Author Topic: Can"EH"dian Tax - You have questions, I have answers  (Read 94529 times)

RidinTheAsama

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #350 on: September 24, 2015, 10:43:08 AM »
My first question here:

I was wondering if the CCTB and/or UCCB benefits we receive every month would count towards our income when calculating our RRSP contribution room.

My guess was that since CCTB is a non-taxable benefit it does not count, and maybe since UCCB is a taxable benefit it does count.  Is this correct?

Thanks!

Hi

Your maximum annual RRSP contribution is based on your earned income in the previous year. Earned income includes salaries, employee profit sharing income, business income, disability pensions (issued under the Canada and Quebec pension plans), taxable alimony or maintenance, and rental income.

Neither CCTB or UCCB count towards calculating your RRSP room.

Well, not the answer I was hoping for but I'm glad to know.  Thanks!
I guess that means a little less tax-deferred saving than hoped for this year, and a little more in the TFSA... life is rough eh?

K-ice

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #351 on: September 24, 2015, 07:22:30 PM »
Thanks GettingThere.

I've held on to the looser stocks, they are slowly climbing.

I did do the in-kind transfer so I will have a capital gain.

I have put about half of what I need in an RRSP to offset.

The other half should be doable by the February deadline if not sooner.

Thanks!


GettingThere

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #352 on: September 25, 2015, 05:48:52 AM »
K-Ice,

I forgot to mention one important thing in your case, for in kind transfers. If you transfer shares from a taxable account to a RRSP or TFSA, you must declare the capital gain as if you sold it at the price you transferred the shares. But if the result of the transfer  is a capital LOSS, you can not claim the loss on your taxes. You must sell the shares first, incur the loss, transfer the money to your tax advantaged account, and rebuy the same shares 30 days later  (if that's whatt you want). A bit stupid in my opinion, but that's how it works.




« Last Edit: September 25, 2015, 06:20:07 AM by GettingThere »

K-ice

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #353 on: September 25, 2015, 07:28:48 AM »
Thanks for the tip.

I had read about the loss 30day thing but kind of forgot.

Anyway, I didn't touch the looser stock, it is a Canadian dividend stock so I will probably just let it sit outside of the TFSA or RRSP.

I still have some TFSA RRSP room but I will just fill it with new savings.

So many little rules to optimize these things.

Thanks

FI40

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #354 on: October 03, 2015, 01:28:03 PM »
I have a complicated tax question. My in-laws are canadian citizens, but my FIL used to work in the US, and has a 401k there. Unfortunately he passed away last week at 56, and now my MIL (age 52) needs to figure out what to do with it. I assume she is named as the beneficiary on it, assuming it works the same way as RRSPs, and once she provides the company with his death certificate she'll have ownership of it I suppose.

My question is how should she proceed in order to minimize the tax impact? What are the options?  I found some information here but I'm not sure I am interpreting it correctly. I think if she just took it all out now, she would pay 10% penalty plus 15% withholding tax, so that's likely not a good option. If she keeps it invested in the 401k until age 59.5, does that effectively avoid the 10% penalty (she may retire at around that time too, so maybe would avoid the 15% tax as well).

Thanks in advance!
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Cathy

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #355 on: October 03, 2015, 05:30:46 PM »
FI40, you are correct that your question is complicated, and it doesn't help that most of the existing literature on this topic is incorrect in some way or another. As I just noted in another post, secondary sources do not have the force of law and are mainly useful as a starting point for research. You need to verify the claims in secondary sources by reading the primary sources (e.g. treaties, statutes, and case law). My posts here are, of course, also secondary sources of information and you similarly cannot rely on them.

The publication you linked to ("Sunlife Publication") contains serious errors.

A plan commonly referred to as a 401(k) plan must hold assets in "a trust created or organized in the United States". 26 USC 401(a). For the purpose of this post, the operative phrase there is "in the United States". In the case of a distribution from such a trust "in the United States" to a nonresident alien, the distribution is generally subject to a 30% tax "to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States". 26 USC 871(a)(1). If the payee is "at no time during the taxable year ... engaged in trade or business in the United States", then the amount is not "effectively connected with the conduct of a trade or business within the United States" and the 30% tax applies. 26 CFR 1.871-7.

In furtherance of the above, when the distribution is made to a nonresident alien not engaged in a US trade or business, the payor is generally required to withhold 30% of the proceeds and remit them to the IRS. 26 USC 1441(a). However, the provisions of the Internal Revenue Code are applied "with due regard to any treaty obligation of the United States which applies to such taxpayer". 26 USC 894(a)(1). Assuming that the payee is a resident of Canada, the relevant treaty provides that the tax withheld is reduced to 15% if (and only if) the recipient of the distribution(s) is "the beneficial owner of a periodic pension payment". Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital, Article XVIII, 2(a).

The Sunlife Publication at page 2 claims that in the case of a distribution from a 401(k) plan to a nonresident alien who is a resident of Canada not engaged in a US trade or business, the withholding rate is always reduced to 15%. Unfortunately, this claim has no basis in law. The only authority cited by the Sunlife Publication for this proposition is 26 CFR 1.1441-2(b)(ii), but this regulation merely defines the term "fixed or determinable annual or periodical" for the purpose of "chapter 3 of the Internal Revenue Code and the regulations thereunder". This regulation has nothing to do with the meaning of "the beneficial owner of a periodic pension payment" as used in the treaty provision above. To be clear then, the withholding rate on the distribution, assuming that the payee is a nonresident alien who is a resident of Canada and not engaged in a US trade or business, will be 30% unless the payee is "the beneficial owner of a periodic pension payment", in which case it will be reduced to 15%. There is no precedential authority on the meaning of "the beneficial owner of a periodic pension payment" and certainly no authority suggesting that all recipients of the distributions from a 401(k) plan fall within the meaning of this phrase. In conclusion, the payee may have to pay a 30% tax to the US on the distribution, not necessarily the 15% claimed by the Sunlife Publication.

In addition to the above, and assuming that the payee is a resident is Canada, the 401(k) distribution will also have to be included in the payee's income for Canadian tax purposes. Income Tax Act, RSC 1985, c 1 (5th Supp) ("ITA"), 56(1)(a)(i).

Fortunately, there are a few pieces of good news.

First, the 10% additional tax that you mention for distributions from a qualified retirement plan (you call it a "penalty") does not apply to a distribution made to a beneficiary after the death of the employee whose account it was. 26 USC 72(t)(2)(A)(ii).

Second, the payee may be able to claim a tax credit in Canada for all or part of the 30% (or possibly 15%) tax that was paid to the US, depending on the overall Canadian tax profile of the payee and subject to all relevant statutory requirements. ITA 126.

Third, the payee may be able to contribute the 401(k) proceeds to an RRSP and claim a deduction for same. Subject to various conditions, there is a Canadian deduction available for income that is "a superannuation or pension benefit ... payable out of or under a pension plan ... attributable to services rendered by the taxpayer or a spouse or common-law partner or former spouse or common-law partner of the taxpayer in a period throughout which that person was not resident in Canada". ITA 60(j)(i). I bolded some of the most salient requirements, but there are also many other conditions not discussed here.

