Is it possible to bet the benefits of both an RRSP and a TFSA in one account? According to draft legislation, such an account could launch in Canada in 2023. The proposed account is the Tax-Free First Home Savings Account (RHSA). Currently, the RHSA is part of draft legislation, it is not approved as of yet, if it is approved, some of the details could change. It is expected to launch in 2023, the information we have at the moment indicates the FHSA is intended for residents of Canada, who are at least 18 years of age and are first-time homebuyers. In order to qualify as a first-time homebuyer, you cannot own a principal resident at any time during the calendar year you open the FHSA, or at any time in the four preceding calendar years.
So, this proposed account is intended to help first-time home buyers save for a brand-new home. The FHSA combines the features of an RRSP and a TFSA. If you qualify to open an RHSA, there is a lifetime contribution limit of $40,000. The per-year contribution limit is $8,000. If you don’t use that full amount in one year, the contribution limit rolls over. Similar to an RRSP, the money you contribute to an RHSA is tax deductible. You get a full tax deduction for every dollar you add to the account. Once in the FHSA, the money grows tax-free and can be withdrawn from the account without any tax consequence, similar to a TFSA. Your TFSA contribution room and RRSP contribution room are separate from the FHSA, so contributions to the FHSA will not impact your contribution room for the RRSP and TFSA. Investments permitted inside the RHSA are the same as those for TFSA and RRSP. The account is intended for first-time homebuyers, so once a withdrawal is made, you must buy or build a home by October of the following calendar year. So, if you withdraw funds from the FHSA in February of 2023, you have until October 2024 to get your home. You cannot use the funds in the FHSA for a rental property or cottage, the funds in the FHSA must be used for your principal residence. The account can remain open for 15 years. However, it must be closed by the end of the calendar year following the withdrawal. As well, any unused funds can be rolled into your RRSP without impacting your RRSP room. For example, let’s say you had $40,000 in your FHSA and in February of 2023 you withdraw $30,000 to put toward a home. That means you would have until October 2024 to get the home and the FHSA would have to be closed by the end of December 2024. Also, the unused funds, $10,000 in our example, could roll over to your RRSP. The rollover does not impact your RRSP room, if you had $5,000 of RRSP room, you could roll the $10,000 remaining in the FHSA into your RRSP, all of it would go to your RRSP and you would still have $5,000 of RRSP room. If you withdraw from the FHSA but don’t use the money towards a home, the withdrawal will be taxed. The withdrawal is only tax-free if it's used for its intended purpose – which is purchasing your first home. As well, at the end of the 15 years or after you purchase your home, if you don’t roll the remaining funds in the FHSA to your RRSP, it’s taxed. The Tax-Free First Home Savings Account is draft legislation. It is expected to launch in 2023 and could be a powerful tool to help Canadians save for a home. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning How much we spend in retirement is a key component of our overall retirement plan. Recently, I wrote a column about how retirees often don’t spend all of their savings in retirement. The data in the article was based on research conducted by the Employee Benefit Research Institute (EBRI), they did additional research to uncover why people spend the way they do when they retire. This research was conducted in 2020, they surveyed 2,000 individuals between the ages of 62 and 75, 97% of which reported being retired, and the findings were released in early 2021.
