Back to Basics: A Reminder of RRSP Musts

To play any game, it is important to know the rules and how they may affect the outcome or result of the game. Not to suggest that planning for retirement is a game, but knowing how RRSP rules can affect your retirement planning is very important. Below are a few of the “must knows” for your RRSP planning.

1. Maximize your contribution

The more you put away the more you will have. It is important to know the maximum allowable limit for your financial situation. Currently for 2007, you can contribute 18% of your prior year’s earned income up to a maximum of $19,000 less your pension adjustment (PA) and your past service pension adjustment (PSPA). Remember also that carryforwards of unused contributions from 1991 onward can also be contributed.

2. Contribute Today

The sooner you contribute, the sooner your savings start growing for your retirement. The compounding of interest returns can make a big difference on your RRSP balance over time.

3. Spousal RRSPs
Contributions can be made to a spousal RRSP that will allow income splitting at retirement which in turn will reduce the amount of tax that you will pay. Contributions are limited to your personal limit.

4. No More Foreign Content Limit

• 30% foreign content limit in RRSPs and registered pension plans is now a thing of the past.
• Canadian investors now have the option to invest up to 100% of their retirement plans into foreign securities, without penalty.
• Opportunities for money managers to seek out the best investment opportunities wherever they exist is wonderful news for Canadians - provides the opportunity for greater diversity and more attractive risk-adjusted returns.

5. Consolidation

Consolidating your assets leads to more efficient asset management as well as reduced costs. The Butler / Laing Group will be happy to discuss why consolidation would be right for you.

Contact us at (604) 535-4749, or use our contact page.

Planning For Your Children’s Education

Registered Education Savings Plan (RESP)

There are several ways to fund a child’s post secondary education; one might be to anticipate a child will receive scholarships or use student loans; ‘pay as you go’ although budgeting your cash flow will be more difficult; or start a savings plan now to prepare for the inevitable future expense. The following article will focus on one of these savings plan strategies; a Registered Education Savings Plan (RESP).

Background

An RESP is a tax deferral plan designed to help save for a student’s post-secondary education. It was created as a way for Canadians to save for education without the growth being taxed under the regular attribution rules. Normally, when you give your minor child money, interest or dividends earned on this money is taxed as if you had received the income i.e. it is attributed back to the parent and taxed in their hands. Please note: capital gain income does not attribute back to the parents.

Previously the rules governing an RESP were onerous. If your child did not attend a qualifying institution (i.e. college or university), all of the growth, interest, dividends and capital gains went to the educational institution that you designated on your RESP contract. The good news is that the Canada Customs and Revenue Agency (CRA) has significantly enhanced the RESP rules. In addition to the tax advantages, there are increased savings limits, additional termination options and the Canada Education Savings Grant (CESG).

Rules
Although contributions to an RESP are not tax deductible, all of the income in the plan compounds on a tax deferred basis. Further more, when the accumulated income is withdrawn from the plan to pay for education expenses, the student pays the taxes not the contributor. In most cases, this income would attract little tax because the student’s basic personal exemption and tuition and education credits will offset this tax liability.

Any individual can set up an RESP. This includes grandparents, aunts, uncles, godparents and friends (does not include trust or corporations).

The contributions may be made for up to 21 years, to a lifetime maximum of $50,000 per beneficiary with no annual maximum contribution. If these limits are exceeded, a one per cent per month penalty tax is charged until the over-contributed amount is withdrawn from the plan.

If the child does not proceed with post secondary education, the contributions are returned to the contributor with no tax consequences and the CESG is returned to the government. The accumulated income that has not been paid out to the beneficiary can be returned to the contributor.

Contact us at (604) 535-4749, or use our contact page.

Life Annuities

Are They Right for You?
As a part of retirement planning annuity income can compliment other incomes you are receiving. There are two types of annuities – “life” and “term certain.” Both these types of annuities can be registered and non-registered. This article will outline the details of life annuities and suggest reasons why you may wish to consider them in your portfolio.

