Blogosphere – Page 5 – Doug Carroll

5undamentals – TFSA – Tax-free Savings Account

1. What is a TFSA?

Purpose – The TFSA is a flexible savings plan that can be used (and re-used) for any savings purpose over a person’s lifetime. It is registered under the Income Tax Act, entitling it to special tax treatment. Compared to other registered plans, the TFSA has relatively few rules to understand and follow.

Investment options – Qualified investments are similar to RRSPs and other registered plans. Options include money accounts, deposits with a regulated financial institution and guaranteed investment certificates; stocks, bonds and most other securities listed on a designated stock exchange; and mutual funds and segregated funds.

2. Who can use it?

Eligible contributors – To use a TFSA, a person must be a Canadian resident over the age of 18. When you open an account, your financial institution will require proper identification, your Social Insurance Number (SIN) as a tax requirement, and other information according to securities regulations.

Age 18 contributors – A person must be 18 to open a TFSA, and will be entitled to the TFSA dollar limit (discussed below) for that full year, not pro-rated by birthday. If the person cannot enter a contract until age 19 if that is the province’s age of majority, the TFSA limit/room for the age 18 year carries forward.

Upper age limit – There is none.

Foreign citizens – Eligibility is based on being a legal Canadian resident, regardless of citizenship. For Americans (and possibly others), their home country tax rules may influence whether to use a TFSA.

3. How it works – Key tax features

In, within and out – Whereas RRSP contributions are deductible and withdrawals taxable, for TFSAs:

Contributions are after-tax, meaning they are NOT deductible in calculating current income.
Income and growth within the plan are NOT taxable.
Withdrawals from the plan are NOT taxable.

Over-contributions – If your TFSA contributions exceed your TFSA contribution room recorded at the beginning of the year, you are said to have an excess TFSA amount. If this is the case at any time in a month, you are liable to a penalty tax of 1% on your highest excess TFSA amount in that month.

Non-resident contributions – If, at any time during the year, your TFSA contains contributions you made while a non-resident of Canada, you will be subject to a tax of 1% per-month on these contributions.

4. Contributions and withdrawals

TFSA dollar limit – As a Canadian resident who is 18 at any time in a year, you are entitled to the annual TFSA dollar limit. The limit was $5,000 from 2009-12, $5,500 from 2013-14, $10,000 in 2015, $5,500 from 2016-18, and $6,000 in 2019-20. It is indexed to inflation and rounded to the nearest $500.

Unused room – Your unused room is carried forward for you to use in any future year.

In-kind transfers – You may transfer securities in-kind to a TFSA, but the transaction may trigger tax. If it originates from a non-registered account, there is a deemed disposition at fair market value (FMV) that may result in a taxable capital gain. If the source is your RRSP, it will be treated as a withdrawal at FMV.

Credit for withdrawals – When you make a withdrawal, you get a dollar-for-dollar credit to re-contribute to your TFSA. The credit applies the following January 1^st. If you re-contribute in the current year, you may exceed your contribution room and face the 1% penalty tax.

TFSA-to-TFSA transfers – If you want to move funds from one TFSA account to another, whether at the same institution or another, do so as a direct transfer so as not to affect your TFSA room. There is no prescribed form for this purpose, so some companies use their own form or use CRA Form T2033.

Loan interest – TFSA income is tax-exempt, so interest on a loan to invest in a TFSA is not deductible.

5. Life events, and death

Income splitting with spouse / common law partner (CLP) – Generally if you make a gift to a spouse/CLP that is put into passive investments, tax on that income will be attributed to you the giver. However, those attribution rules don’t apply if your spouse/CLP places the gifted money in a TFSA.

Relationship breakdown – A direct transfer of a TFSA to a separated spouse/CLP will not affect either person’s TFSA room. The recipient’s room is not reduced by the receipt, and the transferor receives no credit to recover room as this is not a withdrawal. You must be living separate and apart at the time of transfer, and the transfer amount must be pursuant to a separation agreement or court order.

Becoming non-resident – If you become non-resident, there is no tax on a TFSA at that event nor while you remain non-resident, and any earnings or withdrawals will still not be taxed in Canada. You will not accrue any annual room while non-resident. Withdrawals are allowed, and those will be credited toward room the following year, but you may only use that room if you re-establish Canadian residency.

Death: Designated beneficiary generally – You may designate one or more beneficiaries on the TFSA contract, and he/she/they will receive the plan value at date of death without any tax reduction. Any growth from time of death until the transfer is taxable to the beneficiary/ies.