I hope this information is helpful, but as you surmised, this is a complicated topic, and this post is only a secondary source of general information intended to help with your research and is not a substitute for familiarising yourself with the primary sources, which contain other requirements not described here. The payee may benefit from retaining counsel to assist with this matter.
« Last Edit: October 04, 2015, 12:08:03 AM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.

FI40

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #356 on: October 04, 2015, 01:21:08 PM »
Thank you so much Cathy for the detailed response! This is very helpful. I will look into the "periodic pension payment" issue and the Canadian tax credit and RRSP contribution options. Great to see all those primary sources referenced which I didn't know enough to even look for!

Thanks again!!
I now have a blog, chronicling my journey to Financial Independence! So original, right?! Anyway, it's www.danglefoot.com

MMMdude

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #357 on: October 04, 2015, 01:26:49 PM »
Hi

On T2125 can one include GST on expenses if they are not registered for GST (ie still considered small supplier).  I would think so since it's a cost of business and not able to claim ITC on it.

Also for CCA of items owned before start of business, I assume one can "transfer" them to the sole proprietorship at a deemed fair market value.  Obviously if it was a Corporation this would be via s.85 rollover, however I assume on sole prop no form is needed?


Slideguy

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #358 on: October 05, 2015, 08:47:40 AM »
Hi all,
New to MMM and am sorting through "my house" and slowly getting things in order and an understanding of good things to be doing. My question is in regards to a second job. I have gotten one and am wondering what to set that at for deductions so that I don't get hit by the evil dreaded empire more than I am now. The second job I work at is saying that I have to give them a % rate that I would like to withhold for tax purposes.
I have searched and cannot find a somewhat easy way to calculate this.
The ultimate goal of the second job is to actually make some extra money to help get the "house" in order.

Thanks for any help. LOVE this site.
-a fellow Canadian-

FI40

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #359 on: October 05, 2015, 09:08:59 AM »
Hi all,
New to MMM and am sorting through "my house" and slowly getting things in order and an understanding of good things to be doing. My question is in regards to a second job. I have gotten one and am wondering what to set that at for deductions so that I don't get hit by the evil dreaded empire more than I am now. The second job I work at is saying that I have to give them a % rate that I would like to withhold for tax purposes.
I have searched and cannot find a somewhat easy way to calculate this.
The ultimate goal of the second job is to actually make some extra money to help get the "house" in order.

Thanks for any help. LOVE this site.
-a fellow Canadian-

Not sure what province you're from, but I think you can just use the tables here (for Ontario): http://www.taxtips.ca/taxrates/on.htm

You want to look at Marginal tax rates, for Other Income. Just choose the bracket that your primary job income is in (or combine brackets depending how much you'll be making at the side gig).
I now have a blog, chronicling my journey to Financial Independence! So original, right?! Anyway, it's www.danglefoot.com

Slideguy

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #360 on: October 05, 2015, 11:41:25 AM »
Thanks for the info! Sorry,  I forgot to include my home Province of Ontario.

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #361 on: October 19, 2015, 03:22:43 PM »
Hello all,

I'm back!

I will be getting to people's unanswered questions, in the meantime, thanks to everyone who has helped out their fellow MMM'er. I will state names - but don't have the time presently.

Everyone, I do want to take a quick moment to comment on the importance of voting (apolitically as possible). For what it's worth, I'm a moderate Libertarian - take it or leave it.

As a relatively young guy (30's), I'm proud that my grandfather, and all of his brothers fought, and survived D-Day. After 70 years, this does lose some meaning to us, but many of our descendants put their lives on the line (and their family's for that matter) to protect a notion of freedom, democracy, and the right to vote.

In this sense, I urge everyone to do the following.

1) Ignore the noise - there are a bountiful number of partisans on either side of this election. Ignore them entirely. I don't want to call them scumbags - so let's call them sheep.

2) Look at what the leaders have said, and the odds of this coming to fulfillment. Currently, the Conservatives have a really great record of making promises they keep - the other two haven't yet had the opportunity.

3) Weigh your options carefully, and considerably. What are your values, what's most important, and how does one affect the other? I.e. if you're passionate about X, but the accomplishment of Y and Z are necessary for X to succeed, you're likely better to vote for the party who will deliver with Y and Z, versus the one who says X will happen.

I'm keeping this as non-descript as possible, unlike Mike Myers and John Oliver... Sub in your values as necessary please.

Take the responsibility seriously, as if buying a car or a house. Test your assumptions, vote with who you think is going to do the best job, and be happy to fulfill your right and duty as a real Can'eh'dian. After all, it is guaranteed 2/3rds of the country will be complaining of the result - why not make sure you can too (winner or loser)?

We're all in it for the best of one another. Remember that, vote for whomever you think is best for you, and be proud. 

All the best, and happy voting MMM'ers,

CPA CB



sierrafire

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #362 on: October 24, 2015, 07:05:15 AM »
This year I started a small business doing some landscaping and construction.  I don't need the money but I enjoy the work and it keeps me busy in my spare time.  I am operating the business as a sole proprietorship, not a corporation.  Currently it earns about $20,000 in profit that I can't expense.  I am looking for suggestions on options to minimize taxes by structuring the business differently or doing something with profits other than regular income. 

I am a single guy working in a full-time, permanent job that pays $65,000 and will increase to $100,000 over the next few years.  it provides full benefits as well as a good pension.

ChrisInAmerica

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #363 on: October 24, 2015, 09:09:05 PM »
Hey! Ok I have a weird situation that maybe MMM could have related to that I'm having a very tough time reconciling.

I was born in BC and worked there for one company right out of college until the age of 29 when I was internally
transferred to Los Angeles (31 now).  Queue the big raise and woo hoo the beaches are nice!

In the 20ish months that I've lived here so far I have discovered mustachianism and  have adapted it to a really neat beach bumish life. 
I get my work done, live on the beach and save about 50% of my take home which amounts to about 40,000$ a year (spend 40k$ save 40k$ - luxurious - I should probably cut back).

But here is the problem I have that I can't seem to figure out.  My Canadian 20s were not so fiscally sound and the only shining light was
an old boss who told me to cap my company sponsored retirement plan to get their max contribution.  I have managed to consolidate an old motorbike loan
and a few large credit card balances into a line of credit @ 7.8% to the amount of 23,000$ CDN currently.  I have been paying just above the minimum ~200$
each month and ignoring it (great debt strategy right?).  I also have 72,000$ in a locked in retirement account and 18,000$ in an RRSP.

As a non-resident of Canada (I have filed the paperwork) I am entitled to withdraw both the RRSP and the Locked-In Retirement Account (LIRA) at a one time 25% penalty after
two years out of the country. (Right? I think? Sunlife confirmed it for me?)