What is a life annuity?
Life annuities provide you with a regular income paid at selected intervals for the rest of your life, regardless of the age you live to. These payments will cease at your death and no value will be available to your beneficiaries unless you arrange for a joint annuity or a guaranteed minimum payment period (explained later.) These regular payments can be monthly, quarterly, semi-annually or annual. A life annuity can only be purchased from a life insurance company. The income payments can be level for the remainder of your life or can be indexed at a pre-selected rate. Several factors, including current interest rates, are considered when an annuity income is calculated, and as a result, once you buy a life annuity you are locking this interest rate in for the entire payment period.

Registered
Life annuities can be purchased with assets in any registered account. (These can include RRSP, RRIF, LIF, LRIF and DPSP funds.) You can also arrange for your company “Registered Pension Plan” to be converted to a life annuity. The entire amount of the income you receive will be taxable in the year you receive it.

Non-registered
Any money you have in an unregistered account may also be used to purchase a life annuity. The taxation of payments from a non-registered annuity can be quite favorable. Non-registered funds can be used to purchase a “prescribed” annuity. When you do this only the interest portion of the payments are taxable and this interest portion remains level throughout your lifetime. This results in a very favorable after tax income. A suggested strategy would be to consider using cash that is in an account and earning interest, which is taxable to you each year, to purchase a prescribed annuity. The resulting after tax cash flow will be substantially greater. If you wish to ensure that the original capital you put into the annuity is available to your beneficiaries (remember the annuity stops at your death) then you can life insure this capital. In most case, even after the cost of insurance is paid, the remaining after tax income is significantly greater.

Types of life annuities

“Single” life annuities

These will pay you an income at the selected intervals for as long as you live. As mentioned the income will cease at your death.

“Joint” life annuities

These will pay an income for as long as two people live, the income will stop at the second death. Typically you would select this type of annuity to be sure you and your spouse would receive income for life. As a note, current pension legislation requires that if you are married and are selecting an annuity income from any registered pension plan, you must select a joint annuity with your spouse. The only exception to this would be if your spouse “signs off” and allows the payments made for your life only. In most cases it would not be in the best interest of either spouse to sign off as this effectively “disinherits” the survivor. Joint life annuities can also be arranged to pay the original amount, or a percentage of the original amount, to your spouse after your death. Typically this would be 75, 60 or 50%.

Guarantees

Although all life annuities will pay an income to you for the remainder of your life, this income will cease at your (or the joint annuitants) death. In order to protect you against a substantial loss in the event you purchase an annuity and die within a short period of time, you can add a minimum guarantee to the payment period. This can usually be 5, 10, 15, or 20 years or until a specific age. The maximum guarantee period however cannot exceed your age of 90.

Example: If you add a 10 year guarantee to a single life annuity and die in the 5th year, the remaining 5 years of payments will be commuted to a discounted lump sum and paid to your beneficiary.

How do you decide?

The income received from a given amount of capital will reduce as you add additional guarantees and survivor benefits to an annuity. The highest income will result from a single life, no guarantee annuity. This income will reduce as you add features to the point where the least amount of income would result from a joint last-to-die annuity, with a maximum guarantee period, paying 100% of the original income to your spouse at your death. When you are considering which type of annuity is best in your situation you should review several quotes with these various alternatives. This will allow you to see the resulting incomes, and help you select the correct annuity, based on your income requirements, balanced with your desire to leave an estate for your beneficiaries.

Impaired annuities

Similar to the effect poor health will have on the purchase of life insurance, in that it will increase the premium you pay, the effect of poor health on life annuities will be to increase the income you receive.

When should you consider life annuities?
For most people a “base” income that is guaranteed to be paid for your and/or your spouse’s life can form the foundation of retirement income. Here are some factors you might consider in purchasing a life annuity.

• You want a fixed income guaranteed for life.
• You don’t want to make investment decisions.
• You want to lock in your investments at current rates.
• You’re not concerned about leaving an estate to your children or grandchildren.

Summary

The use of life annuities can bring several advantages to your income planning. As with any other decision, assistance from The Butler / Laing Group in showing you how these can fit into your plan would be of benefit. In addition, rates from different insurance companies can vary significantly and we will be able to assist you by shopping various companies and reviewing the results with you.  Contact us at (604) 535-4749, or use our contact page.