Death: Spouse as designated beneficiary – If you die having designated your spouse/CLP as beneficiary on the TFSA contract, he/she may contribute and designate all or a portion of the payment as an exempt contribution to their own TFSA, without affecting their own unused TFSA room. Again though, any growth from time of death until transfer is taxable to the spouse beneficiary. To qualify for the rollover, transfer must occur before the end of the calendar year after the year of death.

Death: Spouse/CLP as “successor holder” – If you die having designated your spouse/CLP as successor holder, he/she becomes the new holder of the TFSA without affecting his/her existing TFSA room. This designation will be effective whether it is made on the TFSA contract or in the original holder’s Will. In this case though, the transfer is deemed to occur at the date of death, so any post-death growth will not be taxable as it will occur within the survivor spouse’s TFSA. Once more, to qualify for the rollover, transfer must occur before the end of the calendar year after the year of death.

Death: Spouse as estate beneficiary – A TFSA paid to the deceased’s estate may be subject to provincial probate tax. A spouse/CLP who has a sufficient financial entitlement as a beneficiary of the estate may make an exempt contribution with the same effect as being a designated beneficiary on the TFSA contract. Interim growth is again taxable to the spouse/CLP. To qualify for the rollover, transfer must occur before the end of the calendar year after the year of death.

Death: Unused TFSA room – Unused room cannot be transferred to anyone at death.

5undamentals – RRSP – Registered Retirement Saving Plan

Published version: Linkedin

1. Nature of an RRSP

Purpose – The RRSP is designed to assist with long-term savings, generally funding toward your retirement years. Being ‘registered’ with the Canada Revenue Agency (CRA), it is entitled to beneficial tax treatment, while having to comply with stringent rules governing its ongoing use and operation. As the owner of the RRSP, you are known as the annuitant.

Investment options – Qualified investments for RRSPs include money accounts, deposits with a regulated financial institution and guaranteed investment certificates; stocks, bonds and most other securities listed on a designated stock exchange; and mutual funds and segregated funds.

Key tax features – Contributions to an RRSP are deductible in calculating current income. Income and growth within the RRSP are not taxed. Withdrawals are taxable in the year taken. This defers tax and facilitates lower ultimate tax if the annuitant is at a lower tax rate in future.

2. Funding your RRSP

Contribution limits – A person is entitled to annual contribution room equal to 18% of the previous year’s earned income, limited to an annually indexed dollar maximum. For your 2019 tax return, the dollar limit is 18% of 2018 income, to a maximum of $26,500, which would be reached at income of $147,222.

Spousal plan – If you have a spouse or common law partner (CLP), you may contribute to a spousal RRSP. You will get a current deduction, and the eventual withdrawal will be taxable to your spouse/CLP. However, if a withdrawal is made the same year or the next two years, the income will be attributed to you. Otherwise this can be an effective income splitting strategy.

Timelines – In order to claim the deduction, generally a contribution must be made in the calendar year, or within 60 days of the year-end. To qualify for deduction against 2019 income, the contribution deadline is Monday March 2, 2020.

Unused room – If you do not make a contribution, your unused room is carried forward for you to use in future years. In fact, even if you make a contribution, you can either claim the deduction in that year or carry the deduction forward to claim against income in a future year.

Over-contribution penalty tax – Contributions in excess of a person’s available room are subject to a tax of 1% per month that the excess remains in the RRSP. A lifetime $2,000 over-contribution amount provides relief for inadvertent over-contributions, but there is no deduction allowed when this happens, and if it is deliberate then the penalty tax will still apply.

3. Access before retirement, without triggering tax

Generally – A withdrawal from an RRSP is normally taxable in the year taken. There are two programs that allow non-taxable withdrawals, so long as funds are repaid to the RRSP according to regulated timelines. If repayment is not made, the unrepaid amount is taxable, and no RRSP room is recovered.

Home Buyer’s Plan (HBP) – Qualified first-time homebuyers may each take up to $35,000 to be used toward a home purchase. You must buy or build before October 1^st of the year after the year of the withdrawal. Repayment may be spread across 15 years, beginning 2 years after the withdrawal year.

Lifelong Learning Plan (LLP) – You can withdraw up to $$10,000 per year to a maximum of $20,000. Funds must go toward full-time training or education for you or spouse/CLP. Detailed rules determine when you cease to be a student, following which you have 10 years to repay the withdrawal.

4. Taking funds from your RRSP

Cash withdrawal – When you withdraw money from your RRSP, the amount taken is taxable to you in that year. Your RRSP administrator will withhold a percentage for taxes and remit that to CRA: 10% on amounts up to $5,000, 20% from there to $15,000, and 30% on amounts over $15,000.