So my thinking is - I paid more than 25% tax on the contributions to the LIRA and the RRSP.  Shouldn't I take advantage of this situation and take my 72,000 + 18,000 -25% = 67,500$
and pay off my 23,000$ line of credit leaving me with 44,500$ Canadian cash to invest or move over the border at some point (the exchange rate hasn't helped my calculations)?  Or do I slash
 my US savings rate of 40,000$ to pay it off with a US to CDN transfer?  Even if I were to do that should I not take the chance to unlock the ~90,000$ now?  Both the LIRA and the RRSP are at
about 1.5-2.0% expense ratios which hurt now that I understand what that means.

Is my thinking sound?  Any advice?

Thanks in advance for your time!
Chris

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #364 on: November 04, 2015, 07:51:55 AM »
This year I started a small business doing some landscaping and construction.  I don't need the money but I enjoy the work and it keeps me busy in my spare time.  I am operating the business as a sole proprietorship, not a corporation.  Currently it earns about $20,000 in profit that I can't expense.  I am looking for suggestions on options to minimize taxes by structuring the business differently or doing something with profits other than regular income. 

I am a single guy working in a full-time, permanent job that pays $65,000 and will increase to $100,000 over the next few years.  it provides full benefits as well as a good pension.

Hi Sierra,

Are you taking any expenses? Presumably so, and you've maximized the number of expenses you take.

The problem with sole-proprietorships are two-fold, which you rightly point out.

1) No tax deferral mechanism - profit earned now, is fully taxed now
2) No ability to income split.

With you take home earnings increasing I would ask, are you married, with children? If so, incorporating is a great way to income split dividends with your spouse, and even with children after they reach 18 years of age. You can leave the funds in the company, and only pay the corporate tax rate, and defer the personal component to when it is best, instead of being forced into it.

That being said - incorporating and filing corporate returns comes at a cost. $1k per year likely or more. Is it worthwhile? Maybe - it depends on your circumstances, and whether the business continues to grow.

Hope this helps!

sierrafire

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #365 on: November 04, 2015, 08:17:17 AM »
Thanks for your advice. Much appreciated.

I'm taking as many expenses as possible. Unfortunately some jobs have no expense other than travel.

As well I'm not married and no children. So it sounds like I don't have many options other than trying to include more expenses.

Thanks again for your help.

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #366 on: November 04, 2015, 08:19:02 AM »
Hey! Ok I have a weird situation that maybe MMM could have related to that I'm having a very tough time reconciling.

I was born in BC and worked there for one company right out of college until the age of 29 when I was internally
transferred to Los Angeles (31 now).  Queue the big raise and woo hoo the beaches are nice!

In the 20ish months that I've lived here so far I have discovered mustachianism and  have adapted it to a really neat beach bumish life. 
I get my work done, live on the beach and save about 50% of my take home which amounts to about 40,000$ a year (spend 40k$ save 40k$ - luxurious - I should probably cut back).

But here is the problem I have that I can't seem to figure out.  My Canadian 20s were not so fiscally sound and the only shining light was
an old boss who told me to cap my company sponsored retirement plan to get their max contribution.  I have managed to consolidate an old motorbike loan
and a few large credit card balances into a line of credit @ 7.8% to the amount of 23,000$ CDN currently.  I have been paying just above the minimum ~200$
each month and ignoring it (great debt strategy right?).  I also have 72,000$ in a locked in retirement account and 18,000$ in an RRSP.

As a non-resident of Canada (I have filed the paperwork) I am entitled to withdraw both the RRSP and the Locked-In Retirement Account (LIRA) at a one time 25% penalty after
two years out of the country. (Right? I think? Sunlife confirmed it for me?)

So my thinking is - I paid more than 25% tax on the contributions to the LIRA and the RRSP.  Shouldn't I take advantage of this situation and take my 72,000 + 18,000 -25% = 67,500$
and pay off my 23,000$ line of credit leaving me with 44,500$ Canadian cash to invest or move over the border at some point (the exchange rate hasn't helped my calculations)?  Or do I slash
 my US savings rate of 40,000$ to pay it off with a US to CDN transfer?  Even if I were to do that should I not take the chance to unlock the ~90,000$ now?  Both the LIRA and the RRSP are at
about 1.5-2.0% expense ratios which hurt now that I understand what that means.

Is my thinking sound?  Any advice?

Thanks in advance for your time!
Chris

Hi Chris,

You're right in that you're getting dinged on the expense ratios. Unfortunately the exchange rate won't be swinging dramatically in your favour in terms of converting to USD any time soon (as far as I can tell), and as such I'd recommend keeping the funds in loonies for now.

That being said - transferring out of Sunlife and into a traditional RRSP/LIRA direct investing account would be highly recommended. You can avoid the expenses, and invest in what you want more actively.

8% is crazy for a line of credit - earning money in USD however means you're only looking at about $14-16k US to knock out this debt entirely, less than half a year. I would definitely do this as quickly as possible, as 8% is hard to beat in terms of investing.

As far as the 25% is concerned - if you keep the funds in Canadian dollars I wouldn't recommend it. In terms of compounding your investment, you're better to invest the 90k and earn on this (and pay the 25% flat tax later), rather than take the hit up front and crawl back up to 90k.

That being said, from a tax planning perspective, remember that RRSP's and LIRA's need to be reported specifically in your US tax return. Take a look at this article for a bit more detail - http://www.greenbacktaxservices.com/blog/canadian-retirement-tfsa-rrsp-treatment/

Hope this helps!


CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #367 on: November 04, 2015, 08:21:47 AM »
Thanks for your advice. Much appreciated.

I'm taking as many expenses as possible. Unfortunately some jobs have no expense other than travel.

As well I'm not married and no children. So it sounds like I don't have many options other than trying to include more expenses.

Thanks again for your help.

Gotcha,

From there - look to your RRSP's and TFSA and contribute to at least attempt to offset current and future taxes. Purchase any equipment you may need prior to this year end so you can expense at least a portion of it up front as well.

K-ice

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #368 on: November 04, 2015, 09:46:34 AM »
I have a question about spousal RRSP.

My marginal tax rate is about 36%
My SOs tax rate is 31%

I have very little room in my RSP $10K  and very little saved $20K. I barely accumulated any room since I spent years in school but now I should have a pension one day.
My self-employed SO has much more room $100K, and more saved $75K

I think our situation is odd since the higher income earner actually has less savings and less contribution room.  None of the spousal RSP samples I found on the internet are like us.

SO is 3 years older and early 40s

When retired, I think we would both be in about the 31% tax rate but no one has a crystal ball.

I plan on topping up my RSP this year.  After that, can I make a spousal contribution?  I dont think so since I am at MY limit.  So should I just put my extra cash into my spouses RRSP so it can grow tax free?

We are close to having our TFSA maxed as well.

My gut says it makes more sense to invest in a tax sheltered manner before unregistered regardless of whose name it is under.

Thanks

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #369 on: November 05, 2015, 09:51:26 AM »
I have a question about spousal RRSP.

My marginal tax rate is about 36%
My SOs tax rate is 31%

I have very little room in my RSP $10K  and very little saved $20K. I barely accumulated any room since I spent years in school but now I should have a pension one day.
My self-employed SO has much more room $100K, and more saved $75K

I think our situation is odd since the higher income earner actually has less savings and less contribution room.  None of the spousal RSP samples I found on the internet are like us.

