Comparing Investment Plan Alternatives – What are they and how can they work for you?

This week’s blog is about the different types of investment accounts an individual can open up in Canada. Since we are right around the first 60 day mark, which means the last chance to contribute to RRSPs for the 2018 taxation year, I figured it’s a great time to explain how to choose what type of investment accounts to invest into.

Before I explain the various investment options Canadians have, I will first explain what individuals can invest in these accounts. The idea is that these accounts dictate the tax advantages people will benefit from. However what they can actually invest is totally up to the risk tolerance of the individual.  People can invest in anything from individual stocks, mutual funds, GICs to regular savings accounts. If the investment time horizon is long, and the individual’s risk tolerance is medium, you would not likely have that individual invest in GICs as the rate of the return would not make sense for this individual considering their time horizon and risk tolerance.

Now that we know we can practically invest in any type of investment product, let’s discuss the various investment vehicles that are available to Canadians. I will go one by one and give the pros and cons of each type.

RRSP – Registered Retirement Savings Plan

This type of investment account is important for multiple reasons. The primary reason someone would invest in an RRSP is for retirement planning, and the idea is that this type of investment account will help you achieve your retirement goals faster. The reason for that is because an RRSP contribution is tax sheltered, which means any growth is exempt from taxes until the funds are withdrawn. The second is that the RRSP is considered a tax deduction against your highest income tax bracket, which means that someone in a high tax bracket will get a very decent refund back and can reinvest the refund and grow their investment balance exponentially.

Another reason for someone to invest in an RRSP is to use a $25,000 as a down payment towards their first time principal residence called the Home Buyers Plan (HBP). If you are dealing with a couple, they can each invest $25,000. There are strict rules in how long these investments have to be in an RRSP before a withdrawal can happen, and the RRSP repayment term is quite strict, if not followed a portion of the withdrawal will be considered an income to that individual.  If you want further details please read my article here on RRSP withdrawals for first time home purchase.

The last reason someone will invest in an RRSP is for the Lifelong Learning Plan (LLP). This withdrawal from RRSP is for the purpose of going back to school and using their RRSPs to pay for their studies. Again there is a strict repayment period for individuals and if not followed just like a HBP the amount would be considered as income in that particular year.

Example

Lisa is a very high income earner. She earns over $300,000 working for one of the biggest companies in her industry. Her company however does not contribute to her retirement plan and this is why it is important for Lisa to contribute and max out her RRSP’s every year, because an RRSP contribution means 50% back in the form of a refund back every year. On top of this, Lisa has no immediate plans to spend any of this money. She has a home that she lives in and she is very young. Her investment into an RRSP should at the minimum be in mutual funds assuming she has a medium risk tolerance level. She can still be in a low to medium risk tolerance level and invest in mutual funds, but if she has a fear in the markets she should invest in something safe like GICs.

RESP – Registered Education Savings Plan

This type of investment vehicle is for parents with a child or children, specifically used for their education planning. This type of investment account makes it very easy to help parents achieve their goals of raising enough funds for their child/children’s futures since the government deposits a 20% grant to every dollar investment. Up to a lifetime grant of $7,200 and a maximum of $1,000 per year assuming the parents are behind on their RESP contributions. If not, it is a maximum of $500.

These investments are grown tax deferred just like an RRSP because they are in a registered account. The different with this type of registered account is that it does not get deducted against a taxpayer’s return, and thus generate a further refund.

Once the funds are withdrawn, the grant and growth component become taxable on the child’s tax return in that year. However since the student likely won’t have more than 10k in grant and growth, they will not have to pay any taxes as a result.

The RESP can be opened as an individual account or a family account. Family RESP’s give a little bit more flexibility in the sense that parents can use grants from both children on the first one, especially if they fell behind with the first child early on.

Example

Lena and Grant had baby Leon and they are very interested in their child’s education. Since their income is very high, it is unlikely that their child will ever be able to receive any government loans when he is old enough to attend University. Depending on their goals they can contribute now or later on in their lives, since they can always play catchup on their contributions in the future.

TFSA – Tax Free Savings Account

The income earned in this type of investment vehicle is tax exempt. Many often ask which tax vehicle, RRSP or TFSA, makes sense for them. Depending on what these funds would be used for and where they are in their lives, the answer from their financial advisor could be very different.

If the plan is for growing their retirement plans early in their lives, contributing to their RRSP makes more sense. However if they have some additional room and they would like some funds for a rainy day or for vacation it makes more sense to contribute to a TFSA. The funds invested for short term purposes will likely have a different risk profile and be invested in something lower risk like a GIC or a low risk mutual fund.