The Insured Annuity Strategy

Perhaps the biggest retirement question we face is, “Will I have enough?” Most of us want to know that we’ll have a steady base level of retirement income that won’t run out too soon. Traditional investment vehicles such as bonds, T-bills, and term deposits are often popular choices to achieve the retirement goals of income generation, safety and preservation of capital. However, the after-tax rate of return of these options may not be enough income to meet your needs.

There is an alternative strategy that provides income that is guaranteed for life and upon death, pays your originally invested capital to your beneficiaries directly, without the usual estate-related hassles and costs. The Insured Annuity strategy can preserve the value of your estate, minimize income taxes and most importantly, guarantee an income stream for the rest of your life.

Enhance Your Retirement Income

The Insured Annuity strategy involves the purchase of two contracts: a permanent life insurance policy and a prescribed Life Annuity. You designate a portion of your non-registered capital to be used to generate a guaranteed income with which you purchase a Life annuity. This usually produces a higher income than typical fixed income investments and ensures a guaranteed income that you and/or your spouse cannot outlive. With a Life Annuity, each payment is actually a blend of interest and your original
capital, where only the interest portion is taxable. As a result, there is no residual value for your estate when you die.

Leave a Legacy

To solve this, part of the annuity payment is used to pay the life insurance premium. At death, the annuity income ceases and the life insurance death benefit is paid to your beneficiaries to replace the capital originally invested in the annuity. Because of the special tax treatment afforded by the annuity and the life insurance policy, the after-tax return on the Insured Annuity concept may be significantly greater than can be found on conventional interest-bearing investments.

An Example

The following example shows how a 60-year-old couple can benefit the Insured Annuity strategy compared to a GIC. They are generous grandparents of three who are looking to maximize their income now that they are retired. They also wish to fund their grandchildren’s education. The Insured Annuity strategy allows the couple to increase their monthly cash flow and still maintain the size of their estate.

As illustrated, the couple would apply for $500,000 of Term-to-100 insurance and once the insurance is in place, they would buy a $500,000 life annuity to generate income. They would then receive the difference between the monthly cash flow from the annuity and the monthly premiums being withdrawn for the insurance, while still maintaining the full value of their estate. Upon the death of the last surviving spouse, the annuity income ceases and the life insurance proceeds are paid out to the couple’s beneficiaries without passing through probate.

Things to Consider

This strategy is suitable for those who are between the ages of 60 and 85, risk-adverse, dissatisfied with currently low interest rates, and in good health (to qualify for life insurance). Once the annuity is purchased you cannot cancel the contract – it is locked in for life. This may represent a significant commitment, depending on your age. It also means that you should not consider moving all of your investment assets into the annuity just in case something unexpected should occur that requires some of your investment capital. As well, annuity income is fixed so although interest rate levels may go up, the annuity income remains the same. However, the accumulated cash flow over the lifetime of the Life Annuity may be more than that of a GIC, even with increasing interest rates.

Summary

The Insured Annuity strategy can generate a guaranteed, lifetime net income that is typically much higher than what you can achieve with other fixed income vehicles. As well, by directing the capital to named beneficiaries, you can avoid unnecessary estate costs and delays.

Contact us at (604) 535-4749, or use our contact page.

How Much Money Do You Really Need For Retirement?

You May Not Like the Answer

The title of this article seems to be the most sought after answer for people who are either saving for their retirement or are actually in their retirement. Obviously, it is a very important question-you spend a lot of years working and saving to hopefully achieve your retirement dreams.

Getting to the answer to the question is not as easy or straightforward as you might think. This means that constant planning and review is necessary to make sure you have done the best job possible to answer that question for yourself.

The short answer to the question is, (and you are not going to like to hear this), but, it depends!!! If you have had anyone that claims that there is a definite answer to this question, be highly suspect of the advice that you have received.

There are a number of factors that will affect how much money you need for retirement:]

When do you want to retire? Obviously, the earlier you want to retire, the more money you will need. If you want to retire at age 60 and we assume you started working at age 20 and that you will live until age 90, it means that you have 40 years of working to save enough money to provide you with income for 30 years of retirement-no small feat to accomplish!!