Key findings: people generally wish they saved more, only 18% of respondents reported that they had saved more than what was needed, and 46% said they saved less than required. Most don’t want to spend down their assets, despite the comment above about folks wishing they’d saved more, only 43% of those in the study intended to spend down all or a significant portion of their assets in retirement. The majority planned to only spend a portion of their assets, just the interest or expected their investments to show growth in retirement. Fear of running out of money isn’t the primary motivator: when asked about the reason for not spending down assets in retirement, savings for an unforeseen cost was actually the most common response. A close second was feeling that spending down assets is unnecessary, third and the most common rationale was wanting to leave as much as possible to heirs, feeling happier when the account balance remains high was fourth, and fifth on the list was fear of running out of money. Priorities change during retirement. Staying healthy proved to be by far the most important goal at the time of retirement, 81% said this was very or extremely important. Health became even more important as retirement progressed. In stark contrast, traveling became less important for a quarter of the folks in the study. The reality of retirement is highly aligned with how they expected or planned for their retirement to be. The findings of the study were more or less what I expected. However, the fact that only 24% of folks said retirement matched their expectations was a surprise. In my view, the way we approach finances, our view of money, and how we collectively save and spend, is largely learned behaviour. For decades, we diligently work to have money and form financial patterns that are hard to change. I believe some findings in the study reflect that. This isn’t a bad thing. If you are content with your current level of spending and having a bit extra provides a feeling of security, then do that. I think it’s important to be aware of financial behaviour, but we don’t necessarily have to change it. Chat with your financial professional to ensure your plan is properly updated. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representatives of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning In the first 60 days of the year, you can contribute to your RRSP and use the tax deduction on your prior year’s tax return. During that period, I often get the question: is it wise to contribute to an RRSP, or is it better to put that money in a TSFA? Ideally, you’ll want to contribute to both, however, the budget does not always allow for that to happen.
As such, I will pass along a few guidelines to help make the decision. To start, a quick review of the basics: RRSP stands for Registered Retirement Savings Plan and TSFA stands for Tax-Fee Savings Account. The RRSP offers a tax deduction for any money contributed to the account. This is a significant benefit, one not matched by the TFSA. One benefit of both the RRSP and the TFSA is that any money contributed to the account grows tax-free. Both RRSP and the TFSA limit the amount of money you can contribute. There is a formula based on the earnings from the previous year’s income that determines your RRSP room. For the TSFA, it is a fixed annual amount. In both cases, unused room carries forward. Unfortunately, when you withdraw funds from your RRSP, the money is regarded as taxable income, which is a drawback that a TFSA doesn’t have. As well, an RRSP must be converted to a Registered Retirement Income Fund (RRIF) by the end of the calendar when you turn 71. Once in an RRIF, the government mandates that every year a minimum amount of money must be withdrawn and those withdrawals are fully taxed. A TFSA does not have a forced conversion, you and hold a TFSA as long as you’d like to. In my view, one of the main benefits of the RRSP is the upfront tax deduction. The best time to contribute to your RRSP is when you are in a high tax bracket. Ideally, you would want to contribute to your RRSP when you are in a high tax bracket and withdraw funds when you’re in a lower tax bracket. A good example would be if you have a temporary increase in your taxable income. This could include the sale of a rental property, retirement payouts, the sale of a cottage, and a bonus from your employer – all of these events could create a one-time increase in your overall taxable income. In all of these cases, an RRSP contribution could ease up your tax burden. That money could be withdrawn down the road when you’re in a lower tax bracket. Also, for individuals who have a high income, regular RRSP contributions can provide significant tax savings. Generally, I often suggest an individual make an RRSP contribution if their income is above $74,416. At the moment, that level of income is the start of a tax bracket, above that level, the combined federal and provincial marginal tax rate is 37.90 per cent. With that level of income, every dollar you contribute saves you 37.9 cents of tax. That is a significant amount of savings. In addition, I usually recommend contributing enough to the RRSP to push your income into a lower tax bracket. As your taxable income declines, your marginal tax rate will also drop, meaning the tax saving of an RRSP contribution will lower and an RRSP contribution is less beneficial. So, RRSP contributions at lower income levels might not be worthwhile for you. Ideally, you want to contribute both to your TFSA and RRSP. If that isn’t possible, an RRSP contribution makes more sense if you earn a high income or if there is a temporary increase in your taxable income. In those cases, I often suggest contributing to an RRSP enough to lower your income by one tax bracket. However, if you’re not in one of these situations, it’s my opinion that a contribution to your TFSA would be better. It is important to mention that these are just guidelines and might not apply to your own unique financial situation. It is best to review your financial plan and see what the best fit is. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning An often misunderstood issue people face is wondering what tax is required to be paid, and by whom, when someone passes away. The issue itself is big enough to consist of multiple articles, but in this one, we can clear up a few misconceptions on the subject.
