If you have a Defined Benefit Pension Plan (DB Pension), you likely have questions about how it works and how it interacts with your overall financial plan. In our latest Question From Clients video, Kelley Doerksen, CFP® explains some of the key information you need to know about these plans.
It’s common to have a pension from your employer that you contribute to and know very little about! Especially if you contribute to a “Defined Benefit” pension (often referred to simply as a DB pension). While each pension is unique, let’s look at 6 similarities:
1. Predictable Income for a Lifetime
Once retired and your pension begins, a DB pension will pay you a set amount of income for your lifetime. Some pensions also offer indexing, which will increase your income by some percentage of inflation.
2. Income for spouse or partner on death
Many DB pensions allow you to choose if your pension will continue to be paid to a spouse or partner in full upon the death of one of the pensioners, or if it will continue at a reduced rate. The choice you make at retirement will influence the amount of pension income you receive for life.
Most DB plans allow you to choose a guarantee period. This is not related to how much time you will receive your pension income for (remember, these plans pay for life), but relates to how long a death benefit would be made available to your beneficiaries upon death of the pensioner(s).
4. Commuted Value (lump sum transfer) is an option
When you leave the plan, either due to retirement or leaving the employer, most plans allow you to take a commuted value (lump sum). This lump sum can be transferred in part without immediate tax penalty to a LIRA (Locked-in Retirement Account), however often there is also a taxable portion to consider. You should always make sure that any immediate tax hit does not erode the assets available to you in such a way that you cannot equal your predicted pension income. This is a complex decision, and assistance from your financial planner will be valuable.
5. You are making contributions
Nearly all Defined Benefit pensions require a contribution from the employee as well as the employer. In fact, most DB pensions have relatively large contribution requirements of their employees in the range of 10 – 11% of your gross salary. You can be assured that the employer contributes at least as much as you do.
6. Limited Reporting
Many DB pension holders receive a statement only once annually. This is different than what you may be used to with your investment reporting. Since your value from a DB pension comes from the income you will be provided with at retirement, there is little need to receive more frequent statements as the ‘value’ is related to your years of service (and other factors), not specifically investment returns.
In our new video series, we answer common questions from our clients. In this video, Kelley Doerksen, CFP® explains the tax slips generated by different investment accounts and which slips you may expect to receive this upcoming tax season. Learn about the tax planning services we can provide you here.
TFSA (Tax-Free Savings Account)
Clients often ask if they’re going to receive any sort of documentation for Tax-Free Savings Accounts. The answer is no, you don’t get any sort of slips or reporting for your TFSA contributions or withdrawals. But it’s important that either yourself or your advisor team is keeping track of those contributions and withdrawals. You can find your TFSA room on your CRA MyAccount to make sure that you’re on track for your contributions and withdrawals not going over; however, be aware that CRA doesn’t report on a regular basis for those contributions, so it’s a good idea to also keep track of these on your own.
RRSP (Registered Retirement Savings Plan) and RIF (Retirement Income Fund)
You will receive receipts for these accounts. For an RRSP contribution, you’ll receive a receipt for January 1 to December 31 as well as one for the first 60 days which is that period from January 1 to the end of February in the year following. You can use your RRSP receipts to reduce your taxable income. Watch for these to arrive around mid-March, especially for the first 60 days receipt.
When you withdraw from a RIF or from an RRSP, you will also receive a receipt. This will be a T4, so T4RRSP if you’ve taken from your RRSP or a T4RIF if you’ve withdrawn from your RIF. This is going to be added to your income and you’ll use that receipt to report your income from that registered account.
For more information about TFSA vs. RRSP accounts, refer to our infographic.
For Non-Registered accounts, there is a lot more taxation involved and documentation to be aware of. You might receive a T3, which is a Statement of Trust Income, if you hold mutual funds. You could receive a T5, which is a Statement of Investment Income, which could be earned interest or dividends, etc. You may also receive a T5008, if there’s been a disposition of securities in your Non-Registered account. That slip will provide you the information that you need to file on that disposition, but make sure that you have the Adjusted Cost Base (ACB) on that form as well, otherwise you’re going to need to find out what that ACB is.
Another receipt that some of our clients receive is a Schedule K-1. This is a form for the IRS, so if you file a U.S. tax return, you’re going to need this Schedule K-1. If you’re a Canadian citizen only filing a Canadian tax return, that Schedule K-1 may or may not be important for you, and likely you’re not going to need to use it at all.
