We recently sent out a client update on high level RRSP and TFSA facts, as well as common tax strategies that are used with these two investment vehicles. We felt this information would be benefit our larger audience, thus included this in the blog below. Should you have any other questions, please don’t hesitate to reach out to our team. You may also fill out the form below and a team member will get in touch with you.
RRSP Quick Facts
- Deadline for 2019 tax year RRSP contribution is Monday, March 2, 2020.
- Any person, age 70 or younger as of January 1, 2020, can contribute as long as they have RRSP contribution room. Contribution room is based on earned income (such as employment income reported on a T4 slip). A RRSP must be converted to a RRIF by the end of the calendar year in which the person turned 71.
- Contribution limit for the 2019 tax year is 18% of earned income, up to a maximum of $26,500 and $27,230 for the 2020 tax year.* Unused contributions can be carried forward and used in future years.
- Contribution limits can be checked by visiting My Account through the CRA website.
*This figure will vary per individual based on any pension adjustments, pension reversals and unused contribution room carried forward from previous years.
Common RRSP Strategies
- Contribute and deduct only as much as necessary to bring down taxes owing for the year to $0, within individual contribution limits.
- Contribute and deduct only as much as is necessary to bring your taxable income down to the top of the income bracket just below your current bracket. This allows for maximum value on each dollar contributed and saves unused contribution room for future years when income may be higher.
- It is possible to contribute to a RRSP and deduct only a portion of the contribution against your income for the current tax year. This can be a handy way to invest while receiving the most value from your contribution.
TFSA Quick Facts
- There is no deadline to make TFSA contributions since these are not deducted from income.
- Canadian residents who were 18 years of age or older in 2009 (the first year of the TFSA), now have a contribution limit of $69,500 which includes the 2020 addition of $6,000.
- Unused contribution room is carried forward and any withdrawals made in the current year will increase the TFSA room for the next calendar year by that withdrawal amount, plus the new year’s contribution limit (simply, the contribution room is ‘put back’ the next year if you withdraw).
- There is no tax on the growth, income or dividends of investments held within a TFSA and generally, any investments eligible for a RRSP are also eligible for a TFSA.
Common TFSA Strategies
- Hold Canadian stocks as opposed to American companies. Dividends from American companies will have a withholding tax applied at the time they’re paid, this tax can’t be recovered. The same withholding tax is applied to shares held in a non-registered account but there is a way to recover some of this tax. Withholding tax is not applied to dividends paid from American companies held within a RRSP.
- TFSAs make sense for nearly every Canadian age 18 and over.
Generally, the CRA allows for the deduction from income of “fees to manage or take care of your investments… (and) fees for certain investment advice”. Section 20(1)(bb) of the Income Tax Act allows fees (not commissions) paid to an investment counselor (such as CWB Wealth Management) for "advice on buying or selling a specific share or security… or for the administration or the management of the shares or securities of the taxpayer".
This allowance is currently only for fees in non-registered accounts (not TFSAs or RRSPs). Although there has recently been favourable discussion from the CRA regarding shifting of fees from registered accounts to non-registered accounts to allow for greater deducibility. We’ll continue to monitor this and will connect with our clients as it develops. We encourage you to discuss this option with your accountant.
Deferred Income Annuities
The latest Federal Budget permits Canadians to move a portion of their savings out of a RRIF and into an annuity, which defers payments until age 85 rather than the usual starting age of 72. Known as an advanced life deferred annuity (ALDA), this strategy may be a great option for many people that struggle with the fear of outliving their savings or who are looking for enhanced long-term cash management options.
Rather than requiring a minimum amount of income on the entire amount of a RRIF to be paid every year, an ALDA allows for a portion (up to 25%) of a qualifying plan to be placed into an annuity with payments starting at the end of the year the annuitant turns 85.
In general, the ideal way to approach your taxes is to gain knowledge now so you can plan an effective strategy ahead. It's important to know your tax bracket/rate as it guides you to make optimal tax planning decisions, whether you want to contribute to an RRSP, TFSA or implement a different strategy. If you need support to ensure you have the right plan in place, fill out the form below or reach out to us at 780.429.3500 or [email protected] and we’d be happy to help.