SO is 3 years older and early 40s

When retired, I think we would both be in about the 31% tax rate but no one has a crystal ball.

I plan on topping up my RSP this year.  After that, can I make a spousal contribution?  I dont think so since I am at MY limit.  So should I just put my extra cash into my spouses RRSP so it can grow tax free?

We are close to having our TFSA maxed as well.

My gut says it makes more sense to invest in a tax sheltered manner before unregistered regardless of whose name it is under.

Thanks

Hi K,

It's a conundrum, certainly.

You're correct that contributing to a Spousal RRSP goes against YOUR RRSP limit - so your ability in this sense is restricted.

I don't necessarily agree with the statement that one should max out registered accounts prior to looking at unregistered. If this were all TFSA I would agree (there is literally no reason to not top out the TFSA), but an RRSP vs. Unregistered account discussion is warranted.

I've posted at length in this forum on the benefits of the RRSP, and cons of the RRSP, when comparing to an unregistered account. The RRSP is a good tax deferral mechanism - BUT if you're deferring Capital Gains you end up behind as your gains are now 100% taxable vs. 50% taxable.

People with pensions like yourself usually get hosed on RRSP's in retirement, as CPP+Pension+RRSP usually sticks you in a very high bracket.

Therefore you're best to invest in non-dividend paying stocks in an unregistered account (Berkshire Hathaway, for example) and dividend paying stocks (Banks, etc) in your RRSP.


K-ice

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #370 on: November 05, 2015, 11:27:06 AM »


It's a conundrum, certainly.

...... but an RRSP vs. Unregistered account discussion is warranted.

 The RRSP is a good tax deferral mechanism - BUT if you're deferring Capital Gains you end up behind as your gains are now 100% taxable vs. 50% taxable.

....

Therefore you're best to invest in non-dividend paying stocks in an unregistered account (Berkshire Hathaway, for example) and dividend paying stocks (Banks, etc) in your RRSP.


Thanks.  I will do some more reading. 

FI40

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #371 on: November 06, 2015, 08:42:18 AM »
I don't necessarily agree with the statement that one should max out registered accounts prior to looking at unregistered. If this were all TFSA I would agree (there is literally no reason to not top out the TFSA), but an RRSP vs. Unregistered account discussion is warranted.

I've posted at length in this forum on the benefits of the RRSP, and cons of the RRSP, when comparing to an unregistered account. The RRSP is a good tax deferral mechanism - BUT if you're deferring Capital Gains you end up behind as your gains are now 100% taxable vs. 50% taxable.

Sorry to jump in and derail you a bit, but I'm not sure I understand your position here regarding capital gains in the RRSP. Can we do a simple example?

Let's assume tax rate is the same now and in the future when the RRSP is withdrawn - that is a conservative assumption, since if it's lower in the future that favours the RRSP. Say 50%. We have $1000 pre-tax to invest, and will have 100% capital gains over time.

Taxable:
Start with $500 (1000*.5). End with 875 (extra 500 is taxed at 25%).

RRSP:
Start with $1000. End with 2000, which comes down to $1000 when you take it out. RRSP wins.

If I make the tax rate 30%, I get Taxable 700->1295, RRSP 1000->1400. RRSP wins again.

And this is assuming an equal tax rate at the end as at the start. It gets better for the RRSP for mustachians I believe, who tend to have a high income and then retire with a lower one. The one argument I can think of against what I'm saying is that for older folks the RRSP method might hurt their OAS payments. Again for mustachians retiring at like 40-50, there's time to manage this. There are probably other things I'm not thinking of. Just wanted to get your perspective on it! I'll go check your post history now, maybe I should have done that first.
« Last Edit: November 06, 2015, 08:44:04 AM by FI40 »
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #372 on: November 06, 2015, 09:07:44 AM »
Having read some of the history, I think I might just be beating a dead horse. I believe my opinions are accurate for people in my situation.

Generally, as you have mentioned, tax rates are not always lower during retirement. Also age 71 is annoying. Also, future governments may mess with how RRSPs are taxed or put more rules on how they can be used, which would suck. Then again they could make cap gains tax 100% of your marginal rate or something so taxable stuff could get nerfed too.

By the way, thanks so much for starting this thread! Tons of great advice.
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #373 on: November 06, 2015, 10:54:27 AM »
Having read some of the history, I think I might just be beating a dead horse. I believe my opinions are accurate for people in my situation.

Generally, as you have mentioned, tax rates are not always lower during retirement. Also age 71 is annoying. Also, future governments may mess with how RRSPs are taxed or put more rules on how they can be used, which would suck. Then again they could make cap gains tax 100% of your marginal rate or something so taxable stuff could get nerfed too.

By the way, thanks so much for starting this thread! Tons of great advice.

Hey FI40 -

I think I have a proof somewhere in the forum here that you can see - it's hard to follow your example but let me try...

Let's assume in both cases you double your investment.

And also, we can assume a 30% marginal tax rate now and in retirement. Now, we could launch into a diatribe about this, but I find people are surprised to find out that after 65/67 with OAS, CPP, and RRSP income their yearly income is over 50-60k per year, and they were previously earning about the same.

Un-registered you're left with $1,850 after tax.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

Yes, it ignores time value of money and incremental taxes on trading activity, but on the flip side it also ignores the fact that the vast majority of our clients do not re-invest 100% of their RRSP refunds. Po-tay-to, po-tah-to.

Also cap gains only count 50% towards your clawback ratios for OAS and CPP - RRSP are 100%. There are benefits and downfalls of both, but from a pure tax perspective you're better to save RRSP room for dividend/interest income, and capital gains unregistered. And have both in general, as has been recommended.

Hope this clarifies a tad.








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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #374 on: November 09, 2015, 12:27:52 PM »
Un-registered you're left with $1,850 after tax.

I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.


Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.

Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #375 on: November 10, 2015, 11:44:23 AM »
Un-registered you're left with $1,850 after tax.

I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.


Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.

Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?

Hi there,

You're putting the cart before the horse here -

The question is - I have $1,000 sitting in my bank account. Should I invest in an RRSP, or unregistered, given all gains will be capital gains. My tax rate is 30%, and I will re-invest the RRSP tax credit I receive in the future in the plan.

It's an apples to oranges comparison if you say I have $1,000 to contribute to non-registered, but $1,428 to registered because of future tax events. It has to start at the beginning, i.e. if I put $1,000 into Plan A vs. Plan B, which nets better?

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #376 on: November 10, 2015, 11:54:44 AM »
Un-registered you're left with $1,850 after tax.

I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.


Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.

Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?

Hi there,

You're putting the cart before the horse here -

The question is - I have $1,000 sitting in my bank account. Should I invest in an RRSP, or unregistered, given all gains will be capital gains. My tax rate is 30%, and I will re-invest the RRSP tax credit I receive in the future in the plan.

It's an apples to oranges comparison if you say I have $1,000 to contribute to non-registered, but $1,428 to registered because of future tax events. It has to start at the beginning, i.e. if I put $1,000 into Plan A vs. Plan B, which nets better?

