By Fin MacDonald
Fin Tax Service
Fin MacDonald has over 20 years’ experience providing retirement and Income tax planning advice. Readers are however cautioned that responsibility falls on the taxpayer to ensure that all information is adequate and correct.
Now that we have all, or almost all, received our notice of assessment for the 2017 tax year, let’s look at some tax planning ideas. First, what are your goals? That leads us to: what stage in life are you in?
Starting A Family
So, you are looking forward to starting a family. Are you settled in your work, education finished for now? Does home ownership loom? Buying a home is the biggest purchase most people will have in their lives, if they are fortunate enough to do so. In Victoria city a majority of residents are not homeowners. The federal tax system offers some help to those buying their first home.
RRSP Home Buyers Plan (HBP)
Registered Retirement Savings Plans (RRSP) provide a deduction from income when contributions are claimed (you don’t have to claim contributions the year you make them, they can be carried forward). Through the HBP, participants may withdraw up to $25,000; a couple has a total of $50,000 that can be withdrawn. You can’t run a deficit in your RRSP – you have you put the money in before you can make an HBP withdrawl. Some of the HBP rules include: neither you or your spouse can have owned a principal residence in the previous four years, RRSP contributions must be in the RRSP for at least 90 days, and the amount withdrawn is repaid (or added to your income) in equal payments over a fifteen-year period, commencing the second year after you withdrew the money from your RRSP.
The option to make the HBP re-payments to your RRSP expires in the year you turn 72; which is the year an RRSP must be converted into an annuity, taken as cash, or transferred to a Retirement Income Fund (RIF). For those folks, the annual amount is added to their income until the fifteen-year period expires. Once the re-payment period starts, the question is: make the re-payment or, take the re-payment amount in to income? My recommendation is to make the re-payments. This enables your RRSP to continue to grow tax-free and enjoy the benefits of compounding.
A second way the tax system provides help is the “Home Buyers Amount”. This is a Federal Non-Refundable Tax Credit of $5,000, that lowers your taxes payable by up to $750 (15% of $5,000). This may be shared between the two buyers if it is not a single person buying the home. The same “no principal residence for the previous four years” that is a condition for the HBP, is also a condition for this tax credit.
Registered Education Savings Plans (RESP)
RESPs enable you to save for your child(ren)’s education. Grants, both federal and from British Columbia are available. Here are two useful links: https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-education-savings-plans-resps/registered-education-savings-plans-resps.html and for B.C.: https://www2.gov.bc.ca/gov/content/education-training/k-12/support/bc-training-and-education-savings-grant
RRSP vs Tax Free Savings Account (TFSA)
RRSP contribution room is earned through employment, self-employment, taxable disability income and rental income up to age 72. Typically, 18 per cent of this eligible earned income, up to a yearly ceiling becomes your contribution room. Unused contribution room is carried forward until used. People who contribute to, or have contributions made on their behalf to, a workplace or group pension plan receive an annual number called a pension adjustment. This number is deducted from the contribution room you would otherwise earn in the year. It recognizes the value of the pension plan that you earned that year.
TFSA contribution room is allocated each year a person is 19 or over, starting in 2009. The amount is adjusted for inflation in $500 sums; for 2018 it is $5,500. If you have never contributed, and were at least 19 years old in 2009, your contribution room is $57,500.
* RRSP contributions are tax deductible, TFSA contributions are made with after-tax dollars
* RRSP income is taxable, TFSA withdrawals are not taxable, and are not income
* Both grow tax-free inside the plans
* Except to a surviving spouse, RRSPs on death are taxable; TFSAs are not
Choosing which plan to contribute to can be easy, or not. If you have a workplace pension, you will not have very much RRSP contribution room because of the pension adjustment. Maxing out your RRSPs and then putting money into a TFSA would make sense. This is assuming that your retirement income will leave you above the limits for means-tested social programs such as Guaranteed Income Supplement (GIS), Shelter Aid for Elderly Residents (SAFER), and BC Bus Program.
If you will not receive a workplace pension, the balance is on your pre-and post-retirement income. Making RRSP contributions before retirement, when your income is higher than what it will be, saves more tax, and defers tax to when you will be paying tax at a lower rate.
If your projected retirement income is low enough to qualify for the GIS, putting your money into the TFSA is the way to go; because any withdrawals from the TFSA are not included in income for any means-tested programs.
In the September issue of The Beacon I will look at Tax Planning and Investing. As always dear readers, I look at tax through my lens of Helping You To Keep More Of YOUR Money.