Example

John and Nancy are both 60 and they will retire in 5-7 years, their income at this point is very low, they make 40k each and they have both invested in their pensions over the years and have amassed a significant pension. At this point in their lives contributing more towards their pensions wouldn’t make sense so it would be smarter to invest in their TFSA. Which funds they draw first during retirement depends on their plans, and a financial advisor is very important to help this couple decide how to plan their retirement.

RDSP – Registered Disability Savings Plan

Parents that have a child with a disability can also find solace in the Registered Disability Savings Plan (RDSP). It is designed as a long-term savings plan to help disabled persons be better financially prepared for the future. For people living on a low income (below $30,000) the federal government will include up to $1,000 into this plan each year for up to 20 years in the form of the Canada Disability Savings Bond. For family income less than $91,831 on the first $500 contributed in the RDSP, the beneficiary will receive $3 for each $1 contributed, for the next $1,000 it will be $2 for each $1 contributed. Maximum grant for any one year is $3,500 and a life time grant of $70,000. If the beneficiary’s income is above $91,831 then they will receive $1 for each contributed amount up to $1,000. Once the child turns 18, the income qualification is on the disabled individual.

This investment vehicle is almost a combination of the RESP and the RRSP. Although the purpose of the investment account is not for the purpose of a child’s schooling but the government does provide a grant component for a disabled child’s future. The idea is for the parent to contribute for a child’s long term needs so that the government doesn’t have to only pay for the care of this child in the future.

Example

Mart and John have a child that was born with a long term disability, one that they want to make sure they are able to pay for once they both pass away in the future. Since their incomes are very low their advisor recommended they open up an RDSP. The government will contribute a large sum of grant money, and with their new provision will even go retroactive to make these contributions, assuming the disability is backdated.

OPEN – Non Registered Investment

This is the last type of investment vehicle and one that is least desired, but if an individual has exhausted all other investment vehicles that suit their needs this is the only choice they have. Any growth in this investment account carries potential distributions that are taxable in the forms of T3’s or T5’s, thus an individual may pay tax even if they do not draw from the investment account. Also any withdrawal is taxed in the form of a capital gain when the investment account is divested.

In the long-term if an individual has amassed enough wealth there is no other choice but to also invest in an Open account.


Frank and Bernadette have maxed their RRSP’s and they have no need for RESP’s as both their kids have graduated from University and they always maximize their TFSA’s.  They ask their financial advisor what else they can invest in, and they are told that non-registered is the only option left. However, even here they are told that they could potentially invest in investment products like corporate class investments with mutual funds that will at least not pay out much in the forms of distributions. This type of product will help them grow their investments and defer the taxes they would pay until they dispose of these funds.

Everyone’s investment path differs because no two situations can be the same, this is why it is very important for you to have a financial plan prepared from a Financial Advisor. If you need a plan prepared, please contact me and I will help you as a financial advisor through Canfin Magellan Investments. 

Tax and other benefits for people with children

Last week we discussed what employment expenses are, and who can deduct these types of expenses. If you missed that blog, you can find that blog right here.

Today I will be blogging about a subject that is very important to me as a parent. Many new parents ask me what tax breaks/benefits are available to them now that they have become parents.

Throughout this blog I will be discussing various benefits:  some that are available in past years, and other benefits that have been available to parents in the past but since removed due to change in the government.

Benefits for Single and Separated Parents

The first benefit only applies to single parents. If a parent has sole custody over a child because of a separation agreement and receives benefits from the other parent, that parent will be able to claim the child as an eligible dependant. This non-refundable tax credit is like having the credit for a spouse with no income, you will essentially be able to claim the basic exemption twice federally, and almost the maximum for the provincial credit. If two separated parents have 50-50 custody and no agreement in place for one to pay the other support, there is a choice on who can make the claim for the eligible dependant. Also, if these separated parents have two children, they can each make a claim for one child.

Benefits for Parents of Children with Disabilities

If your child has a disability, you are able to file for a disability tax credit which will be transferred to you since your child would not need to claim that disability. The disability tax form T2201 is filled out by the child’s physician and sent to the CRA. Upon acceptance, the credit will be exercised on the parent’s tax return.  The credit would be used on the parent that has enough taxable income to benefit from the transference of the disability tax credit. This very much like the eligible dependant credit, if the parent has no taxable income, unfortunately it would not produce any tax benefit.    

Canada Child Benefit

Another benefit to being a parent is receiving a benefit such as the Canada Child Benefit (formerly Child Tax Benefit). This benefit is based on income, although the Liberal government has proposed increases to the CCB the parent/parents, with families with lower family incomes receiving higher benefits. The CCB isn’t only income based but depending on the age of the child as well, families with children below 6 can receive as much as $6,496 in 2018 and $5,481 if the children are 6-17. The benefit is substantially more when the child has a disability, once the parents apply for the disability tax credit they will automatically adjust the CCB amount.