If you do it that way, you are not accounting for the fact that when you re-invest the tax credit back into the RRSP, you get a refund for that too. I'm accounting for that effect in advance.

I agree there is a timing difference doing it the way I suggested, but if you just frame the question as "the contribution part happens within a year" then it's fine. We're talking about a long term investment here. To achieve what I'm talking about, someone could take out a loan for the $428 from the time they contribute to the RRSP until the time they get their tax refund. The cost of doing this is pretty small. Alternatively they can set up a plan with their employer to just not pay the tax in the first place! I forget the form that is used for that, but you know what I mean. Right?
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #377 on: November 11, 2015, 06:53:20 AM »
Un-registered you're left with $1,850 after tax.

I'm with you - $1,000 became $2,000 after the gains, then was taxed at 30%*.5 so we are left with 1850.

Registered is a bit trickier but here goes -

After you re-invest your refund you're at $1,300 as an initial investment.


Hang on a minute, I thought the way to calculate it was: pre-tax, you earned X, and were taxed at 30% on X to obtain the $1000 in taxable dollars. So, X*(1-0.3) = 1000. So X=1428.57. So if you contribute $1,428.57 to the RRSP, then you will get back a refund of 1428.57*0.3=$428.57 to make you whole on the taxable side. So you effectively are out only $1000 in taxable cash, but you have an RRSP worth 1428.57.

Since we are doubling - you have $2,600 to withdraw (rather than the $2,000 above) you pay a full 30% tax on this, or $780 dollars.

Therefore your net after tax is $1,820.

In this example, the unregistered account wins by $30.

So if I am right, the numbers change to 2857.14, taxed at 30% so you pay 857.14, so your net is exactly 2000. So RRSP wins.

Fully agree with your other well made points. What do you think though, does this change anything for you (assuming you think my math is OK)?

Hi there,

You're putting the cart before the horse here -

The question is - I have $1,000 sitting in my bank account. Should I invest in an RRSP, or unregistered, given all gains will be capital gains. My tax rate is 30%, and I will re-invest the RRSP tax credit I receive in the future in the plan.

It's an apples to oranges comparison if you say I have $1,000 to contribute to non-registered, but $1,428 to registered because of future tax events. It has to start at the beginning, i.e. if I put $1,000 into Plan A vs. Plan B, which nets better?

If you do it that way, you are not accounting for the fact that when you re-invest the tax credit back into the RRSP, you get a refund for that too. I'm accounting for that effect in advance.

I agree there is a timing difference doing it the way I suggested, but if you just frame the question as "the contribution part happens within a year" then it's fine. We're talking about a long term investment here. To achieve what I'm talking about, someone could take out a loan for the $428 from the time they contribute to the RRSP until the time they get their tax refund. The cost of doing this is pretty small. Alternatively they can set up a plan with their employer to just not pay the tax in the first place! I forget the form that is used for that, but you know what I mean. Right?

Definitely!

I was keeping the scenario limited to the RRSP return from the first year, rather than counting years 2-4 as the return diminishes.

The issue is really more one of what we see in our practice. When it comes down to it, people aren't as efficient with their investments and reinvesting their refunds from an RRSP back into the product.

People may reinvest their tax refunds - but this is likely not close to their RRSP portion of the refund if they 'technically' owed tax at the end of the year. Too often we see someone who would have owed $1,000 in tax receive a $1,000 refund (so 2k back from the RRSP contribution) and they'll invest the $1,000 refund (or worse).

In addition, people generally have their RRSP and an unregistered account - and in this circumstance you're better to invest your fully taxable investment income in the RRSP, and capital gains earning investments in your unregistered account.

Point being - you're best to 'save' the RRSP room for dividend or interest income given the chance, where the difference is substantial. That being said, given how the vast majority treat refunds as lottery-esque windfalls, if people save at all it's a good thing!




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Will incorporating be beneficial?
« Reply #378 on: November 14, 2015, 05:34:35 AM »
Hi, I am wondering if I would be able to save significant taxes by incorporating in my situation or what the best tax-saving strategy would be, especially given the tax increase expected with the new government:

Salary: $240,000, with usual payroll deductions for EI, CPP, income tax.  RRSP gets max yearly contribution from payroll from salary income (but still have $80,000 room from previous years).

Self employment income: $260,000 +/- $20,000.  Currently filing taxes as sole proprietor on my personal return.

(Total annual income around $500,000)

Spouse: $30,000/yr salary

Dependent: 5 yr old

Student Debt: $180,000 at 2.8%
Student Debt: $10,000 at 6% (interest tax deductible)

Mortgage: $380,000 at 2.6%, 5 yr term, amortized over 30yr to maximize cash flow in case of emergency, but I am setting aside enough each month for lump sum payments of $50,000 every year and enough to pay off the mortgage at the end of the term so I wouldn't need to renew.

From what I understand, if you can't leave money in the corporation, there isn't really a tax benefit to incorporating because of the costs and fees but I'm wondering about saving by income splitting with my spouse and if I would save by getting paid in dividends versus salary.

At this point, I basically need all of my income for expenses and debt because I just started working.  I'm not sure what other strategies would be available to save.

Thank you.


« Last Edit: November 14, 2015, 05:58:22 AM by marcus199 »

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Re: Will incorporating be beneficial?
« Reply #379 on: November 14, 2015, 09:52:29 AM »
Hi, I am wondering if I would be able to save significant taxes by incorporating in my situation or what the best tax-saving strategy would be, especially given the tax increase expected with the new government:

Salary: $240,000, with usual payroll deductions for EI, CPP, income tax.  RRSP gets max yearly contribution from payroll from salary income (but still have $80,000 room from previous years).

Self employment income: $260,000 +/- $20,000.  Currently filing taxes as sole proprietor on my personal return.

(Total annual income around $500,000)

Spouse: $30,000/yr salary

Dependent: 5 yr old

Student Debt: $180,000 at 2.8%
Student Debt: $10,000 at 6% (interest tax deductible)

Mortgage: $380,000 at 2.6%, 5 yr term, amortized over 30yr to maximize cash flow in case of emergency, but I am setting aside enough each month for lump sum payments of $50,000 every year and enough to pay off the mortgage at the end of the term so I wouldn't need to renew.

From what I understand, if you can't leave money in the corporation, there isn't really a tax benefit to incorporating because of the costs and fees but I'm wondering about saving by income splitting with my spouse and if I would save by getting paid in dividends versus salary.

At this point, I basically need all of my income for expenses and debt because I just started working.  I'm not sure what other strategies would be available to save.

Thank you.

Hi Marcus,

In a word, yes. Incorporating your business will definitely save you money if done correctly. In fact, I would say you're crazy not to in your circumstances.

You're absolutely correct in stating that the benefits of incorporation generally tend to stem from income splitting and tax deferral if you leave the funds in the company. There is some tax arbitrage in terms of dividend vs. salary, especially if you save on the payroll taxes as you would in your wife's case.

