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RRSP's versus Pensions

Child Care Expenses

New Rules Affect RRSP's and RRIF's



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Accountants in the news...

Some interesting and not often known information about accountants.

Only an accountant could catch Al Capone...
It was an accountant that finally brought Al Capone to justice. After the IRS spent 2 years in intense undercover investigation, he was sentenced to 11 years in prison for tax evasion of more than $200,000.

Lights, Camera, Accountant!
The first positive portrayal of an accountant in Hollywood was the character Murray Blum in the 1993 movie "Dave".

Hmm...
should I be a Rock Star or an Accountant?

Before he found his fortune through fame… the Rolling Stones lead singer and rock legend Mick Jagger was a smart teenager who earned a scholarship to attend accounting and finance at the London School of Economics.


"I have no use for bodyguards, but I have very specific use for two highly trained Certified Public Accountants."
Elvis Presley
Rock & Roll Legend

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To learn more about "Go To Assist"... Contact Tammy Leslie at 250-748-1426.

 

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The following information is supplied by Mike Watkins, financial advisor with Edward Jones, Duncan B.C. 

RRSP's Versus Pensions 

Dollars & Sense

Mike, I've never been a big fan of RRSPs, but you seem to like them. Tell me why it's still a good idea to put my money into them. - Dan in Saanich

I've been advising clients for over 15 years, through all kinds of markets, and it still surprises me when someone says, "I don't like RRSPs." When I'm struck with this statemnt, I invariably ask why; and the answer is always some variation of the following two responses: "Well, you have to pay all that tax when you take your money out". Or, "Ah, all they do is lose money".

Now when I ask most Canadians if they like having their pension, the response is pretty universal: "Yes, but i wish it was more". When I ask them why they like their pension, I'm often greeted with a look as though I've grown a second head, "Because it gives me an income i can live off in retirement".

Having a pension is a huge benefit going into retirement, but the main advantage of a pension plan is the forced savings aspect. When you work for a company that provides a defined pension and you enrol in the plan, the contribubtion is taken from your pay cheque pre-tax, every pay period whether you want to or not. That money is invested into the pension pool whether the market is up or down, or if you could afford it that month or not. There is no secret as to what a pension holds either. If you look at any of the major pension plans in Canada, you'll see a lot of the same types of investments you can hold in your RRSP: A well diversified mix of stocks, bonds and cash. The difference is that pension fund mangers tend to invest consistently and systematically through all markets; which is why they tend to out-perform the average RRSP investor.

With regard to the tax aspect, let's examine a pension versus an RRSP over the lifetime of the annuitant. With a penesion, you contribute money to the plan on a pre-tax basis that is reflected on your T4 as a Pension Adjustment. With an RRSP you generally contribute the money to the account on a post-tax basis; receiving a tax slip that reduces your taxable income for the year by that amount. Over your working life, both of these assets are exposed to the market, and grow in value through a combination of ongoing contributions, interest, dividends, and captial gains. Once you retire, you may use these programs to fund your retirment. In the case of the pension, that income is taxed as it is paid out to you. The underlying assets that the pension derives its value from, remains sheltered and untaxed with the plan. The same is true of the RRSP account. Any funds drawn from the account are taxable, but the value of the account still held within the plan remains sheltered from taxation.

When the annuitant dies, there are options for both plans. With a defined benefit pension plan, you elect your beneficiary options when you retire. These options generally range from 100% single life, to as much as 100% benefit for your spouse once you pass away. Inevitably, the greater the death benfit for the surviving spouse, the lower the monthly pension benfit for the annuitant. The conversion of the pension benefit from deceased annuitant to surviving spouse is a tax neutral event. Compare this with the RRSP account. If you name your spouse as beneficiary, 100% of the value of the account transfers to your spouse regardless of the accumulated RRSP contrubution room. It is also a tax neutral event.

It's on the death of the spouse where most people get concerned with RRSPs. When the spouse dies, the remaining value in the RRSP account is liquidated and becomes income for the spouse in their final tax return. This generally means a lot of tax must be paid out of this amount. But let's compare that to the defined benefit pension plan. When the surviving spouse finally passes, whatever remains of the underlying value of the plan is gone. Back into the pension pool. Sure you don't have to pay any taxes, but that's because the estate doesn't actually get anything.

Pensions are  great benfit, but RRSPs are a necessary answer for those that don't have a job that provides a pension for them. The key to maximizing the benfit of your RRSPs is to treat them like a pension. Ask your financial advisor to calculate how much you need to contribute to create a pool of money that will give you the income you need in retirement. Now make sure you contribute that amount to your RRSPs every pay period without fail, through good markets and bad, strong times and lean.

