Posts Tagged ‘savings’

Registered Education Savings Plans (RESPs)

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What is it? A Registered Education Savings Plan (RESP) is a special investment account that helps families plan for post-secondary education funding, and provides future tax-saving and tax-deferring opportunities. Also, the RESP allows access to the Canadian Education Savings Grant (CESG), a government freebee that makes an RESP even more attractive!

What’s a Beneficiary? The beneficiary is the student who is expected to make use of the RESP to fund his or her education. The lifetime contribution limit for a beneficiary savings $50,000. Over-contribution results in a penalty tax of 1% per month on the over-contributed amount, until it is withdrawn. From 2007 on, there is no annual limit for RESP contributions.

There is no age limit for being a beneficiary of an RESP; the only drawback is that adult beneficiaries are not eligible for the CESG. Contributions can be made over a 31-year period, and the plan must be wound up by the end of its 35th year.

How does the CESG work? The CESG is a government incentive implemented to encourage people to make use of RESPs: the government will match 20% of your annual contributions, up to a maximum of $500 every year, until the child turns 17 years old. Then things get more complicated – that’s for another discussion. The point is that is free money that instantly provides a return on your investment into the plan that’s frankly impossible to beat! The total CESG that can be paid into a plan by the government is $7,200 over the life of the plan.

In order to receive maximum CESG, it would therefore be better to make minimum annual payments of $2,500 instead of making one big payment to the RESP. Unused CEGC contribution room can be carried forward. For instance, if you do not make a RESP contribution in year 5 but contribute $5,000 in year 6, you will be able to receive $1,000 of CESG in year 6. However, the maximum CESG is $1,000 in any given year.

What are the tax benefits? The investment pool grows free of any tax each year (possibly for many years) and the withdrawals for the capital invested are return to the contributor tax free. The accumulated income and the CESG are distributed to the beneficiary when they attend a qualifying post secondary educational program, and included in their (typically low) income, usually attracting tax at lower rates. Not a bad result!

RRSP Season For The 2016 Taxation Year is Ending Soon!

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A Registered Retirement Savings Plan (RRSP) is a personal savings account registered with Canada Revenue Agency (CRA) to help you save for retirement and reduce your current income taxes. RRSP contributions are tax deductible and the earnings are tax-free as long as the money stays in the plan. Once the funds are withdrawn or payments are made from the plan, you will be taxed. You are able to contribute to your RRSP up to a certain limit for any tax year and any unused RRSP contribution room will be carried forward until December 31st of the year you turn 71.

Contribution Limit

The RRSP deduction limit, which is the maximum annual contribution limit, changes annually and it is calculated as follows:

  1. 18% of your earned income[i] from the previous year, up to a dollar limit which for 2016 is $25,370 (2017 – $26,010), less
  2. the pension adjustment (PA) that was reported on your previous year’s T4.

If you have unused RRSP contribution room at the end of the previous year, you can increase your current year contribution accordingly. A quick way to find out your contribution limit is to look it up in the “RRSP Deduction Limit Statement” section of your latest notice of (re)assessment from the CRA.

Over-contributions and Penalties

RRSP contribution is a great retirement saving and tax deferral tool, but if you over-contribute you may be subject to penalty taxes. Over-contribution in excess of $2,000 is subject to a 1% penalty tax per month, until you withdraw the excess amount. A T1-OVP tax return is required for reporting the penalty tax. This return must be filed with the CRA by March 31st of the following tax year to avoid a late-filing fee.

If the excess RRSP contribution is $2,000 or less, there is no penalty tax, but the excess contribution is not deductible until a new RRSP contribution room is available.

Contribution Deadline for 2016 Tax Year

The last day to make RRSP contributions that are eligible for the 2016 deduction is March 1st, 2017 (60 days from December 31, 2016). Therefore, it is important to include and report all the RRSP contribution tax slips up to March 1, 2017 on your 2016 tax return.

Other RRSP tax planning opportunities, such as spousal RRSP contribution, home buyer’s plan or lifelong learning plan, are available. Please contact us for more information.


[i] Earned income includes salaries, wages, and rental income, but excludes investment income.

Tax Free Savings Accounts (TFSA)

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The Tax Free Savings Account (TFSA) is a savings account that allows any individual over the age of 18 and who has a valid Canadian SIN to invest in assets and earn tax-free investment income.


Contribution limit, accumulation, and penalties

There is a limit to the amount you can contribute to the account. In previous years from 2009 to 2012, the contribution limit was $5,000 per year. In 2013 and 2014, the limit has increased to $5,500 per year. Then in 2015, the limit increased again to $10,000. However, starting Jan 1, 2016, the limit was decreased to $5,500.

Investment income earned and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years.

You can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year. Any amounts that exceed the contribution room will be subject to a monthly penalty tax of 1% of the excess amount, until the excess is withdrawn.

On the other hand, if your contribution for the year did not meet the limit, the unused portion is carried forward to future years. This increases your contribution limit for next year.