In addition - including your 5 year old as a shareholder is prudent - just don't bother with dividends or salary until they reach 18 (as the money will just be attributed as income back to you).

There are also benefits in terms of limited liability - but in the grand scheme of things you would save about 10% in taxes or potentially more.

Cheers,

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #380 on: November 16, 2015, 11:33:51 PM »
We are on the verge of mortgage free at 41, and ready to kick investing into high gear next year. However, I'm still tryin to figure out the TFSA vs RSP question.

Vik had a great post that helped.

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Quote
Vik February 9, 2015, 10:16 am
Older post, but I thought I would add to the Canadian content.

I put $$ into my RRSP at 22% 29% Federal Tax rate [Ill ignore the Provincial Tax rates as I contributed in 3 Provinces so it gets messy].

At 60 Ill be getting ~$8400 CPP [2015$] and 67 Ill get a total of ~$15,100 [2015$] CPP + OAS.

Currently the lowest Federal Tax bracket is 15% at $44.7K and below.

At 71 Ill have to convert the RRSP to a RRIF at take out ~7% minimum which grows to ~16% over time. If my RRSP is too large Ill end up being bumped up to a higher marginal rate tax bracket and potentially get some OAS benefits clawed back increasing my effective tax rate two ways.

It would be most advantageous to keep total income below ~$44.7K to get the biggest tax deferral benefit. At 71 that means $44.7K $15.1 = $29.6K would be the maximum mandatory withdrawal. That corresponds to a RSSP worth $422K at 2015 $. Although keep in mind each year after 71 Ill have to take out more $$ and that extra $$ will get taxed at the higher marginal tax rate. So it would be preferable to have shifted to even less RRSP income by this point and more TFSA or non-registered income.

My RRSP is already projected to exceed that adjusted for inflation so contributing more now will provide a much smaller deferred tax benefit than it did earlier in the program. If I am earning some unexpected income in my older years and/or tax rates go up I could quite possibly pay more tax then I would have if I had simply used the same $ for a non-registered investment.

There are a couple ways to deal with this:

1. analyze your income needs over time factoring in all sources of income. Identify any opportunities to harvest deferred tax benefits as you go along and withdraw from your RRSP at that time.

2. Stop RRSP contributions and max out TFSA accounts and then invest in non-registered accounts.

For example any year where my taxable income is less than $44.7K it makes sense to withdraw the difference from my RRSP and invest it in my TFSA or non-registered accounts. Say when I am 40 I have one year I travel a lot and only earn $15K from my consulting business [after deductions] I would take $29.7K out of my RRSP that year and see it taxed at 15% which is much lower than the 22%-29% I would have paid when I put the $$ in the RRSP and when I get to 71 Ill have less $$ in the RRSP and reach a lower mandatory withdrawal rate.

If my projections for the later years of retirement indicate that mandatory RRSP withdrawals will be in a higher rate than what when I put them even if I jumped up to the 22% marginal rate bracket which is triggered between $44.7K and $89.4K. I might start withdrawing more from my RRSP earlier to optimize the actual taxes I pay.

Some important RRSP/TFSA tax facts

RRSP is a tax deferral account it works best if you are making less $$ when you take the money out vs. when you put it in. If you are in a low tax bracket when you are saving you might be better off to max out your TFSA or invest in a non-registered account paying the tax owed now at the low rate and enjoying tax free income later in life.

your RRSP only really works if you put the principal amount [say $1K] AND the tax credit [say $300] into the account. You are going to have to pay that tax later so if you spend the credit now you dont get the full benefit of the plan.

RRSP withdrawals become mandatory ay 71 so check the current rates and model your unavoidable income $$ in the later years to see what will happen.

There is no penalty for early withdrawal from a RRSP. There is a witholding tax, but that is just a payment of tax owing to the Govt. When you file your return you will use that as tax already paid against the years burden. If you take your years RRSP withdrawal out in Dec and then file that years tax return as quickly as possible the next year you can minimize the amount of time the Govt has your money and you do not.

you accrue TFSA contribution room every year regardless of income so you can [today 2015] put $5.5K/yr of any RRSP withdrawals into your TFSA to shelter its growth. This money is never taxed again and does not impact any income tested old age benefits.

you will pay capital gains tax on income generated from non-registered accounts, but this is at a lower rate than the same gains inside a RRSP get taxed when you take them out [assuming you are earning the same base income at both times.

Sorry for the long comment, but its a topic worth thinking about.

My summary is:

evaluate the income needs for your whole retirement [including CPP + OAS]

project your RRSP value throughout your retirement and calculate the mandatory withdrawal income combined with CPP + OAS

assess the likely input tax rate vs. output tax rate and use this to identify when it makes sense to put $$ in your RRSP and when to take it out.

dont miss out on opportunities to withdraw from your RRSP early at low tax rates if you have low income year.

when you start using your investments to fund your lifestyle consider using RRSP $$ first until your RRSP is projected to provide a tax favourable income stream in your later years combined with CPP + OAS.

dont forget to max out your TFSA account every year to shelter your capital gains

Canada has some pretty great retirement savings plans, but they take some analysis of your specific situation to get the most out of them.

Vik

reply

Lori March 21, 2015, 8:54 am
Just remember that when you withdraw from an RRSP you dont get that contribution room back, so you are permanently reducing your contribution limit.


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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #381 on: November 17, 2015, 04:43:02 PM »
If you are making a higher income, especially over that $90,000 mark, and project low expenses in retirement, the RRSP is a great tool. But yeah, you need to be careful not to run your RRSP value too high because you don't want to get hit with high taxes and especially benefit clawbacks. So your RRSP number ultimately depends on your individual circumstances. Some important factors would be retirement age, working income, retirement expenses, and other income (dividends in taxable accounts, part time jobs, your own business, etc).

Aside from this, if you are married it would generally be smart to make sure you and your spouse end up with roughly equal RRSP account valuations so you can maximize the income and minimize the taxes when you retire (assuming you don't convert to RRIF immediately).

Personally, my goal is to build a relatively substantial RRSP account for the following reasons.
1) I make a good salary and I "re-invest" my tax refund immediately because I send in T1213 forms which reduces my taxes withheld on my paycheques
2) We plan to retire early (before 45 for sure), so I plan to withdraw lots of money for retirement expenses between 45 and 65. In fact, I aim to have virtually no RRSP money left by the time I turn 71. This means the RRSP is essentially a bridge for income. During this time my TFSA will compound nicely for 20 years making for fat tax free retirement savings when I'm 65.
3) Once I retire, I aim to withdraw about $20,000 a year each ($40,000 total) in today's dollars. The blended tax rates for this will be less than 7% once I add a few deductions. Not bad considering I'm getting about 35% back for RRSP contributions in my tax bracket.

All this said, I won't run up the value of my RRSP over somewhere around $250,000 each. If I have more to save, than I'm certainly best off to fill first the TFSA, then taxable accounts (again balanced between my wife and I for even dividend income in retirement).

