Tax planning is an important part of your financial plan. It involves taking advantage of various tax-deferring investment vehicles and investment strategies in order to save on tax. In this category, we hope to educate you on various topics related to the tax deferred vehicles mentioned below:
Registered Retirement Savings Plan
RSPs are an investment vehicle registered with the Canadian government which allow you to defer paying tax on money deposited into it. When you contribute into an RRSP, you get a tax deduction for the amount contributed which reduces your taxable income for the year. The greater your tax rate, the greater your tax savings. RRSPs are one of the most important tools when it comes to tax planning.
Registered Retirement Income Fund
At the end of the year you turn 71, your RRSP matures and you must convert it to a Registered Retirement Income Fund, an annuity or withdraw it as a lump sum. The gist of a Registered Retirement Income Fund is to provide you with a regular stream of income as a minimum percentage must be withdrawn each year. RRIFs are a great tax planning tool as you receive the minimum amount each year tax free.
Tax Free Savings Account
Tax Free Savings Account or ‘TFSA’ is an investment vehicle that allows Canadians who are 18 years of age or older to invest money tax-free. Any investment income, capital gains or other earnings are not subject to tax. Tax Free Savings Accounts are a great tax planning tool. The program started in 2009 with a $5,000 limit and over the years, the limit has increased each year. As of 2020, the limit is $69,500.
Registered Education Savings Plan
A Registered Education Savings Plan, also known as an RESP is a savings account for parents who want to save for their child’s education. Its an investment vehicle that allows investment income to accumulate on a tax deferred basis. Funds within an RESP are used to pay for post secondary education and related expenses. It’s highly recommended that an RESP is used as a tax planning tool to fund your children’s education.
Spousal Registered Savings Plan
Spousal Registered Retirement Savings Plan also known as a Spousal RRSP is a savings account registered with the CRA for the purpose of saving for your spouse or common law partner. Spousal RRSPs are similar to regular RRSPs and are known to be effectively used when there is an income disparity between spouses.
Life Income Fund
A Life Income Fund is a locked-in investment savings account that is designed to provide retirement income. LIFs are considered an extension of Locked In Retirement Accounts as the periodic payments that are generally paid out came to be from locked-in pension funds. LIFs can be either provincial or federal depending on where the locked-in pension funds originated from
Locked-in Retirement Account
A Locked In Retirement Account also known as a LIRA is a registered retirement savings account in which you would transfer your locked-in work pension into. If you are participating in a pension plan at your current company, either a Defined Benefit Plan or a Defined Contribution Plan, and quit the company, you will have the option to transfer your pension into a LIRA or LRSP.
Registered Disability Savings Plan
A RDSP is a registered investment account that aims to help families save on a tax deferred basis for loved ones diagnosed with severe or prolonged disability. Introduced in December 2008, RDSPs have been well received and applauded by the international community as Canada was the first country to introduce such type of account.
Deferred-Profit Sharing Plan
Deferred Profit Sharing Plans (DPSP) are registered investment vehicles set up by the employer for the benefit of the employees. The plan encourages employers to share the business’s profits with employees by contributing into the DPSP on a periodic basis. Employee contributions are not permitted. Contributions into DPSPs affect your RRSP contribution room and have vesting requirements.
Retirement Compensation Arrangement
A Retirement Compensation Arrangement (RCA) is a pension plan where a custodian holds funds contributed by an employer for the purpose of distributing it to the employee in retirement. RCAs are often catered to high net worth or high earners who are seeking retirement income in excess of what’s provided by a Retirement Pension Plan.
Individual Pension Plan
An IPP has similar features to an RRSPs as they both provide tax deferred growth and creditor protection but they different in how much you could contribute. An IPP provides greater accumulation and has a higher contribution limit than an RRSP. It’s important to note that a IPP is tax planning tool that is complex to and guidance is recommended.
The bottom line is that when it comes to tax planning, Canadians have many options at their disposal. Taking advantage of the options will ultimately encourage a comfortable retirement.
