Investment Plans

If other tax-sheltered investments have been maximized or a larger sum of money is being invested, a non-registered account may be the appropriate choice.  Non-registered accounts (also known as cash or investment accounts) are taxable, however corporate class investments can limit taxable distributions (income) on investments leaving tax efficient capital gains for the future when the investments are withdrawn.

When to consider using a non-registered account:

1. A corporate holding company has been set up for business profits
2. Investment of an inheritance or employment severance
3. Sale of a business, farm or farm quota, or real estate
4. Taxable income isn’t high enough to warrant adding to an RRSP
5. All TFSA contribution room has been used

Tax Free Savings Accounts (TFSAs) are an excellent option to save and grow your hard earned money.  Growth (capital gains), interest and dividends earned on investments in TFSAs are not subject to tax, and withdrawals made from a TFSA are all tax-free.  Those 18 years of age and older accumulate TFSA contribution room each year and unused contribution room is carried forward to future years. Contrary to what the name might suggest TFSAs aren’t restricted to cash investments or savings accounts, there are a wide range of investment options including equity, bond and balanced investments. Click here to view current TFSA contribution limits.

Three great reasons to open a TFSA:

1. Establishing an emergency fund
2. Saving for an upcoming expense such as a new home, renovation, trip, wedding or maternity leave
3. Saving for retirement in addition to or as an alternative to an RRSP

Funds invested into an RRSP reduce your taxable income and growth within the plan is tax-deferred until withdrawals are made.  The theory behind the benefits of saving in an RRSP is that most individuals are in a higher tax bracket while contributing to an RRSP than when withdrawing, deferring tax to a time when you will pay less.  In general you receive RRSP contribution room of 18% of your previous years income to a maximum annual limit. The maximum amount changes each year, click here to view the current annual RRSP limit.  Your contribution room is reduced by any pension contributions you have made and you can carry forward your contribution room indefinitely.  The RRSP contribution deadline is 60 days after the calendar year end.

In the year you turn 71 you must dissolve your RRSP, however an RRSP can be converted to a RRIF account.  A RRIF has mandatory withdrawal rates based on your age (click to view withdrawal factors) and any withdrawals are treated as pension income and are taxable.  Funds remaining in the account retain their tax sheltered treatment.  RRSPs can be converted to a RRIF before age 71 as well which may make sense for those wishing to take some income earlier.

Spousal versions of RRSPs and RRIFs can allow the higher earner to contribute in the name of their spouse.  Since the lower earning spouse will often continue to be in a lower tax bracket in retirement, it may make sense to have them receive additional income in retirement to save on income tax.  The contributing spouse must have sufficient contribution room, and withdrawals of funds contributed cannot be made for 2 years following the investment.

When you leave an employer who has a pension plan you may be given the option to transfer your pension funds into a LIRA.  LIRAs allow you and your professional advisor to control and make choices on the investments within the account.  There are some exceptions but in general funds in this account are locked-in which means they cannot be withdrawn.  Even though you have left a pension plan the funds within your LIRA are meant to be used down the road for your retirement.

Similar to the RRSP and RRIF relationship, a LIRA must be dissolved at age 71 and can be converted to a LIF.  LIFs not only have a minimum withdrawal rate but also have a maximum rate which regulates income levels in this pension-like fund.  LIRAs can be converted to a LIF prior to age 71 and as early as age 55 should you require the income.

RESPs are a great tool to save for your child’s future. The first $2,500 contributed annually attracts a 20% Canada Education Savings Grant (CESG). There are additional grants and bonds that are available if household income is less than certain thresholds. Unused contribution room does carry forward but CESG will not be paid on amounts over $5,000 per child per year. Funds inside an RESP grow tax free. Proof of post-secondary enrollment is required to redeem; your capital is redeemed tax-free while the grant and growth is taxed in the child’s hands. Click here for more details on RESPs