What do you want your lifestyle to be? Just as important as the length of time you will be in retirement is what do you want your lifestyle to be-what will your expenses be? Be careful not to underestimate them!!

Don’t forget about the effects of investment returns, taxes and inflation. These two variables will have a big effect on how much money you need to save. The higher your investment returns, the less money you need to save. However, for most people, when you get to retirement, you become more conservative in your investment decisions because you are reliant on your investment returns to generate income. This usually means that returns are lower than they may have been previously, which over the long term means you need more money. Everyone is familiar with inflation and the effect that increasing prices will have on their lifestyle-if you don’t take this into account, you may come up short achieving your lifestyle objectives. And obviously taxes will greatly affect where you ultimately end up.

What is your marital status? A single person that makes $50,000 per year will end up with less money after tax than a married couple who each make $25,000 per year. Granted, you may argue that a married couple will have more expenses because there are two people versus one, but your marital status can affect other sources of income due to such issues as OAS clawback.

To illustrate the effect that these variables can have on the answer to the question of How Much Money do You Need?, consider the following:

If an individual has a $500,000 portfolio and a $500,000 RSP. Inflation is 3%. Their average tax rate is
35%. The two variables we will change will be their expenses and their investment return. The chart below shows the number of years that their money will last using these assumptions.

What this means is that if you retired at age 55, your money would last anywhere from age 76 to 92, depending upon the variables noted above.

Alternatively, if you retired at age 60, your money would last anywhere from age 81 to 97.

After having changed only a couple of assumptions, you can see the dramatic effect on the length of time the money will last-obviously the amount of money you need is dependent on a number of factors.

The Butler / Laing Group can help you determine how much money you need to save to reach your retirement goals and objectives. Make sure you talk to us!  Contact us at (604) 535-4749, or use our contact page.

The Home Buyer’s Plan – Is It Right For Me?

What Is It?

If you are considering purchasing (or building) your first home, the Federal Government’s Home Buyer’s Plan is an option you may want to consider. This plan was first introduced in the 1992 Federal Budget to assist first time home buyers. The plan allows you to withdraw up to $20,000 from your RRSP. There is no tax withheld on this withdrawal, however, the funds must be repaid in annual minimum amounts over a period of 15 years.

You Should Know

As with any plan there are several “rules” you should be aware of:

• The home you are buying must become your principal residence.
• Two people can withdraw from their RRSPs for the same home (they need not be spouses); however, the home must be intended to be the principal residence of both.
• You cannot have owned a home, or have lived in a home owned by your spouse, in any of the five calendar years beginning before the time of withdrawal.
• The home must be located in Canada.
• Before withdrawing from your RRSP you need to have a written agreement to buy or build a home. You must acquire your home by October 1st of the year following the year that you withdraw the money.
• You must repay this money to your RRSP over the next 15 years starting in the second calendar year after withdrawal.
• Your payment is due within 60 days of the end of each year. If you don’t make this payment then this amount is added to your income for the year and as a result will be taxed at your highest marginal tax rate.
• If you make a contribution to your RRSP within 90 days prior to your withdrawal, that contribution will not be deductible if the contributed funds were needed for the withdrawal.
• There are special rules for withdrawals to buy a home for the benefit of a disabled person who qualifies for the disability tax credit. These rules allow for previous ownership and multiple withdrawals. Each year Canada Revenue Agency (CRA) will provide an annual statement informing you of your minimum repayment requirement.

Each year CRA will provide an annual statement informing you of your minimum repayment requirement.

One More Important Point

There is one other important point to consider. By withdrawing funds from your RRSP under this plan, you are forgoing the investment income and the related tax-deferred compounding of that income during the time that this money would have been in your RRSP. This results in the reduction of your RRSP balance and subsequently the income available to you during your retirement.

As an example, assume a 30 year old investor takes $20,000 out of his RRSP under the plan and begins to repay the amount right away ($1,333/year over 15 years). Had he left the amount untouched until age 71, the $20,000 would have grown on a tax-deferred basis to approximately $469,000 (assuming an 8% rate of return). However, the home buyer’s withdrawal together with the subsequent repayment (1/15th per year) would result in an RRSP balance (at age 71) of approximately $287,000, a difference of $182,000 from the RRSP that was left untouched.

