The first thing to note is that RDSP accounts are a tax-sheltered account. And that means that the assets within the account can grow without needing to pay tax on the growth of the investments until such time as withdrawals are made on the account.
Another thing to note about the withdrawals is that not all of the dollars that you withdraw from an RDSP are taxable.
Contributions made to the RDSP account won’t be taxed as they have already been tax paid dollars that are going into the account. It will just be the grants and the growth and any bonds that are paid into the account which would be taxed on withdrawal.
Another piece of information about RDSP taxation is that the assets in an RDSP are sheltered from provincial assistance programs. Most programs have an asset limit with which a person eligible for Disability Tax Credit can accumulate assets. And in Alberta, AISH does not allow individuals to hold assets greater than $100,000 currently, however RDSP dollars do not count towards that $100,000 limit.
RDSPs are taxed when withdrawn, but again the taxation is only going to be occurring on grants, growth and bonds. And when those withdrawals are made, the withdrawals do not affect federal income-tested benefits such as guaranteed income supplement or old age security.
When withdrawals are made from the RDSP account, the withdrawals are going to be a proportionate representation of contributions, grants, bonds, and income in the account; and so you will be taxed accordingly on those withdrawals.
Withdrawals made within 10 years of the most recent grant or bond, should be avoided whenever possible because they will trigger a claw back of a proportionate amount of the grant and bond.
You may also be wondering what occurs on the death of the beneficiary of the RDSP account. If a grant or bond has been paid into the account within 10 years at death, those grants and bonds would need to be repaid to the government. But if 10 years has elapsed since the last grant or bond has been paid, the proceeds of the RDSP account in full would form part of the beneficiary’s estate.
If the beneficiary of the RDSP does have testamentary capacity, it is recommended that a will is drawn up so that the proceeds of those assets in the RDSP and others can be distributed according to the terms of the will.
And it is also important to know that an RDSP does not replace a disability trust for the beneficiary.
If there is an inheritance contemplated for your family member that has access to the Disability Tax Credit, there can be some trust planning done around any inheritance that you may desire to provide to that beneficiary. And it is important that you speak to a lawyer when contemplating that as part of your own estate planning objectives.
RDSPs can be complex vehicles, but so valuable and important to your family and to the financial future of the beneficiary of that plan. If you have any questions, please reach out to us and we’re happy to discuss.
Today we’re talking about another common question from clients – what is a RIF and how does it work?
A RIF is simply a conversion from your Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund. So the income version of the tax sheltering that you receive from a registered account. A RIF is set up so you can continue to enjoy growth on your assets without paying tax as the assets grow.
Of course, you are going to be taxed when you take money out of your RIF. So how does that work?
You have to convert your RRSP to a RIF at age 71, and you must begin to draw income out of the RIF at age 72.
You can convert to a RIF prior to that if you choose to. You can also convert partially to a RIF from your RRSP account if you choose to, which can be a great way for you to use the pension tax credit for example.
So how much do you take out of a RIF when it’s time to convert? You have to take out a designated amount that’s specified by the Government as a percentage of your assets. Your assets will be calculated on December 31 of the previous calendar year and a percentage applied to it based on what CRA determines. This will give the minimum amount that you have to take out of your RIF once it’s in RIF format. You can always take more out of your RIF if you choose.
When you take money out of your RIF, it is taxed as ordinary income. The RIF minimum will not be taxed immediately, but you need to consider it in your tax planning for the year. Anything over and above RIF minimum will incur a withholding tax, and that portion will be taxed as you go. You can ask to have your RIF minimum taxed as you go as well, but it’s not automatic.
Another common question we get asked is whether you are taxed twice on a RIF? And the answer to that is absolutely not.
When you make a contribution to your RRSP in your working years, typically you are at a much higher income than you are in your retirement years. Often this means you get a great tax benefit throughout your working career to make those RRSP contributions. Following that up, you pay a much lower rate of tax when you draw that money out from your RIF.
So are you taxed on your RIF? Absolutely, but you’re certainly not double-taxed. And typically, you are seeing a significant benefit in terms of tax planning from your working career to your retirement years.
If you have any questions about how your RIF fits into your financial plan, please contact your advisor or give us a call.
As 2022 comes to a close, it is an excellent time to review your finances and plan for the year ahead. Here are 5 financial boxes you should check off before the year ends.
1 – Take advantage of your company benefits.
Most employer sponsored health plans turn over at the calendar year end. If you have benefits remaining, be sure to schedule some time to get that massage, see your physiotherapist or arrange the dental cleaning you’ve been putting off. Now is a great time to review your coverage overall, and start planning for next year especially if you’re not quite sure what your coverage provides. Bonus: Pull out your life, disability, and any other insurance coverage you hold. Review your beneficiaries, the amounts of the coverage, and when/how it would pay out. Contact your financial planner to help you determine if you have what you need.
2 – Review your registered contributions and your income for the year.
You have until the end of February of the following calendar year to contribute to your RRSP or a spousal RRSP to reduce your taxable income for the current calendar year. Talk to your financial planner who can help you optimize this.
3 – Review your fixed expenses, recurring expenses and your borrowing costs.
Sitting down at least once/year to look at your financial commitments can help put your finances into perspective. Borrowing costs have increased dramatically for some in 2022, and now is a great time to make sure you’re compensating for these increases in your variable spend or elsewhere if necessary. Bonus: set a calendar reminder to review your cash flow quarterly.
4 – Consider your goals for next year plus the next few.
Determine how much those goals might cost. Sit down with your financial planner to help you find the best source of money to tap into to achieve these goals.
5 – Make a plan for charitable contributions.
Review who you’ve donated to and if you want to make further donations for the calendar year. Donations should be complete by the end of December to use for the current calendar year income or saved for future years. If you have securities that have appreciated, consider a donation of securities in-kind. Bonus: Review the profiles of the organizations you donate to at charityintelligence.ca.
If you need assistance with any of these financial planning items before year-end, please reach out to us.
As we approach the end of the year, some clients may have questions about capital gains and losses that have occurred in their portfolio.
Watch this video to understand what capital gains and losses are and how they may impact your taxes.
Today we are discussing capital gains and losses.
Capital gains and losses are in reference to a taxable account and today we are discussing them as they relate to stocks, although capital property is another variety of property that they can apply to.
Capital gains and losses occur when you dispose of a stock at higher or lower than your adjusted cost base (ACB).
Your adjusted cost base (ACB) is the total price that you have paid for your stock. In addition, you can add some of the cost that you had to acquire the stock, such as commissions, to the adjusted cost base.
A capital gain occurs when you sell your stock for more than your adjusted cost base. A capital loss occurs when you sell your stock for less than the adjusted cost base.
Capital Gain
Let’s say you paid $100 for your stock and you sell it for $150. You would have a capital gain of $50 – the difference between your sale price, and in this example, your adjusted cost base.
Halfof the $50 is taxable, so $25 would be taxable for you in the year that you dispose of the security.
Capital Loss
Conversely a capital loss would happen if you sold your security for $75.
You’ve incurred a loss of $25 and halfof that – $12.50,can be used to reduce any capital gains that you’ve experienced in the year that you’ve sold your security, three years prior, or essentially indefinitely going forward.
Capital gains and losses are in reference to a taxable account (Non-Registered Accounts). They do not apply to Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs).
Capital gains and losses can be used for tax planning, so please reach out to our team if you have a tax planning situation that you need assistance with. Learn more about the tax planning services we provide here. If you have any further questions about capital gains and losses, contact us here.
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.