Withdrawals from your TFSA are tax-free, regardless of the amount. These can generally be done any time you want, depending on your investments. Withdrawals will be added to your TFSA contribution room at the beginning of the following year. For example, if you withdraw $2,000 from you TFSA in 2015, your 2016 contribution room will be $7,500 ($5,500+$2,000).

Re-contributing your withdrawals is also allowed – however this will not change your contribution room for the year. For example, in 2016 taxpayer opened his/her TFSA and contributed maximum amount allowed of $46,500. Later in 2016, the taxpayer withdrew $8,000. The date that a taxpayer can re-contribute the $8,000 without incurring penalties is Jan 1, 2017. Therefore any re-contribution should be done carefully to avoid penalties from over-contributing.



Funds given to your spouse or common law partner to contribute to their own TFSA is permitted, without any restrictions or tax consequences.

Fund transfers between your own accounts or to ex-spouse/ex-common law partner are considered qualifying transfers. These can be done without any tax consequences, as long as they are directly transferred by your financial institution.


Death of a TFSA holder


A TFSA holder may:

  • Name a successor holder for the account-the survivor automatically becomes the holder of the account at the time of the former holder’s death.
  • Designate a beneficiary for the account – the account will cease to exist and the funds will be distributed to the beneficiary.


 Tax implications


Successor holder

The TFSA holder may only appointed his/ her survivor (i.e., the holder’s spouse or common-law partner at the time of death) as the successor holder for the account. Any income earned after the death of the holder will continue to accrue on a tax-free basis in the TFSA and the deceased’s spouse of common-law partner may make withdrawals from the TFSA free from tax.

Where the success holder has their own TFSA, they may choose to consolidate the two plans by the direct transfer of all or part of the assets of the holder’s plan to their own plan. In general, the direct transfer will not affect the successor holder’s TFSA contribution room.

Going forward, the successor holder may make additional contributions to the combined TFSA based only on their own unused contributing room.



In general, the fair market value at the date of death may be viewed as a non-taxable capital receipt to the designed beneficiary and maybe withdrawn free of tax. Any accretion in value after death will be subject to tax in the hands of the designated beneficiary.

If the TFSA holder’s spouse or common-law partner was designated as beneficiary, the situation is more complicated. When the estate is settled, the full value of the TFSA will be paid to his/her spouse. Deceased’s spouse or common-law partner has option to contribute all or portion of the funds received from the former holder’s TFSA to their own TFSA as an exempt contribution without affecting their own unused contribution room.

In order to do this, the exempt contribution payment must be made before the end of the calendar year following the year of death, the payment may not excessed the fair value of the holder’s TFSA at the date of death and the prescribed designation election from must be filed within 30 days after the contribution is made. In addition to the above requirements, any income or growth earned by the TFSA after the former TFSA holder dies is fully taxable to his/her spouse.

TFSA is a great tool to take advantage of, to save for the future. In order to make sure that the TFSA passes to your spouse of common-law partner as simply and as tax-effectively as possible, the successor holder method will allow for it in a less complicated manner.

How RRSP Contributions Work

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A registered retirement savings plan (RRSP) is an account you can set up to save money for the future. There are immediate tax benefits in the year that a contribution is made to the plan. Also, RRSP investments can grow and not be taxed until the funds are withdrawn, often many years later.

But the big question is: how do RRSP contributions work?

Any taxpayer is entitled to contribute to an RRSP if they have “contribution room” (also called the deduction limit), although the contribution room is subject to an annual maximum limit.

The RRSP annual maximum limit for 2012 is $22,970 and for 2013, it is $23,820. In order to be eligible for this maximum limit, you must have had sufficient earned income in the previous tax year.  So this year’s limit is based in part on last year’s earned income (primarily employment or business income). Your deduction limit can exceed this amount if you have unused contributions carried forward from previous years.

The Canadian Revenue Agency (the “CRA”) calculates the RRSP deduction limit for the following year on every Notice of Assessment (“NOA”), which you receive each year after you file your income tax return (i.e. your 2013 annual limit will be reported on your 2012 NOA). Therefore, a taxpayer can simply refer to their NOA to determine their limit.

Excess Contributions

Excess contributions occur when you contribute more that you are permitted by more than $2,000. When contributions have been made of more than $2,000 over the contribution limit, a penalty of 1% per month is charged on this excess amount, until the excess contribution is removed from the plan.  Excess contributions are to be avoided at all costs, so if you are in doubt about how much to contribute to your RRSP, check it out carefully before you contribute.

When is the deadline for contributions?

The RRSP contribution deadline for the 2012 tax year is March 1, 2013. Therefore, if you contribute to your RRSP on March 1, 2013 or earlier, you can take the deduction on your 2012 tax return.

The very last contribution you can make to your RRSP is December 32 of the year you turn 71. However, it is possible for taxpayers over 71 to contribute to the RRSP of a spouse until December 32 of the year that their spouse turns 71.

The earlier you contribute to your RRSP, the more time you have for investments to grow tax free – so don’t wait until the deadline to contribute! Also the younger you start your RRSP account the better – compounding of income really takes off if you have a long period of time to run your RRSP.

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