Registered Retirement Savings Plan (RRSP) - A pillar of retirement income planning

This blog submission is provided by our friends from the Sonoda Team at TD Wealth to help with your retirement and estate planning education.

What is an RRSP? When and how much can you contribute to your RRSP?

One of the pillars of retirement income planning in Canada is the Registered Retirement Savings Plan (RRSP). Introduced by the federal government as an alternative retirement saving vehicle for Canadians who did not have the benefit of an employer-sponsored pension plan, RRSPs have become a mainstay of saving for retirement.

RRSPs enable effective savings for two main reasons:

1. Contributions to a plan are not taxed until they are withdrawn, which reduces your present taxable-income.
2. Investment income or capital gains arising from any investments held inside your RRSP grow on a tax-deferred basis until you withdraw them, or until the plan is de-registered.

You can contribute to your RRSP up to and during the year you turn 71 and you can make contributions at any time during the calendar year.

By the end of the year you turn 71, you are required to close your RRSP by either withdrawing the funds; transferring the funds to a Registered Retirement Income Fund (RRIF); or using the funds to buy an annuity. One of these choices must be made by December 31st of that year.

There is a limit on the amount that you can contribute annually to your RRSP. The annual limit is known as the RRSP deduction limit—or, more commonly, your RRSP contribution room.

The amount you can contribute each year depends on: Your earned income from the previous year The maximum contribution limit set annually by the federal Income Tax Act (ITA) Any unused contribution room from previous years (which can be carried forward indefinitely) Any adjustments based on employer pension plan contributions or spousal RRSPs

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What income counts toward your RRSP contribution room?

RRSP contribution room is based on certain types of earned income as defined in the federal ITA, including:

• Employment income
• Net rental income
• Net business income
• CPP/QPP disability pension income
• Spousal/child support received
• Research grants

Earned income does not include:

• RRSP/RRIF income
• Interest and Dividend Income
• Capital gains
• CPP/QPP income, other than disability benefits
• Old Age Security
• Workers’ Compensation

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How does your earned income and the ITA affect this year’s RRSP contribution room?

You can contribute 18% of your previous year’s earned income up to an annual allowable maximum, which changes every year as set by the ITA. Quite simply, if you have worked and created contribution room, you can contribute.

The quickest way to find out the amount you can contribute is to refer to the RRSP deduction limit on your Notice of Assessment (or Reassessment) from the Canada Revenue Agency (CRA), which you receive after filing your tax return, either in the mail or in your CRA online account:

http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html

Your Notice of Assessment will show the contribution limit for the present tax year, as well as any contributions you made but haven’t deducted in previous years.

The federal ITA also influences your contribution room through its rules to prohibit tax avoidance. For RRSPs, the Anti-avoidance Rules will enable the CRA to impose tax if investments made within them are not qualified. Qualified investments include money, guaranteed investment certificates, government and corporate bonds, mutual funds and securities listed on a designated stock exchange.

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How does your unused contribution room from previous years affect this year’s RRSP contribution room?

Perhaps you made a contribution but didn’t have enough room to deduct it in a past year. You can carry forward the contribution room you build up and deduct any undeducted contributions then.

You are allowed to make a cumulative over-contribution of $2,000 above your annual contribution room without incurring a penalty from the CRA. That $2,000 over-contribution may be made in one tax year, or over a number of tax years. Note, however, that you cannot deduct that extra $2,000.

By contrast, if you contribute more than this year’s amount, including making up for your unused contribution room, you will be in an over-contribution position. The CRA may then impose a penalty of 1% per month on the excess amount, until you withdraw it. You will not be taxed on the withdrawal if you make it during the year the unused contribution was made, or the year following, provided that you reasonably expected you could fully deduct the excess.

Alternately, you can leave the excess contribution in your RRSP if you know you will be generating sufficient new contribution room in the following year. However, in the meantime you will still pay the monthly penalty for an excess contribution.

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How do adjustments based on employer contributions affect this year’s RRSP contribution room?

The amount you can contribute in a given year will be affected by any pension adjustments or past service pension adjustments you may have.

