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that is because an RRSP contribution is tax sheltered, which means any growth is exempt from taxes until the funds are withdrawn.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. 

So I’m a First Time Home Buyer, What Do I Need to Know?

Congratulations, you are on your way to purchasing your dream home, here is what you should know about the biggest investment of your life.

Purchasing a home in this day and age is an expensive proposition, one must be mindful of available government incentives and initiatives designed to reduce the financial burden and ease the process of making their dream home a reality. In this article I will discuss some of these initiatives, including the first-time home buyer RRSP withdrawal, First-Time Home Buyers’ Tax Credit (HBTC), GST/HST Home Buyer Rebate and the Land Transfer Tax Credit.

First, a note of clarification regarding the difference in the definition of a first-time home buyer from the perspective of the Canada Revenue Agency (CRA) for tax purposes and the municipal and provincial government for land transfer tax purposes. According to the CRA, a first-time home buyer is anyone who has not lived in a home owned by oneself or one’s spouse or common-law partner in the year of acquisition, or in any of the four preceding years. Thus, even if you or your spouse/common law partner have previously owned a home that you lived in, so long as you have not been doing so in the 5 years prior to your new home purchase, you are considered a first-time home buyer. Land transfer tax rules differ in that you can only ever qualify once and even then you would need to occupy the property as your principal residence within 9 months of your purchase. Thus, if your first property purchase is strictly for investment purposes, a key implication of this 9 month requirement is that it will not be eligible for the provincial rebate of $2,000, nor will you qualify for the municipal rebate of $3,725 if you’re buying a home in Toronto. The CRA, however, will permit you to purchase a property as an investment and still qualify as a first-time home buyer on your second property.

Q: I owned a property in another country before moving to Canada. Do I qualify for the Land Transfer Tax Rebate?

A: One of the conditions for the Land Transfer Tax Rebate is that you cannot have ever owned an eligible home, or an interest in an eligible home, anywhere in the world.

Two privileges afforded to first-time home buyers under the CRA is the ability to utilize your RRSP to capitalize your down payment and the First-Time Home Buyers’ Tax Credit. You can borrow up to 25k from your RRSPs for a down payment, which represents a substantial amount for most first-time home purchasers. Repayment of the borrowed amount is to be made over a period of 15 years, commencing 2 years after the withdrawal is made. The RRSP is a source of refund on your tax return and, depending on your marginal tax bracket, could result in upwards of 46% back. Should you need more detailed information about the withdrawal process for RRSPs refer to my article here .

Q: I have already used up my first-time home buyer withdrawal before, can I utilize it again?

A: As long as you qualify as a first-time home buyer under the CRA, and provided you have paid back your first RRSP withdrawal in full before the year of purchase, you are permitted to utilize it again.Home Owner

Next is the Home Buyer amount. This is a 5k non-refundable tax credit which works out to $750 back to a first-time home buyer. This credit could be shared or used by one person and must be applied for in the tax return concurrent to the year the purchase was made.

Q: Can I qualify for the Home Buyer tax credit even though I don’t qualify for the first-time home buyer RRSP Withdrawal?

A: As long as you are considered a first-time home buyer under the CRA, you are eligible to apply for both the Home Buyer tax credit and RRSP withdrawal again, with the only point of difference being that qualification of another RRSP withdrawal is, as mentioned earlier, dependant on whether you have paid back the previous RRSP withdrawal in full.  Your ability to reapply for the Home Buyer amount is not affected either way.

Q: My partner was considered a first-time home buyer when they purchased a property, am I still eligible to use my first-time home buyer privileges when we get married?

A: As long as you have not lived in the property that belonged to your partner while you are married or considered to be common-law, you may still utilize your home buyer privileges.

Another key consideration if purchasing a new home is the implication on the HST Rebate. While there is no HST on the resale of a property, there are HST implications to be considered on newly constructed properties. I have previously written a detailed article on the issue here.

In summary, when buying a property from a builder there is an associated HST charge, but this is partially offset by an HST rebate that one will qualify for. The process is straightforward if the property is to be your principal residence; the rebate is handled by the builder and included in the final price. However, things get dicey when the property is to be used as an investment. In this case, the full amount of HST must be paid up-front, then the purchaser must apply for the new residential rental property rebate. The rebate will be granted provided the property is leased for at least 1 year from the transfer of ownership (meaning one year from closing, not occupancy). Consequently, your purchase price for the property will always be higher in the case of an investment property purchase. Always speak with your accountant when making such a big investment before making a first deposit or down payment on a property.

Q: What if I rent out my condo during its occupancy phase before it closes? Since most of the amenities may not be available, I don’t want to move in yet.

A: You or a relation to you must be the first occupant of the property.  If someone else occupies the property, even before closing, you have forfeited your right to the HST rebate. CRA have several means of discovering who the first occupant of the residence is, one of which is to check with the ministry of transportation.

Q: I have purchased a property and plan to live in it as my principal residence. How long do I have to live in it to satisfy the CRA’s requirement for principal residence?

A: Each case dealing with consideration of a principal residence for HST purposes is handled on a case-by-case basis as there is no period specified in the income tax act regarding the ownership of a property being considered principal or investment. If the residency period is fairly short, less than a year for instance, as long as you can justify the reasoning for such a short residency, it may be enough to satisfy the CRA. For example, a qualified reason might be that shortly after moving into the property, your parents fell ill, thus requiring you to live with them. Another possibility is that you moved to a different city for work purposes.

One such credit is the Healthy Home Renovation Tax Credit. You can find more information here.

Disclaimer: The information contained herein is not meant to be professional advice but for educational purposes only. You should consult with your accountant when handling such matters.