Mike Watkins, CFP, FMA, FCSI, CSWP

(Michael is a financial advisor with Edward Jones and author of the financial planning guide It's Only Money. To ask Mike a question, or to arrange a consultation, call (250) 418-0114 or email him at michael.watkins@edwardjones.com

Posted September 2012

 

The following information is supplied by Shelagh Rinald of Rinald Tax Advisory Inc. of Victoria. BC 

Child Care Expenses

Subject: Child Care Expenses Amounts paid to grandparents could qualify
Number: 11-28
Date: Nov. 11, 2011

The Income Tax Act allows an individual to claim a deduction for child care expenses if the individual or a supporting person of the child is employed, carrying on a business; carrying out research and receiving a grant, or attending secondary school or educational institution in a full-time or part time program. 

Normally, child care expenses are deductible by the spouse with the lower net income and the amount that may be deducted its limited to the lesser of two-thirds of earned in come and  

  - a maximum of $10,000 per year for each child who is eligible for the disability tax credit for the year;

  - a maximum of $7,000 per year for each other eligible child who is under 7 years of age at the end of the year,

  - a maximum of $4,000 per year for each other eligible child who is under 17 years of age at the end of the year.

 Child care expenses can include payments made to any person resident in Canada other than a parent of the child, a related person under age 18 or a person for which a parent has claimed a deduction as a dependent.

The Canada Revenue Agency confirmed in a recent Technical Interpretation that amounts paid to grandparents could qualify as long as the expense incurred were in respect of an eligible child and the grandparent was not being claimed as a dependent by the individual's parent.

In the right circumstances, paying a grandparent for child care services can reduce the overall family tax burden. For example, a grandparent over the age of 65 and resident of Ontario with $12,000 of existing income would be subject to additional tax of approximately $700 on childcare payments of $8,000. As long as the amount paid is reasonable for the services provided, the parent paying the amount could save up to $3,800 from the tax deduction. Of course, the $3,100 reduction in the family tax burden must be compared to the effect the additional income might have on the grandparent's eligibility for the Guaranteed Income Supplement, Old Age Security payments and other income tested benefits.

 

Provided to you by: RINALD TAX ADVISORY INC.
841 Yates Street
Victoria, B.C. V8W 1M1
Tel: 250-361-1300; Fax: 250-590-1555
Website: www.rcatax.com

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

Further details may be obtained from our website at www.taxspecialistgroup.ca

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

 Posted: November 2011

 
The following information is supplied by Shelegh Rinald of Tax Advisory Inc. of Victoria, BC

New Rules Affect RRSP's and RRIF's Owning Shares of Private Companies

Subject: New Rules Affect RRSP and RRIF's "The "prohibited investment" rules....have significantly impacted RRSP and RRIF holdings of private campany shares"
Number: 12-13
Date: May 25, 2012

Shares of private corporations held by individuals in their RRSP or RRIF may now be considered to be "prohibited investments" and subject to significant tax penalties if the individual, together with non-arm's length persons, own 10% or more of the outstanding shares of any class of the corporation.

The "prohibited investment" rules which were introduced in the 2011 federal budget have significantly impacted RRSP and RRIF holdings of private company shares. Before the change, it was possible to own private company shares in an RRSP of RRIF, even if the individual ownded more than 10% of the outstanding shares, provided the individual and the related persons did not control the company and the cost of the shares was less than $25,000.

Under the new rules prohibited investments in an RRSP or RRIF may attract a 50% tax on the fair market value of the prohibted investment on the date it is acquired. Furthermore any income or capital gains earned after March 22, 2011 (the date of the original budget announcement) from a "prohibited investment" in an RRSP or RRIF is consdered to be an "advantage" taxable at 100%. There is some relief from the full advantage tax on income and capital gains arising from previously qualified investments that became prohibited investments under the new rules. This relief is available until December 31, 2021.

Under the transitional rules, the advantage tax can effectively be reduced from 100% to the individual's normal marginal taxrate on any income or gains accruing from March 23, 2011 to December 31, 2021, provided the income or gain is withdrawn and paid to the individual within 90 days after the end of the year in which the income is earned or the capital gain is realized.

To take advantage of the transitional rule, an individual must file Form RC341, Election on Transitional Prohibited Investment Benefit for RRSP's or RRIF's, by June 30, 2012.

Under the transitional rules, prohibited investment can also be removed from an RRSP or RRIF by December 31,2021 by exchanging it for cash or other property with the same value. It is important to ensure that the exchange takes place at fair market value, which may require an independent valuation.

 

Provided to you by: RINALD TAX ADVISORY INC.
841 Yates Street
Victoria, B.C. V8W 1M1
Tel: 250-361-1300; Fax: 250-590-1555
Website: www.rcatax.com

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

Further details may be obtained from our website at www.taxspecialistgroup.ca

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof

Posted: June 5 2012

 

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