The amount of pension benefits you earn in a year from an employer pension plan will comprise your pension adjustment, which reduces your RRSP deduction limit for the following tax year. The greater the amount put aside for you in your employer pension plan, the less you will be able to contribute to your RRSP. This reduction occurs because, if you benefit from an employer pension plan or deferred profit sharing plan, you are seen to be receiving benefits similar to an RRSP. Following from the original intent behind creating RRSPs, this limitation is designed to level the retirement savings playing field.

Meanwhile, if you receive additional pension benefits because your employer has upgraded the company pension plan on a retroactive basis, or you have purchased pension credit for past service, that will result in a past service pension adjustment (PSPA). It will also reduce your RRSP contribution room.

The impact of an employer pension plan enhancement may sometimes be sufficient to reduce that year’s contribution limit, and any unused carry-forward room. You will have “negative contribution room”, which will not be decreased until you generate earned income and new contribution room.

If you leave your employment before retirement, you may be entitled to a pension adjustment reversal (PAR), which will restore some of the RRSP contribution room that was lost due to pension adjustments. In that case, the amount of the PAR would be calculated by your pension administrator. It will differ depending on whether your employer plan was a defined benefit (DB) or defined contribution (DC) plan. DC plans involve contributions from the employee, and are viewed by the CRA to be similar to an RRSP. DB plans, on the other hand, generally involve contributions from the employer as well. Therefore, they are viewed as providing an added benefit on top of an RRSP. If you had a DB plan, you will only get a PAR if you give up the right to receive payments from the plan, or if the commuted value of benefits earned under the plan to a locked-in RRSP (generally known as a Locked-in Retirement Account) are less the amounts considered to be a pension adjustment or PSPA.

You may be able to buy back benefits from your employer pension for a time period when you were not participating in your employer pension plan, perhaps due to a leave of absence such as maternity leave.

Funding a buyback can be done as:

• A lump sum payment
• Installments
• Direct transfer from a registered plan such as your RRSP

If you, as an individual (rather as part of a group), decide to undertake a buyback, please note that the CRA must certify the PSPA calculated by the employer or pension administrator. It is the employer or pension administrator’s responsibility to submit a buyback for certification.

A PSPA cannot be certified if it creates more than $8,000 of negative RRSP contribution room. If so, you will have to weigh the value of the future income generated by adding to your employer pension plan versus the income that could be generated by the funds you transfer from your RRSP.

Let's look at an example: In this scenario, Sam decides to buyback $30,000 in past service. It will result in a PSPA of $30,000. If she is funding the buyback by transferring $15,000 from her RRSP, this creates $15,000 negative contribution room (more than the allowable maximum of $8,000), so she will be required to make further RRSP withdrawal of $7,000 to fund the buyback. PSPA of $30,000 - RRSP transfer of $15,000 = PSPA reduced to $15,000 Allowable negative RRSP room of $8,000 = Requires an RRSP withdrawal of $7,000

A pension buyback and its impact on your RRSP involve some tricky calculations, possibly a transfer from your RRSP to fund the buyback, and a withdrawal so you won’t end up penalized by the CRA. Review your buyback plan with your TD advisor to ensure you will benefit from doing it in the first place. If you will benefit, your advisor can assist with facilitating the buyback, and if necessary a withdrawal from your RRSP.

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How do spousal RRSPs affect each spouse’s contribution room?

A spousal RRSP can be set up by one spouse or common-law partner for the other. Generally, it is established by the higher income-earner for the lower income-earner. Some couples have both individual and spousal RRSPs. Some individuals eventually combine both types of their RRSPs into one spousal RRSP to make managing their investments easier or to cut down on administration costs.

Let's look at an example: If Rahim sets up a spousal RRSP for Kala, when he contributes to the spousal RRSP, his own contribution room will be decreased. He may deduct a contribution based on his contribution room, even though Kala is the annuitant and has full control of the plan. When income is withdrawn from the plan, it will taxable to Kala. The exception would be if she makes a withdrawal within three years from when Rahim makes a contribution. The attribution rules in the federal ITA will be applicable and Rahim will be taxed on the withdrawal.