While this is a significant amount, it does not necessarily mean that a home buyer’s withdrawal is a poor strategy to follow. A home buyer’s withdrawal strategy however, should be well thought out. This may mean for instance, that a comparison be done of the amount of interest that is saved due to the smaller mortgage balance that results from the home buyer’s withdrawal. Also, where other non-registered funds are available it would be wise to use this money (before you use RRSP funds), since the investment returns earned on it are not deferred but are instead taxable to you each year.

In The End

So, although the decision to use RRSP funds is never an easy one, as long as you weigh both the advantages and disadvantages of the Home Buyer’s plan, you will be in a much better position to make an appropriate decision.  Contact us at (604) 535-4749, or use our contact page.

The Estate Reallocation Strategy

The key to effective estate planning is to minimize estate tax and maximize the amount of wealth that is transferred to the next generation. But how? Life insurance offers a unique strategy.

Investments and Taxes

While registered assets, such as those within RRSPs, RRIFs, and pension plans allow for immediate tax deductions and tax-deferred savings for retirement, any withdrawals will be fully taxed as income at your marginal tax rate. Furthermore, any income or growth from most non-registered investments such as GICs, stocks, bonds, real estate, and cash will be taxable to some extent, either as it is earned or upon the sale of the asset. Even upon death, you are deemed to have sold all of your assets at their fair market value for tax purposes, which can result in some significant liabilities for your estate.

Tax Minimization, Estate Maximization

Many individuals view life insurance as simply a necessary expense for managing risk. This is part of its purpose, but it can be much more than that. The Estate Reallocation strategy involves shifting a portion of your assets (say 5%) from fully taxable positions into a tax-exempt insurance policy, resulting in a
significantly enhanced estate plan.

The investments you make in a Universal Life or Participating Whole Life policy are exempt from accrual taxation during your lifetime. With this permanent, tax-exempt insurance, you can pay a premium that is far in excess of what is necessary; the difference is invested on your behalf and the growth is tax-deferred,
just like registered assets. This strategy also allows for the potential for tax-free retirement income.

Through the years, as your policy grows, your ultimate estate benefit builds as well. Eventually, the proceeds are distributed tax-free to your beneficiaries when you die, eliminating probate fees and delays.

Universal Life (UL)
In a UL policy, the investments are tracked separately from your insurance coverage. You are in control of how your additional premiums are allocated (restricted only by the investment options available to you) and you have a great deal of flexibility with respect to when and how those premiums are paid. Investments typically “mirror” equity and bond indices, and sometimes even reflect the returns of certain mutual funds. Unlike the underlying positions, the UL investments are not taxable as they grow, however there is a management fee, much like most mutual funds. Upon death, both the investment value and the insurance coverage are paid out to the beneficiaries tax-free.

Participating Whole Life (PAR)

PAR is a more inflexible product than UL, without as much transparency. The insurer itself invests your additional premiums – you have no control. The growth is achieved through the crediting of dividends, which strongly reflect the returns that the insurer achieves with your money, and which are used to buy additional amounts of permanent insurance coverage. The dividends have traditionally been quite stable, and cannot ever be negative. PAR policies fully guarantee the level of premiums you pay, the death benefit, and minimum level of cash value. The dividend scale in a PAR policy is the only feature that is
not guaranteed.

Summary

Tax-exempt life insurance allows individuals to maximize the estate value that they pass on to future generations. It allows for tax-sheltered growth and a tax-free payout at death that typically far outweighs achievable returns in a taxable investment account. Both UL and PAR policies are excellent products; whether you choose one or the other will be based mostly on your comfort level and investment style.

Contact us at (604) 535-4749, or use our contact page.

Tax Planning Year Round

You and your taxes: Establishing a year round process.

Does most of your tax planning take place during the last few months of the year? If so, you are not alone. However, to effectively reduce your current and future tax liabilities, tax planning should be a year round endeavor. Here are some opportunities.

