In this edition of Questions From Clients, Kelley Doerksen, CFP®, CIM® explains how RESPs (Registered Education Savings Plans) work. Learn about some of the key concepts surrounding RESPs such as grants, contributions, and withdrawals.
RESPs are a very effective way to save money for your child’s post-secondary education as you receive grants from the Government when you make contributions to the RESP.
An RESP will provide you with a 20% grant from the Government when you make contributions. You can receive up to $500 a year in grants. However, if you’ve missed some years of making contributions, you can go back and you can receive up to $1000 a year of the current year’s grants and previous year’s missed grants. You can continue to receive grants for your child until your child is 17, so long as you’ve started making contributions prior to their age 16.
When you go to withdraw from an RESP, although there are some rules and regulations, it’s actually fairly simple. When your student starts University or Post-Secondary, so long as they’re in a qualified post-secondary institution, you can begin withdrawals.
The student will need to provide proof of enrolment, and from there, RESP withdrawals can be made. There is no limit to how many dollars of contributions that can be taken out, however in the first year of school, there is a limit to the amount of grants and growth that can be withdrawn during the first 13 weeks of school.
The nice thing about an RESP is that your contributions have already been taxed when you’ve made the contribution initially to the RESP, and you won’t pay any tax on the contributions when they are withdrawn.
The grants and the growth are going to be taxed in the hands of your child. Many students don’t pay tax or pay very minimal tax while they’re students in University; therefore an RESP is a very effective way to income split from your assets to your child and potentially see no tax on the grants and the growth when that withdrawal is made.
To learn more about the terminology and specific rules pertaining to RESP accounts, please watch this video. If you have questions about how to use an RESP, please contact us and we’d be happy to help.
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.
3. Guarantees
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.
If you have questions about how your Defined Benefit Pension interacts with your overall financial plan, please reach out to us and one of our financial planners would be happy to walk you through your specific details.
One of the objectives of estate planning is to review and minimize potential taxes on your remaining assets.
Lets review how some common assets (RRSP/RIFs, TFSAs, Non-Registered Accounts, and Principal Residences) are taxed upon death.
RRSP (Registered Retirement Savings Plan) / RIF (Retirement Income Fund)
The accounts can be left to a spouse as a named beneficiary. This transaction will generate a tax slip, but this is not a taxable event. The spouse can receive the proceeds of the RRSP/RIF.
In some circumstances, the RRSP/RIF could also pass to a dependent child without triggering tax.
TFSA (Tax-Free Savings Account)
No tax and no reporting is necessary.
If a spouse is named as the successor owner, the full value of the TFSA can become the spouse’s with no tax impact (even if the successor owner spouse may have no TFSA room available).
You can name beneficiaries such as children, and the assets would be provided once appropriate legal requirements are met after death.
Non-Registered Account
Death is a taxable disposition and all assets are deemed disposed on the date of death (meaning they are considered sold). The applicable gain or loss must be considered and tax paid.
Principal Residence
No tax is owing on the sale of a principal residence, however it must be noted when filing taxes that the property was deemed disposed.
If you have a question pertaining to your specific financial situation or need some assistance with estate planning, please reach out and our financial advisors would be happy to assist you. You can learn more about the estate planning services we provide here.
We invite you to join us for an upcoming webinar, Protecting Your Estate hosted by Daniel Collison on March 16, 2022 7:00-8:00pm. Register for the webinar here. The registration form enquires who invited you to this event – please fill ‘Blackburn Davis Financial’ in this field. Please feel free to pass this invitation along to any family member or friend you think would find it useful.
If you have any questions or would like further information about this event or speaker, please reach out to us.
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.
Non-Registered Accounts
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.