The attribution will apply on withdrawals up to the total amount of contributions made to all spousal RRSPs in the same year as the withdrawal, and the two previous years. The attribution rule will not apply if the partners are not living together due to relationship breakdown or the annuitant’s partner has died.

While the contributions made to a spousal RRSP are based on the contributor’s contribution room, ultimately, a spousal RRSP will enable the couple to split income when withdrawals are eventually made.

Possible Spousal RRSP Issues: Dominic and Fabriana When Dominic turns 71, his spouse Fabriana is 63. He can still contribute to her spousal RRSP, while collapsing his individual RRSP, as long as he has contribution room. If Dominic and Fabriana separate, under certain conditions, they could ask the CRA to remove the spousal designation of any spousal RRSPs, if they provide written proof that their marriage has broken down (e.g., a legal separation agreement or divorce order). If they get divorced, a tax-free transfer of RRSP funds can be made from one spouse to the other as part of the legal proceedings to settle the division of property or fund spousal support.

Is a spousal RRSP right for you and your partner? Talk it over with your partner and TD advisor to ensure you know the benefits and rules.

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What taxes are imposed on RRSP withdrawals?

If, at any time, you withdraw funds from your RRSP, a federal withholding tax will be imposed (except in special cases such as the RSP Home Buyers’ Plan or Lifelong Learning Plan). If you live in Quebec a combined federal/provincial withholding tax will be imposed.

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When can you claim RRSP contributions?

When making tax claims on RRSP contributions, you can claim contributions made in the first 60 days of the later calendar year for either the preceding tax year or the present tax year. For example, Audley didn’t make an RRSP contribution before the end of 2015, but he needed the tax deduction for the 2015 tax year. Therefore, he decided to make a large contribution to his RRSP in early January, and use it to claim a deduction on his 2015 tax return. Alternately, he could have claimed a deduction for the contribution on his 2016 tax return, or any future tax year.

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How is your RRSP taxed when you die?

It’s likely that your RRSP will present the largest tax liability for your estate. It will be included as income on your terminal tax return at fair market value. Tax will be payable unless you undertake one of a few strategies prior to death.

The most common strategy is to name a qualified beneficiary for your RRSP. That includes your spouse or common-law partner, a dependent minor child or grandchild. The usual practice is to choose your partner. Please note that Quebec residents must name beneficiaries in their will—they cannot do so in registered plan documents.

The RRSP funds are transferred to that person as a refund of premium. The full amount could be taxed as your partner’s income. Usually, however, your partner would transfer the funds into an RRSP or RRIF, continuing the deferral of tax until the funds are withdrawn, or passed on again when he or she dies.

If the beneficiary is a dependent child or grandchild and is named your beneficiary, the funds could be used to purchase an annuity. The only caveat imposed by the CRA is that annuity must end by the time the child or grandchild turns 18 years of age. This results in spreading the tax over several years, when the annual income from the annuity is received, allowing the child or grandchild to take advantage of personal tax credits to lower his or her tax bill. If the child or grandchild (youth or adult) has a physical or mental disability, your RRSP funds can be transferred to the child’s RRSP, RDSP, RRIF, or Pooled Registered Pension Plan, or can be used for the purchase of an annuity.

If you name a registered charity as your beneficiary, your estate will be entitled to a charitable tax donation credit. It is likely to offset any tax owing upon deregistration of your RRSP at the time of death.

If you name neither a charity, nor a qualified beneficiary (such as a partner, child or grandchild), your estate will be responsible for paying the tax owed upon the collapse of the plan. If there are insufficient funds in your estate, the beneficiary may have to pay a share of the taxes owing in situations when the estate and beneficiary share responsibility for the tax liability.

Talk to your TD advisor about a possible beneficiary for your RRSP. Make sure you know the tax impact of your choice.

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This post has outlined some of the ways that RRSPs can help you prepare for retirement, and some of the challenges that they can cause. Be sure to contact your advisor with your questions.