Some of these slips don’t come until mid to late March, so you should always wait until you’ve received all of your tax slips before filing your tax return.
If you need some assistance regarding your tax slips or filing your tax return, please feel free to reach out to us and/or your accountant/bookkeeper.
We often get asked what the differences are between a TFSA (Tax-Free Savings Account) and RRSP (Registered Retirement Savings Plan) account.
We’ve put together this summary to review the primary differences and rules pertaining to each account. If you have any questions, please reach out to us here.
TFSA (Tax-Free Savings Account):
There is no deduction available, but no tax on withdrawals
TFSA contribution limit is cumulative, less contributions; withdrawals provide room back (including growth) in the new calendar year
Can be used for short-term savings, mid-long term, and estate planning
Can name spouse as successor owner, and beneficiaries for estate planning
Withdrawals do not generate a tax slips; drawing money out does not impact income-tested benefits
You must be 18 years old in order to open a TFSA, and can contribute and withdraw based on the plan rules for your lifetime
Can invest using many of the same types of investments as within an RRSP or Non-Registered account
You might be required to pay non-resident withholding tax on US situated investments
There is no need at any time to convert your TFSA to an income plan, it can be held as-is until your death if desired
RRSP (Registered Retirement Savings Plan):
Deduction provided against T4 earnings; suitable if you are earning employment income, not dividends
Contribution room is limited to 18% of previous years’ earned income, less adjustments for pension contributions, up to a maximum specified by CRA each year. Accumulates if you don’t use it
Access available through the Home Buyers Plan or Lifelong Learning Plan without immediate tax consequences
Naming beneficiaries on an RRSP other than your spouse can have unintended tax consequences and it’s important to speak with your Financial Planner, Accountant, and Lawyer to determine your best course of action
Withdrawals are taxed as ordinary income
On death, an RRSP may be eligible for a “spousal rollover”, shifting taxation of the RRSP to the death of the recipient spouse
When withdrawing from RRSP assets once retired, most individuals are in a lower tax-bracket than during their working years which could result in favourable tax outcomes
Depending on your situation, a spousal RRSP could be used to accomplish long-term income splitting
You must convert your RRSP to a RRIF (Registered Retirement Income Fund) by age 71, and you must begin to withdraw a CRA mandated minimum at age 72
Both TFSA & RRSP Accounts:
You can’t deduct interest costs related to borrowing to invest in either a TFSA or RRSP
You can’t deduct investment management fees in either a TFSA or RRSP
You can’t claim a capital loss in either a TFSA or RRSP
Please reach out to us for further information regarding these accounts, or if you have a specific question pertaining to your individual situation.
Here are the contribution limits and cut-off dates for RRSP and TFSA contributions if you are planning to make one this year and have not already done so.
What is the contribution limit and deadline for RRSP accounts?
The cut-off date for your RRSP contributions to count toward reducing your income for 2021 is Tuesday, March 1, 2022. In order to meet this deadline, you should make your contribution by February 25 to allow for your deposit to clear your bank account. The contribution limit for the 2021 taxation year was 18% of your taxable income up to a maximum of $27,830, whichever is less. The contribution limit for the 2022 taxation year is a maximum of $29,210. If you have unused contribution room from previous years, you may use this room as well.
What is the contribution limit for TFSA accounts?
If you would like to contribute to a TFSA for 2022 the limit is $6,000 for the year, unless you have not maxed out your contributions. The maximum one could have deposited into their TFSA account since 2009 is $81,500 as of 2022. Please note that the Portfolio Managers will be processing these contributions between January 15 – February 11.
How To Make an RRSP or TFSA Contribution? Contributions can be made through one of the following methods:
Transfer from Non-Registered Account: If you have a Non-Registered account set-up with enough funds in it, you can simply send your Financial Advisor an e-mail indicating the amount you would like transferred from this account to your RRSP or TFSA. Instructions must be sent to us by 11:00am on Friday, February 25 in order to meet the deadline.
Online Banking Transfer (Bill Payment): Add your Custodian (“Credential Securities” or “National Independent Network”/”NBIN”) as a “Payee” through your online banking and enter your account number as the bill account number. If you need assistance finding your account number or are unsure who your Custodian is, please contact your Financial Advisor. If you choose this method, please also notify us with the amount you are contributing, so we can have your Portfolio Manager watch for it. Please note this must be submitted before midnight on Monday, February 28 in order to meet the deadline.