Split your income

Income splitting involves structuring your affairs to move income into the hands of a lower-income family member who will pay less tax.

A spousal RRSP allows a higher-income spouse to contribute to the RRSP of a lower-income spouse. At retirement, this can help shift more income to the spouse who is expected to be in a lower tax bracket.

Another possibility is a spousal loan. As long as a prescribed rate of interest is paid, a spousal loan can be an effective way to transfer assets from a spouse in a higher tax bracket to a spouse in a lower tax bracket.

Donate securities

If you are considering a charitable donation, you may want to give stocks, bonds, or other publicly traded securities, including mutual funds. You’ll be deemed to have sold the investments at fair market value, however, any capital gains will be eligible for a reduced capital gains inclusion rate of 25% instead of 50%.

Create deductible debt

Tax deductible loan interest can be a great tax-saver. One strategy is to convert all or part of your mortgage debt into an investment or business loan.

For example, you could sell some investments to pay off your mortgage, then take a loan to repurchase the investments. This will effectively replace your non-deductible mortgage debt with a deductible investment loan.

Maximize your RRSP

Your RRSP is one of the few good tax shelters left. But don’t wait for the deadline to make your contribution. The sooner you invest, the longer your savings will be able to grow on a tax deferred basis. A monthly RRSP contribution plan can make this easy. And, if you have significant unused RRSP contribution room, a short-term loan is often a great way to catch up.

Consider an RESP

Today, a four-year university education in Canada costs $32,000 or more. In 18 years, using a 5% annual inflation factor, that number could rise to $77,000. Although contributions to a Registered Education Savings Plan (RESP) are not tax deductible, the income earned in the plan grows tax-free until it is withdrawn by the student. Plus, you could receive up to $500 a year in government grants to help your savings along. Consider this option if you have children with ambitions for higher education.

Make the right decisions all year
- Tax planning means that you are entitled to arrange your affairs, within the limits of law, so that you pay a minimum amount of tax.

Contact us at (604) 535-4749, or use our contact page.

Is Canada Ready to Retire?

Between 1947 and the mid-1960’s, Canadians produced roughly 400,000 babies each year, peaking at 500,000 in 1960. This baby-boomer generation represents a disproportionate chunk of the population, and has been the leading force behind social, cultural and economic changes in Canada during the last four decades.
This generation will begin to enter retirement in the year 2010. In fact, statistics indicate that by 2011, one in five people will be over 65 years of age as compared to one in ten in the early 1990s. While Canada currently has one of the youngest populations in the Western World, by 2030 we will have one of the oldest.

The age of self-reliance

Canada’s aging population will place a huge strain on the Canada Pension Plan/Quebec Pension Plan. And, with fewer people in the workforce, the Canadian tax base will be smaller, further stretching pension programs – not to mention the health care system.

With less money to go around, it has never been more important for Canadians to save and invest wisely. Baby-boomers must take charge of their futures, or they could pay the consequences later in life.

Canada Revenue Agency (CRA) has provided Canadians with an excellent incentive for retirement saving through its Registered Retirement Savings Plan (RRSP) program. This program is clearly telling us something – get ready for a self-reliant retirement, or else.

Will you be ready?

Unfortunately, most people don’t begin planning for retirement until just before they are ready to retire. As a result, statistics show that over 60% of Canadians will retire on CPP and Old Age Security alone. It’s frightening to imagine the number of impoverished seniors who will be relying on dwindling social assistance programs for support in the 21st century.

In addition, baby-boomers who are counting on home equity to cushion their retirement may be in for a surprise. While a home may be the most important investment in a lifetime, it is not the solution to financial security at retirement.

Research shows that home prices will appreciate only modestly over the next few decades. The booming real estate markets – fueled by baby-boomer purchases – are likely a thing of the past.

Time to plan

The only way to be ready for retirement is to follow a disciplined approach to retirement planning. This involves estimating the cost of the lifestyle you want to lead upon retirement. It also means assessing your future income needs, your current assets, and the time remaining until you retire.

Inflation is also a key planning factor, as it can erode half your spending power in a 15-year period unless you have a plan to counter it. Ideally, you should sit down with a professional who can guide you through the planning process and design a comprehensive retirement strategy.