I know many accountants will disagree because they see RRSP horror stories when their clients turn 71. But the value of the RRSP should not be dismissed for someone with low retirement expenses.
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #382 on: November 18, 2015, 07:33:49 AM »
If you are making a higher income, especially over that $90,000 mark, and project low expenses in retirement, the RRSP is a great tool. But yeah, you need to be careful not to run your RRSP value too high because you don't want to get hit with high taxes and especially benefit clawbacks. So your RRSP number ultimately depends on your individual circumstances. Some important factors would be retirement age, working income, retirement expenses, and other income (dividends in taxable accounts, part time jobs, your own business, etc).

Aside from this, if you are married it would generally be smart to make sure you and your spouse end up with roughly equal RRSP account valuations so you can maximize the income and minimize the taxes when you retire (assuming you don't convert to RRIF immediately).

Personally, my goal is to build a relatively substantial RRSP account for the following reasons.
1) I make a good salary and I "re-invest" my tax refund immediately because I send in T1213 forms which reduces my taxes withheld on my paycheques
2) We plan to retire early (before 45 for sure), so I plan to withdraw lots of money for retirement expenses between 45 and 65. In fact, I aim to have virtually no RRSP money left by the time I turn 71. This means the RRSP is essentially a bridge for income. During this time my TFSA will compound nicely for 20 years making for fat tax free retirement savings when I'm 65.
3) Once I retire, I aim to withdraw about $20,000 a year each ($40,000 total) in today's dollars. The blended tax rates for this will be less than 7% once I add a few deductions. Not bad considering I'm getting about 35% back for RRSP contributions in my tax bracket.

All this said, I won't run up the value of my RRSP over somewhere around $250,000 each. If I have more to save, than I'm certainly best off to fill first the TFSA, then taxable accounts (again balanced between my wife and I for even dividend income in retirement).

I know many accountants will disagree because they see RRSP horror stories when their clients turn 71. But the value of the RRSP should not be dismissed for someone with low retirement expenses.

It's absolutely valuable.

I tend to push the TFSA a bit more as truly the only drawback to this account is the cap limit presently. It's the all-purpose screwdriver of investment accounts, good for many things, just limited in terms of size.

The RRSP is a great tool - but it's more of a hammer. People need to be careful with it, or you end up hitting yourself with it.

To be clear, the MMM crowd is different from the 'average' Canadian.

RRSP refunds aren't really 'refunds', it is a tax deferral to re-invest. What we see is that people end up buying a new TV instead of reinvesting, which destroys the purpose of the RRSP in the first place. This, paired with restrictions and income related issues in retirement can lead people off a financial cliff and actually be a detriment.

In short, make sure you use the RRSP and plan it ahead of time like you Tuxedo - It's important to know how/when to use it.

Cheers

CPA CB

FI40

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #383 on: November 18, 2015, 07:44:47 AM »
If you are making a higher income, especially over that $90,000 mark, and project low expenses in retirement, the RRSP is a great tool. But yeah, you need to be careful not to run your RRSP value too high because you don't want to get hit with high taxes and especially benefit clawbacks. So your RRSP number ultimately depends on your individual circumstances. Some important factors would be retirement age, working income, retirement expenses, and other income (dividends in taxable accounts, part time jobs, your own business, etc).

Aside from this, if you are married it would generally be smart to make sure you and your spouse end up with roughly equal RRSP account valuations so you can maximize the income and minimize the taxes when you retire (assuming you don't convert to RRIF immediately).

Personally, my goal is to build a relatively substantial RRSP account for the following reasons.
1) I make a good salary and I "re-invest" my tax refund immediately because I send in T1213 forms which reduces my taxes withheld on my paycheques
2) We plan to retire early (before 45 for sure), so I plan to withdraw lots of money for retirement expenses between 45 and 65. In fact, I aim to have virtually no RRSP money left by the time I turn 71. This means the RRSP is essentially a bridge for income. During this time my TFSA will compound nicely for 20 years making for fat tax free retirement savings when I'm 65.
3) Once I retire, I aim to withdraw about $20,000 a year each ($40,000 total) in today's dollars. The blended tax rates for this will be less than 7% once I add a few deductions. Not bad considering I'm getting about 35% back for RRSP contributions in my tax bracket.

All this said, I won't run up the value of my RRSP over somewhere around $250,000 each. If I have more to save, than I'm certainly best off to fill first the TFSA, then taxable accounts (again balanced between my wife and I for even dividend income in retirement).

I know many accountants will disagree because they see RRSP horror stories when their clients turn 71. But the value of the RRSP should not be dismissed for someone with low retirement expenses.

Very smart and I'm planning the same thing. For me it's even more of a no-brainer as I'm at a 43.41% marginal tax rate. Probably though, my RRSP won't be large enough to get me from FI to 65, so I'll only start withdrawing from it once I'm 50-55 or so. Might as well keep it growing tax-deferred as long as possible.
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daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #384 on: November 18, 2015, 09:15:53 AM »
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #385 on: November 18, 2015, 12:37:39 PM »
So whats the difference between an RRSP and RRIF?   What are the implications for someone wanting income from thier RRSP at age 50?

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #386 on: November 18, 2015, 01:17:58 PM »
So whats the difference between an RRSP and RRIF?   What are the implications for someone wanting income from thier RRSP at age 50?

RRIF= you have to take money out of it. RRSP has no such restrictions.

The amount (which is a percentage) varies based on your age

http://www.cra-arc.gc.ca/E/pub/tp/ic78-18r6/ic78-18r6-e.html

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #387 on: November 18, 2015, 01:27:16 PM »
So whats the difference between an RRSP and RRIF?   What are the implications for someone wanting income from thier RRSP at age 50?

You can convert an RRSP to an RRIF at any time. However once you convert, you can no longer make contributions and you have to make minimum withdrawals. Before age 71 the withdrawals are really quite small. The formula is (Market Value on Jan 1 of x year) x [1/(90-age on Jan 1 of x year)]. At 45 your withdrawal would be 2.2% of portfolio value, at age 65 your withdrawal would be 4% of portfolio value. After 71, you have to draw down 7 - 20% of portfolio value, increasing each year.

If you keep it as an RRSP you can draw as much as you want but you pay 15% withholding tax at the time of withdrawal. This is essentially a downpayment for future income tax. Once you file income taxes you may owe more, or you may get a refund.

With both strategies you pay tax rates at the same rate as regular employment income, but you don't have to pay EI, CPP, etc.
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #388 on: November 18, 2015, 02:31:32 PM »
Thank you again for the excellent advice here. I am 57 and in the process of pulling the plug next spring when I turn 58. Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order, but I still have a few questions about government pension benefits.

1) CPP: According to Service Canada, I should be receiving a monthly CPP payment of $1,000 when I turn 65, or $1,400 if I wait until 70. If I stop contributing to CPP at age 58 when I stop working next year, will the amount of CPP change whether I apply at 65 or 70?

2) OAS: My understanding is that everyone who at 65 has an individual income under $118,055 is eligible to receive a maximum monthly OAS payment of $569.95. The OAS is not tied whatsoever to CPP payments so if I decide to delay CPP until I turn 70, I would still receive the maximum OAS of $569.95. Is this correct?