Registered Disability Savings Plan (RDSP)

Parents that have a child with a disability can also find solace in the Registered Disability Savings Plan (RDSP). It is designed as a long-term savings plan to help disabled persons be better financially prepared for the future. For people living on a low income (below $30,000) the federal government will include up to $1,000 into this plan each year for up to 20 years in the form of the Canada Disability Savings Bond. For family income less than $91,831 on the first $500 contributed in the RDSP, the beneficiary will receive $3 for each $1 contributed, for the next $1,000 it will be $2 for each $1 contributed. Maximum grant for any one year is $3,500 and a life time grant of $70,000. If the beneficiary’s income is above $91,831 then they will receive $1 for each contributed amount up to $1,000. Once the child turns 18, the income qualification is on the disabled individual.

Registered Education Savings Plan (RESP)

Your child can also qualify for the Registered Education Savings Plan (RESP).  This benefit is for you to save up for your child/children’s education in the future when they plan on going attending post-secondary education. The government has provided great benefit here as well. If you have low income, they will initially start you off with a $500 bond. However if you don’t qualify, they will match 20% of whatever you contribute into the RESP account. This amount is capped at an annual limit of $1,000 which is 20% on $5,000 deposit (an amount that is a limit for 2 years). The lifetime limit for an RESP Grant amount is $7,200 with a plan maximum of $50,000. If you have not contributed to your child’s RESP in early years, you are able to contribute in their latter years by doubling up the deposits in a given year. The government will also give a higher benefit on the first $500 if the parents combined income is very low.

If you have any questions about the RDSP and RESP investment accounts, or if you need any help setting one up please contact me here. I can help you through Canfin Magellan Investments, a brokerage I deal with for investment purposes.

Child Care Expenses

Another opportunity for you as a parent is to be able to deduct child care expenses. If both parents are working, or one is taking part time/full time education, the CRA will allow a deduction of child care expenses on the person’s tax return who earns the lower income (unless that person is taking part time/full time education). Unlike the other earlier credits that I have discussed, the child care expense is a deduction against an individual’s income and therefore it affects them at their highest tax level whatever that may be. That is why the preference is to deduct it on the person with the higher income level. How is that achieved? Well one can only do this if the other parent is taking full time/part time education, it will be based on either weeks or months. The amount of expense a parent can also deduct is based on the child’s age, if the child or children are under the age of 7, a parent can deduct $8,000 per child. If that child is 7 to 16 years old, then a parent can only deduct $5,000.

Other ways to plan for your children’s’ future

Parents often wonder how they can benefit their children in the future outside of RESP’s and RDSP’s for those that have a disability. A parent should obviously get a life insurance policy on themselves in case anything happens to them. However not many parents think about buying a life insurance policy on the child. When they are born, the life insurance will be cheapest since they are so young and based on the statistics that life insurance companies use your child should have a long life. Therefore it is wise to consider purchasing a life insurance policy on your child for the future. How can they benefit with life insurance policies? Well for one, if you purchase a permanent insurance the premium amounts will be minimal because they will be very young and have many years to pay the premiums. The life insurance can be used as policy for them in the future when they get married and have kids. Or, if a parent buys them a policy with an investment component like a Universal Life Policy or a Whole Life Policy, then the insurance will grow in value over the years, and the child, when they become an adult, will be able to take some money out of that insurance policy (possibly when they decide to buy a property). It will be very difficult for them to be able to afford anything in the future, and this is one way you can help save up money for them.

A few benefits that have since come and gone

The child amount was a federal non-refundable tax credit that allowed a parent with a benefit per child of about $2,000 which translated into a tax break of $300 per child.

The government also got rid of the fitness credits and the art amounts. These credits were both federal and provincial credits at roughly $1,000 and $500 non-refundable tax credits respectively per child. At the end they were very minimal, but it helped parents cope with cost of sports activities and other arts programs that parents were paying out of their pocket.

Another credit that since has been removed was income splitting for families. This required a couple to a have a child or children under the age of 18 in order to be able to use the benefit.  The proposed policy in the day allowed these families to split their household income of up to $50,000, the maximum benefit a family derived from this split was $2,000 a year. Unfortunately this is not around anymore.

There have been many benefits that have come and gone, and as tax professionals, we are always up to date with any benefits. Ask your accountant about what you qualify for.

In the meantime if you have any ideas for a blog please contact me here and ask what you would like me to discuss in my next week’s article.