A common question we receive as financial advisors is what tax do beneficiaries pay? The simple answer to that question is none. There isn’t any inheritance tax in Canada, unlike in some other countries. Any money you receive as a beneficiary of an estate in Canada is considered after-tax money and it doesn’t need to be included as a part of your income. This isn’t the case in the United States, as there are some states that do have an inheritance tax, such as New Jersey. The amount of inheritance tax largely depends on the relationship of the beneficiary in regards to the deceased, as well as the property value. The fact that some states have inheritance tax is a common source of misconception. However, in Canada, the estate pays the tax rather than the beneficiary. Any inheritance a beneficiary receives would have already been paid. Another common misconception relates to the estate tax. The question often arises regarding whether the estate has to pay a tax based on its assets. Having said that, the technical answer to the question is no. There isn’t estate tax in Canada, but there is estate tax in the United States. In Canada, the Canada Revenue Agency (CRA) doesn’t tax the assets of an estate, rather, they tax the income. The CRA requires that tax owed on income, up to the date of death, must be paid. After you pass, a final tax return must be filed, including any income received up to the date of the passing, including income from any pensions, investments, and employment. When you pass away, you are deemed to have disposed of all your assets. That disposition can create additional income that has to be included in the final tax return. A good example of how the deemed disposition can create income includes an item such as rental property. If you own rental property and you pass away, you are deemed to dispose of the property upon death. Consider it the same as selling property, with any capital gains included on the final tax return. Another good example of this would include an RRSP. If you have any income left in your RRSP, upon passing away, unless the beneficiary is your spouse, you are deemed to dispose of that RRSP upon death. It would be comparable to you withdrawing all the money from your RRSP when you die - that would be considered income and is taxed upon your final return. As mentioned, there is no estate tax in Canada; as explained in the article, the CRA doesn’t tax the assets of an estate. However, having said that, it’s important to note that provinces do impose probate fees. Probate fees are completely separate from income tax. Probate fees, by their nature, vary by province and typically go up based on the value of the estate. Estate and tax planning is a complicated process, which is why it’s worthwhile to seek out professional help from a financial planner, accountant, or lawyer to make sure your estate is correctly planned and set up. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning When spring and summer rolls around, many Canadians make their way to the cottage. It can be a great place to relax and enjoy time with your friends and family. However, if you plan to sell your cottage or pass it on, some tax consequences could incur. Here are some ways to minimize potential tax hits.
The first consideration is the tax bill for the cottage. In Canada, there is a principal residence exemption. This means the home you deem as a principal residence can be sold without paying any tax. Having said that, if you own more than one property, say a house and a cottage, one of those properties will have to be taxed when it's sold. The second property doesn’t have to be a cottage, a second home, condo, or vacation home also fall in that category. The tax on the second property is referred to as capital gains. The price you pay for the cottage and any money spent on improvements to the property are added together to form your adjusted cost base (or ACB). The amount of the sale that exceeds your ACB is your capital gain. Half of which is tax free, while the other half is added to your income and taxed according to your income tax rate. For example, if you paid $100,000 for your property and sold it for $300,000, you have a $200,000 capital gain. $100,000 of that gain will be tax free, and the remaining $100,000 will be added to your income. If your usual income is $40,000, your yearly earnings would go up to $140,000 upon selling your property. If you choose to pass the cottage down to the next generation, when you pass away, there is a “deemed disposition,” which means even though you don’t sell the cottage, the government will treat the change of ownership as a sale and tax you for it. Your estate and beneficiaries will have to deal with the capital gains tax. Minimize your taxes How do you minimize the tax on your cottage? One way is boosting your ACB. Any major upgrade or renovation that improves your cottage can be added to your ACB. The larger the ACB, the smaller the capital gain, which means less tax. However, regular maintenance and repairs do not count. Only enhancements or additions to the property can be considered. Make sure to keep your