the prevailing interest rates and, of course, your appetite for risk, as you may well find an investment option with a potentially higher return more attractive.
Make investments
A particularly effective way of investing an inheritance is to add it to your retirement savings – especially if your nest egg is not looking quite as healthy as it should due to missed savings years for example. Those with lower or less reliable incomes should look upon this option as a great choice in particular.
Be charitable
After considering your own future financial needs, giving some of your wealth away to either charities or to family and friends is a good option to share out some of your inheritance to those who could benefit from it. What’s more, donating to charity can also offer you some tax breaks which may reduce your overall tax burden.
Many individuals see this philanthropic route as offering them the opportunity to do something meaningful and rewarding with their wealth and contributing towards their own sense of moral duty and emotional wellbeing.
Make a spending plan
Of course, you are likely to be keen to spend some of your wealth on yourself and your family, particularly if your financial situation means that you have previously had to be more careful and prudent with money than you would have liked. A great way to do this is to create a spending plan so that you can enjoy the benefits of spending, without it significantly eating into money set aside for your financial planning goals. You could, perhaps, aim to set aside 10% of the inheritance just for yourself and loved ones to enjoy. The proportion will naturally depend on your circumstances but, in principle, it’s a great idea as it allows you to balance sensible saving and investments with some short-term enjoyment of your wealth.
Talk to us, we can help.
Get in Touch
Young Financial Group Inc.
Russ Young, CFP
Certified Financial Planner
Tel: (403) 910-3375
Email: admin@yfgroup.ca
4103A Centre St. NW
Calgary, Alberta
T2E 2Y6
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