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The information contained herein has been provided by TD Wealth and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. TD Wealth represents the products and services offered by TD Waterhouse Canada Inc. (Member – Canadian Investor Protection Fund), TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and TD Wealth Private Trust (offered by The Canada Trust Company).
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Carson Law Press Release - Staff Announcement and Job Opening

Carson Law Office Professional Corporation is proud and excited to announce that Shannon Hogan, our receptionist and one of our brand ambassadors, has accepted an offer to attend law school at the University of Ottawa, with classes starting September 2018.

While the entire Carson Law family is sad to be losing a very competent and positive staff member, we are very happy that Shannon has accepted this opportunity and will be pursuing one of her life and career goals.

We wish her the best of luck and would love to see her rejoin the firm again in the future, especially as a new lawyer.

A search for her replacement will commence immediately with an anticipated start date of Tuesday, September 4, 2018.  A job description can be found below.  Any and all interested candidates should provide a resume and cover letter to our Manager of Operations and Business Development, Chad Blundy, at chad@carsonlaw.ca

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Job Description:

This position currently has a working title of Receptionist and Brand Ambassador.  As the title suggests, the incumbent will be called upon to complete tasks associated with that of a traditional receptionist/administrative assistant as well as duties pertaining to marketing and business development.  Carson Law is currently working to develop a reputation in the legal industry as providing exceptional customer service and communication with clients.  Therefore, above all else, there is an expectation that the person acting in this role will maintain a pleasant and positive demeanor at all times.  The incumbent will also be the first employee that the firms’ clients will see upon entering the office and thus will be responsible for providing a first impression on behalf the entire business.  Some specific work tasks will be as follows:

• Answer phones and direct calls to the appropriate staff member

• Greet clients and make them feel comfortable and welcome – offer to take visitors coats and offer beverages (if appropriate)

• Field inquiries about the firms’ notary public services and advise customers of notarization availability

• Collect payment and issue receipts for notary public services and other legal retainers

• Be intimately familiar with and able to maintain the firms’ lawyers’ appointment schedules

• Ensure that client files are organized and ready for their appointments

• Act as a communication liaison between clients and staff by way of fielding calls for the lawyer(s) and directing to the proper clerk as well as dealing with walk-in customers appropriately

• Manage files between clerks and lawyers so schedules are managed and inquiries get attended to

• Understand all of the firms’ services to be able to confidently answer general questions and market to potential new clients

• Prepare outgoing mail, arrange for courier pick-ups, and collect/sign for deliveries

• Follow new matter and file opening procedures such as collecting client IDs and intake forms

• Other duties as assigned

Projected Salary: $29, 200 per year
Projected Start Date: September 4, 2018
Work hours per week: 40 hrs
Annual Holidays: 3 weeks per year
Benefits: Dental/Medical coverage offered following the completion of 3-month probation period

Any and all interested candidates should provide a resume and cover letter to our Manager of Operations and Business Development, Chad Blundy, at chad@carsonlaw.ca

5 Steps to a Successful Home Purchase

Purchasing a property is the biggest, most important purchase in most individuals' lives, and it can be stressful, especially for first time home buyers. Having the help of an experienced mortgage broker, realtor, and legal team can put your mind at ease.

To help you get started, we've outlined a tried and true method for a successful first purchase:

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1. Establish a budget.

This part sounds simple, but with ever-evolving mortgage rules, it is crucial that you find a reputable mortgage broker who can consider all available options for your particular circumstances.

In addition to the cost of the property, it is important to consider additional closing costs, which could include the land transfer tax (and whether you are eligible for a rebate), government registration fees, title insurance, legal fees, and other professional fees that may apply.

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2. Retain a reputable realtor who has experience working in your target market.

Personal transactions often require extensions, or include terms that cannot be met, which may lead to a breach of contract. An experienced realtor will not only help you negotiate a fair purchase price, but will also have a keen eye for defects, location, layout, upgrades, renovation costs, etc.

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3. Retain a (GooD) real estate lawyer.

Once you've chosen a lawyer, your realtor can send them the signed Agreement of Purchase and Sale (APS) shortly after it is executed.

Carson Law would be pleased to review an agreement at any point, even before a formal offer has been made, and especially if there are unusual circumstances that require a second pair of eyes.