receipts. It is possible that your cottage has a larger pending tax bill than your home. You don’t have to live at a residence permanently for it to be considered your principal residence. You can designate your cottage as your principal residence. Usually the tax bill can help you determine which property to designate. This is typically done by calculating the expected capital gain for each property, then averaging that amount based on how long you owned the property. The property with the largest capital gain should be considered the principal residence. This way, your principal residence exemption will save you the most tax. This last strategy is not for everyone. If you choose to sell the cottage to your kids, it is possible to create a promissory note allowing your children to pay you over the course of five years. Instead of having to claim capital gains in one lump sum in the year of sale, it can be broken up over five years. This lowers your total income and can lower your overall tax bill. It’s important to talk to your lawyer and accountant before you try to implement this strategy. Other Considerations This is only the tip of the iceberg when it comes to cottage succession. You may choose to sell your home and move to the cottage. You may add one of your kid’s names to the title. Perhaps life insurance can be used to ease the tax burden. There are lots of ways to structure a cottage succession plan. Talk to your family and make sure everyone is on the same page before connecting with your financial professionals to put a plan in place. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning Services Ltd. Finding a financial advisor isn’t an easy task, seeing as not every advisor is right for every client. Depending on what your specific financial goals are, you’ll need to select an advisor based on what you hope to achieve as well as your own unique investment style.
As well, it’s worth noting that every financial advisor is an individual as well, and you shouldn’t be too quick to settle on the first one you come across. Choosing a financial advisor should be approached with the same mindset you would have if you were hiring an executive for a business venture – you’d have to interview them meticulously before settling on a decision. But what questions are the right questions to ask a financial advisor? While this might depend largely on what you’re looking to achieve, there are some base-level questions that should be considered when choosing a financial advisor. Here are some of the important questions when considering a financial advisor. Are you a fiduciary? A fiduciary always works in the best interest of the client, meaning everything they recommend is catered specifically to you. Non-fiduciaries only have to recommend “suitable” products for you – even if that means they aren’t the lowest-cost or even the most ideal for you. What are your qualifications? Financial advisors and professionals can have a laundry list of initials behind their names. Whether or not a finance professional is an investment advisor who has a multitude of destinations, it’s up to you to properly vet them. If you need specialized advice, look for an advisor who has expertise in that area. Take the time to meet with several advisors, ask friends and family if they know one they’d recommend, and make your decision based on the one you’re confident has the experience and credentials to help you reach your goals. What asset allocation do you use? You know it’s important to be diversified, right? Your asset allocation is how you create a completely diverse portfolio, which can drive most of your returns. Ideally, your portfolio should include domestic and international stocks, as well as small, mid and large-cap companies. What products do you offer? You should ask about the product range, what products that aren’t offered. If there are any limitations or penalties on selling or redeeming investment products. Do they offer access to lower-cost products such as index EFTs? And what the typical percentage of client portfolios in their company’s product. What is my total cost to work with you and how are you compensated? Even if you’re working with a fiduciary financial advisor, you may not understand the all-in-costs related to their services. Here are some examples of common fees you may pay when working with a financial advisor: Advice Fees: This can be in the form of hourly fees, one-time project fees, or a per centage of your investments. Transaction Fees: These are charged by the custodian when your advisor buys or sells investments on your behalf. Expense Ratio: This particular fee is charged by a mutual fund or exchange-traded fund (AKA EFT) to cover operational expenses. These are just some of the top questions you should consider when looking for a financial advisor. Financial advisors provide a multitude of valuable services and can help you meet your financial goals – which is precisely why you need to make sure you find the right fit. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning Services Ltd |
AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
July 2023
Categories |