The Butler / Laing Group has the knowledge, resources, and team of experts to develop and implement a retirement strategy that is tailored to your personal goals and circumstances.  Contact us at (604) 535-4749, or use our contact page.

What Happens to My RRSP When I Pass Away?

For most of us, RRSPs are one of our single largest assets. What happens to these on death is worth paying careful attention to. This article outlines some of the important considerations.

Taxes Are Due

When the planholder of an RRSP dies, the government is entitled to the income tax that has been deferred since the plan was started. The only exception to this is when the RRSP assets are left to a surviving spouse.
The total value of the RRSP is included in the planholder’s terminal tax return (the last one filed after a person dies) and the tax payable can be substantial. These RRSP proceeds will be taxed at the planholder’s marginal (highest) rate and the taxes must be paid out of the estate.

Naming Beneficiaries

The first thing to remember is that if you die without naming a beneficiary for your RRSP, the proceeds will become part of your estate and as such will be subject to probate. It is important to realize that it may still be possible to have these assets pass to a surviving spouse if the proper tax election is made.

Naming your Spouse - RRSP assets can be passed to your spouse or common law spouse (a person who is, and has for the past one year, co-habitated in a conjugal relationship with the taxpayer) without any immediate tax due. The assets can be transferred to his/her own registered plan (or a new plan can be setup) under what Canada Customs and Revenue Agency refers to as a “refund of premiums.” The RRSP assets are brought into the spouse’s income and offset by a tax receipt for the same amount. This allows these funds to continue accumulating with their tax deferred status and does not affect the spouse’s own RRSP room.

Dependent Child or Grandchild - You can name a financially dependent child or grandchild as the beneficiary of your RRSP. CCRA’s definition of “financially dependent’ is: “A person whose income in the preceding year did not exceed the basic personal exemption amount.” If the child is a minor, these funds must be used to purchase an income-producing annuity that pays the full amount until the child is18. You should note that dependence on grandparents would not qualify if it was by way of gifts or support that merely enhances the child’s “already adequate lifestyle.” This would be especially true if the child was living with another individual, such as a parent, who was already providing support.

Children of Any Age - A child of any age who was dependent on the planholder can receive the proceeds of your RRSP as a “refund of premiums” and the tax will be paid at the child’s rate.

Disabled Dependent Child - If the child is of any age, and financially dependent on the planholder by reason of physical or mental infirmity, then the RRSP proceeds can be rolled over tax free into his/her own RRSP. It is important to weigh any tax savings against the practical issues related to having funds go into the hands of an infirm child.

Others as Beneficiary - It is important to consider who pays the tax bill of your RRSP. If you were to name someone as the beneficiary of your RRSP who does not qualify for preferential tax treatment it could cause a significant problem for the other beneficiaries of your estate. An example would be naming your father/mother as the beneficiary of your RRSP and your children as beneficiaries of the balance of your estate. In this case the tax bill would have to be paid by the estate (out of your children’s share) and your father would get the full RRSP assets.

RRSP Home Buyers’ Plan at Death

If you have participated in the RRSP home buyer’s plan, the outstanding balance will be included as income on your final income tax return unless your spouse was named as beneficiary and had taken out a home buyer’s amount at the same time. When a Home Buyers’ Plan liability exists, the beneficiary has two options:

• the outstanding amount can be added to the final tax return of the deceased spouse or,
• the entire RRSP, including the Home Buyers’ Plan balance, can be rolled over to the beneficiary’s RRSP.

RRIFs

In the case of a RRIF, a spousal beneficiary can receive continuing payments if they are named as “successor annuitant.” Alternatively, the amount can be transferred to their RRIF or they can convert the RRIF back into an RRSP if they are under age 71.
Planning is Important

As you can see there are ways in which RRSP assets can be left to beneficiaries that will result in minimizing any taxes due. It is important to keep these designations up to date and, as always, to consider these assets individually as well as in context with your other estate goals. With careful planning you can reduce the impact of taxes on your estate and your RRSPs.

Contact us at (604) 535-4749, or use our contact page.

Next Page »