Tax-free transfers – At any age you may make a tax-free transfer to an annuity or registered retirement investment fund (RRIF). An annuity pays a guaranteed fixed amount for life or a set number of years. A RRIF can be invested like an RRSP, but has a mandatory minimum annual percentage withdrawal. RRIF payments are taxable income, but there is no withholding tax on RRIF minimum payments.

Mandatory maturity – No further contributions may be made after December 31 of the year that the annuitant turns 71. No later than that same December 31 year-end, an RRSP must be matured by one or more of the combination of cash, annuity or RRIF.

Spousal transfers – If your relationship with your spouse/CLP ends, an RRSP may be transferred between you without tax applying. It continues to be an RRSP in the recipient’s hands, subject to tax on eventual withdrawal.

5. Procedure and options on death

Income inclusion – On death, the full amount in the RRSP is treated as taxable income. It is added to all other income earned in the annuitant’s terminal year, which is January 1^st to the date of death. This income inclusion applies even if the RRSP assets are directed to a named beneficiary.

Named beneficiary – An annuitant can name a beneficiary to receive the RRSP; otherwise the RRSP administrator will pay the plan proceeds to the estate of the deceased. In the estate, the RRSP assets will be distributed in accordance with the deceased’s Will, or by the rules of intestacy if there is no Will.

Tax-free rollovers – If the named beneficiary is a spouse/CLP, there may be a tax-free rollover to the RRSP of that person. If the RRSP was paid to the estate, there may also be a rollover to a spouse/CLP who has a sufficient financial entitlement as an estate beneficiary. Rollover may also be available to a disabled financially dependent child or grandchild. Limited rollover may be possible if that child is not disabled.

My Money Mirror comes into 2020 focus

Published version: Linkedin

From the Today Show to The View and innumerable points in between, Barbara Walters’ voice has been heard by millions of us over the last half century or so.

And while it’s hard not to conjure up Gilda Radner’s “Baba Wawa”, the iconic phrase that the real Barbara is best known for is her crisply enunciated welcome to the ABC TV newsmagazine 20/20. Of course the show title is an allusion to 20-20 visual acuity, which her careful phrasing so effectively captures.

This all came to mind for me as we turned the calendar over into the current 2020 year and decade, while reflecting on My Money Mirror.

What is My Money Mirror?

Whether it came out of a dream or is a remnant of a sci-fi/fantasy moviescape (or both), I’ve long had this notion of a money mirror out in the distance before me. It runs infinitely from left to right, and I’m always moving steadily toward it.

At a younger age, it doesn’t even appear that there’s a mirror at all. Being so far off, it could very well just be continuing sky. But as time and I myself roll forward, a dot appears on the horizon that grows and begins to take form, eventually blocking part of the view. I want to see past it, but as I drift to the left, it follows my move. Then I tack to the right, and it matches me again.

What is this thing, and why is it getting in my way? And that’s when it comes to me — it’s me.

Why a mirror?

Unless you were born into large wealth, you will spend much of your early life saving up a store of your excess labour — what we call money — that will be needed to sustain you in your later life. At some point you will (hopefully) cross over from the need-to-save to the freedom-to-spend. Maybe that’s more like an inflection than a reflection, but then my cute aliteration would be lost, so I’m sticking with my money mirror.

It’s the notion of retirement being the point at which there is enough stored wealth to comfortably and confidently fund the rest of your life. That’s a very different thing from merely reaching a chosen age or ceasing to work. The mirror is a way of visualizing the distinction between the purpose of your journey and the observations along the route.

Specifically, I want and need to visualize who I am on the other side of that divide. Ideally the image will be sharply defined well before reaching the mirror’s surface. Otherwise, without adequate preparation I might find myself on a collision course with an ever-growing dark mass with undulating edges —yeah, maybe this did originate as a nightmare.

Practical reflections on the year, and decade that was

The blurry blob aside, this journey toward clarity truly is the background visual when we look over the family finances each year-end. Note the “we” in that sentence, as this really is a team exercise.

Years ago when I was on my own, my attention was simply on saving something. I had no particular goals other than to be in a regular and reasonably informed habit, and I don’t apologize for that. To require more of a young person could lead to a very unhealthy stressful relationship with money.

These days as a couple dependent on one another and a family to raise, we have to be that much better informed and more targeted. We’re also learning from our experiences, so we have better intuition without having to be constantly looking, but we still run the numbers.

The difference this year is that it’s also a decennial marker, as we enter 2020. Looking back at our net worth progress over the last decade gives us confidence as we pivot from past to future. There’s no question that we’re still on the journey, but things really are getting clearer by the year.