One thing that Carson Law always encourages potential home buyers to do, especially first timers, is to not be afraid to seek legal advice early in the buying process. We are willing to perform services, such as title searches, that would help with the vetting of a property before an offer is made. Afterall, spending around $100 to help make a decision about an asset worth hundreds of thousands just makes sense.

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4. Provide your lawyer with a firm signed deal.

Once our office has a firm signed deal, along with the APS, we will open a file. At that time, we will require a few pieces of information from you and your contacts, including:

• Your personal information

• Your mortgage information

• Your home insurance information

• Your history of property ownership

  • In many cases, first time home buyers qualify for a substantial credit towards the land transfer tax.

• A title search

  • Searching the history of the property ensures that the buyer does not inherit any title defects.

With this information, our team can lead you through the next steps, which include:

• Finalizing all costs, like the amounts of the land transfer tax, government registrations fees, title insurance fees, legal fees, and HST

• Scheduling a meeting to review all legal documentation; and to sign final mortgage documentation, transfer and deed documentation, and ancillary documentation

• Notifying you of the successful closing of your purchase on the closing day

Closing day is an exciting time, and you will be hoping to pick up the keys to your new home as soon as you can. It is important to keep in mind that most closings are finalized during the late afternoon. Our team will ensure that every step of your purchase is completed correctly, which requires thorough work down to the last detail. Plenty of time is required for us to consult with the lawyer representing the seller to transfer funds, verify funds, courier original signed documents and keys, and to release and register the deed which will list you as the new owner of the property. Once these steps are complete, our staff will contact you to pick up your keys.

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5. After closing, ensure everything is as it should be.

We suggest you take the following steps to ensure everything is in order at your new property:

• Look for any new damage in the property. Photograph the property before moving any of your belongings in.

• Look for garbage, debris, or other unwanted items left behind.

• Contact hydro and utilities companies to initiate your accounts.

• Contact your tax company to ensure that they have everything they need to bill you. Doing so will ensure that your taxes stay up-to-date, and that you remain in good standing. If any outstanding tax or water bills show up, contact your lawyer immediately.

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Bonus Tip One more thing that we can't stress enough is the importance of trying to take emotion out of the home buying process. Many potential buyers, especially those purchasing for the first time, get hung up on properties that they think are "the one" and either end up making an offer that they can't afford, ignore serious defects, or agree to waive having a home inspection done. Each of these oversights can have serious repercussions. Purchasing a home needs to be seen for what it is... the acquisition of a significant asset. If the situation is not a good one, you must be prepared to walk away.

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We hope that this guide has helped to prepare you to search for your first home. If you have any questions, our team at Carson Law Office would be pleased to assist you.

While on the subject of first time home buyers, have a look at this great video we did with our good friend Limor Markman where we talk all about this topic in greater detail.

Carson Law and BOSL Donates to Burlington Food Bank

Carson Law continues to be a big supporter of local area causes and on Saturday July 28, 2018, our founder Ryan Carson was given the opportunity to combine his passion for baseball with fundraising for a worthwhile and important community charity.

The Burlington Oldtimers Slow-Pitch League (BOSL) held it's annual Golf Day in support of the Burlington Food Bank.  Ryan has been an active participant, team captain, and vocal proponent of BOSL for a number of seasons, and this year has been no different.

Through sponsorships and mini-contests associated with the golf-day along with a mid-season baseball tournament, BOSL was able to raise $3650 for the Burlington Food Bank.  Ryan then went ahead and donated $1000 on his own to bring the grand total up to $4650 for the day.

All in all, the weather was amazing and everyone had a great time while doing something good for the community.  Ryan was also the main focus for one of the day's contests called "beat the lawyer".

On one of the par-3 holes, golfers had to try to get their tee-shot closer to the pin than a cut out of Ryan that was placed on the green.  Successful contestants were awarded with prizes provided by Carson Law.  We're not sure how many people actually aimed at Ryan's photo instead of the hole, but it looks like it returned in good enough shape to be signed and hung in a hall of fame (somewhere).

Great job to everyone involved in supporting the event and raising funds for such an important local charity!