EFT from your Bank: You will just need to sign an EFT form if you have not already done so, which allows your Custodian (Credential or NBIN) to take the money directly out of your account with your consent. Once you have signed the form, you will need to email your Financial Advisor to indicate the one-time amount you are authorizing the Portfolio Manager to withdraw from your bank account and which account (RRSP or TFSA) you would like it deposited to. We must receive these instructions by Friday, February 25 at 3:00pm at the latest in order to process before the deadline.
If you have any questions or would like to book a video or phone appointment to review your accounts, please contact our office.
Here is a friendly reminder of the contribution limits and cut-off dates for RRSP and/or TFSA contributions if you are planning to make one this year, and have not already done so.
The cut-off date for your RRSP contributions to count toward reducing your income for 2020 is Monday, March 1, 2021. In order to meet this deadline, you should make your contribution by February 25th to allow for your deposit to clear your bank account. The 2020 contribution limit was 18% of your taxable income up to a maximum of $27,230, whichever is less. The 2021 contribution limit is $27,830. If you have unused contribution room from previous years, you may contribute more than the maximum, but one needs to be careful not to over-contribute.
If you would like to contribute to a TFSA for 2021 the limit is $6,000 for the year, unless you have not maxed out your contributions. The maximum one could have deposited into their TFSA account since 2009 is $75,500 as of 2021.
Contributions can be made through one of the following methods:
Transfer from Non-Registered Account: If you have a Non-Registered account set-up with enough funds in it, you can simply send us an e-mail indicating the amount you would like transferred from this account to your RRSP or TFSA. Instructions must be sent to us by 11:00am on Thursday, February 25 in order to meet the deadline.
Online Banking Transfer (Bill Payment): Add your Custodian (“Credential Securities” or “National Bank Financial”) as a “Payee” through your online banking and enter your account number as the bill account number. If you need assistance finding your account number or are unsure who your Custodian is, please contact our office. If you choose this method, please also notify us with the amount you are contributing, so we can have your Portfolio Manager watch for it. Please note this must be submitted before midnight on Friday, February 26 in order to meet the deadline.
EFT from your Bank: You will just need to sign an EFT form if you have not already done so, which allows your Custodian (Credential or NBIN) to take the money directly out of your account with your consent. Once you have signed the form, we will require an email from you indicating the one-time amount you are authorizing them to withdraw from your bank account and which account you would like it deposited to. We must receive these instructions by Thursday, February 25 at 3:00pm at the latest in order to process in time.
If you have any questions or would like to book a video or phone appointment to review your accounts, please contact our office.
When the time comes to withdraw from your RESP, most people have many questions. There are a few things to keep in mind when you wish to withdraw money for your student. Watch our video below to learn more:
First, let’s review some of the terminology.
When making contributions to your RESP, most people will earn CESG – Canada Education Savings Grants. That’s the 20% grant the government applies to certain contributions. When you withdraw from the RESP, the grants and the growth are described as EAP – Educational Assistance Payments. Both the grants and the growth are taxable when withdrawn.
There is another portion of the RESP called “Post-Secondary Education” withdrawal, or PSE. This is comprised of your contributions, and is not taxed when withdrawn.
A third term you should be familiar with is a “Proof of Enrollment”. This is needed every time your student makes a withdrawal from the RESP. It must include:
the student’s full name
the name of the institution they are attending
the semester start date
the year of the program and other information
There are many acceptable proof of enrollment documents, but most commonly we receive a letter from the registrar, an official timetable, or a tuition invoice. A letter of acceptance does not provide valid proof of enrollment.
There are limits on the EAP that can be withdrawn when your student begins their post-secondary program, and these depend on the qualifying time your student is enrolled for. However, once your student is enrolled, there are virtually no limits on how much of your contribution you can withdraw.
It is helpful to try to anticipate how likely your student is to earn additional income throughout their post-secondary careers.
When you withdraw EAP on behalf of your student, this money is taxable to them. We find that generally students will work less in their first two years of study as they often will be trying to get a handle on what university life is like.
In years where your student is earning less income, it may be beneficial to focus on withdrawing the taxable portion of the RESP. Additionally, should your student complete their studies and not need the full value of the RESP, it is much easier to withdraw your own contributions than it is to withdraw remaining grant and growth.
Knowing how to effectively use your RESP is not something you need to manage on your own. Providing the information discussed to your advisor will help us create a strategy for you to help minimize taxes and maximize the benefit of your RESP. For information please contact us.