3) GIS: Regarding the GIS amount (me receiving OAS, my wife not receiving it), the supplement I could receive would be based on our combined income (excluding OAS Pension and GIS). Assuming my income from RRSP withdrawals is $20,000, Service Canada tells me my combined monthly OAS pension and GIS should be $1,016.38. Am I correct that when i start receiving the CPP payment at age 70, the CPP will be treated as income for the calculation of the OAS/GIS? When I convert my RRSP into a RRIF at 71, RRIF payments will be taxable, but will they also count as income for the calculation of pension payments?
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #389 on: November 19, 2015, 07:18:28 AM »
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.


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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #390 on: November 19, 2015, 07:24:58 AM »
Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order

You might want to read just above in this thread, there is a discussion about how it can be beneficial for you to deplete your RRSP before you apply for OAS/GIS. So you may want to change your order of withdrawals. TFSA should always be last, as well.
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #391 on: November 19, 2015, 07:25:18 AM »
Thank you again for the excellent advice here. I am 57 and in the process of pulling the plug next spring when I turn 58. Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order, but I still have a few questions about government pension benefits.

1) CPP: According to Service Canada, I should be receiving a monthly CPP payment of $1,000 when I turn 65, or $1,400 if I wait until 70. If I stop contributing to CPP at age 58 when I stop working next year, will the amount of CPP change whether I apply at 65 or 70?

2) OAS: My understanding is that everyone who at 65 has an individual income under $118,055 is eligible to receive a maximum monthly OAS payment of $569.95. The OAS is not tied whatsoever to CPP payments so if I decide to delay CPP until I turn 70, I would still receive the maximum OAS of $569.95. Is this correct?

3) GIS: Regarding the GIS amount (me receiving OAS, my wife not receiving it), the supplement I could receive would be based on our combined income (excluding OAS Pension and GIS). Assuming my income from RRSP withdrawals is $20,000, Service Canada tells me my combined monthly OAS pension and GIS should be $1,016.38. Am I correct that when i start receiving the CPP payment at age 70, the CPP will be treated as income for the calculation of the OAS/GIS? When I convert my RRSP into a RRIF at 71, RRIF payments will be taxable, but will they also count as income for the calculation of pension payments?

Hi YK -

1) Yes, the amount will change. By exactly how much would be impossible for me to know off hand. Technically speaking, for most people it is actually better to commence the pension at Age 60 vs. 65 based on Canadian mortality rates.

2) OAS starts to be clawed back from $72,809, and is effectively $nil at the $118k figure you reference. You're right that the receipt of the payments are not related to one another.

3) Yes, RRSP and RRIF payments both count as income for the purposes of any clawback payments in regard to the OAS and GIS.

Hope this helps!

CPA CB

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #392 on: November 19, 2015, 07:33:37 AM »
Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order

You might want to read just above in this thread, there is a discussion about how it can be beneficial for you to deplete your RRSP before you apply for OAS/GIS. So you may want to change your order of withdrawals. TFSA should always be last, as well.

Very good point - I didn't see that.

This is absolutely correct as the RRSP is really a handcuff as it becomes fixed (and forced) income. Better to get rid of this sooner than your other investments.

Now, where did I put my coffee...


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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #393 on: November 19, 2015, 09:48:47 AM »
Until I become eligible to CPP/OAS/GIS at age 65, I will live off non-taxable savings, rental income, and TFSA/RRSP withdrawals in that order

You might want to read just above in this thread, there is a discussion about how it can be beneficial for you to deplete your RRSP before you apply for OAS/GIS. So you may want to change your order of withdrawals. TFSA should always be last, as well.

Very good point - I didn't see that.

This is absolutely correct as the RRSP is really a handcuff as it becomes fixed (and forced) income. Better to get rid of this sooner than your other investments.

Now, where did I put my coffee...

Thanks FI40 and CPA CB. Depleting my RRSP before CPP/OAS pension payments kick in makes complete fiscal sense now that you pointed it out. I will revise my strategy accordingly. As for CPP, I take good note of your remark about Canadian mortality rates, and check into receiving it at 60 rather than 65 or even 70.
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daverobev

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #394 on: November 19, 2015, 10:51:25 AM »
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.

THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #395 on: November 19, 2015, 01:04:26 PM »
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.

THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?


Okay,

Let me ignore what CRA is saying and look at this practically.

If you owe $13k - you should pay $13k. Maybe pay a few bits more to ensure you aren't charged interest, but do the due diligence here and make sure you will know what you owe, and pay it as precisely as possible. I suggest TaxTips.ca as this is a good resource that is easy to use for the average person.

Under this scenario, you should owe at the most a very minimal amount of interest, and at best, nothing. Pay what you owe - don't overpay by thousands to ensure otherwise.

Does this clear it up?

CPA CB


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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #396 on: November 19, 2015, 04:21:58 PM »
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.

THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?


Okay,

Let me ignore what CRA is saying and look at this practically.

If you owe $13k - you should pay $13k. Maybe pay a few bits more to ensure you aren't charged interest, but do the due diligence here and make sure you will know what you owe, and pay it as precisely as possible. I suggest TaxTips.ca as this is a good resource that is easy to use for the average person.

Under this scenario, you should owe at the most a very minimal amount of interest, and at best, nothing. Pay what you owe - don't overpay by thousands to ensure otherwise.

Does this clear it up?

CPA CB

Ya.. I think. I just don't want to pay 6% interest on some amount because I'm "under" vs the 1st and 2nd quarters. I guess the worst would be 6% on $750 for 6 months plus 6% on $750 for 3 months (as I'm under by $750 for each Q based on 13000/4 = 3250)... which is what, $22.50 + $11.25 = $33.75.

I guess then I've paid extra in the 3rd Q which offsets it ever so slightly. At 6% it seems worth paying a little extra for Q4... but when do they count it to? To when you file, or just to the end of the financial year? IE if I paid $1k over for Q4, I know the 6% offsets any interest - down to zero but no further of course - but does it do it til Dec 31, or to April 31, or when I file?

Bleh. Ok, I get it - for $30 don't worry too much!

Thanks.
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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #397 on: November 25, 2015, 12:17:42 PM »
Another question about instalment payments.

I didn't know how much work I was getting this year, so I paid "more than they asked for" in the first 2 quarters, enough to hit the "amount they asked for" in the third quarter (which is much much higher than Q1 and Q2 due to cap gains last year). Coming in to the 4th Q, if I pay "what they asked for" I'll be over for the year. If I pay *less* than what they asked for, my first two quarterly payments won't be enough to be 1/4 of the entire year - so I will have 'underpaid' those quarters based on the other calculation methods.

If I pay less in the 4th quarter, but still end up paying "enough" for the year, will I still get penalties?

Eg:

1st Q no calc option = 2000/I paid 2500
2ndQ 2000/2500
3rdQ 6000/5000 (so I'm clear here - they've asked 10k in total which is what I've paid)
4thQ 6000/ I only want to pay 3000 because that's what I actually need to pay

So they want 16k, I only paid 13k, when I do my tax return in April my entire bill is 13k - so I've paid it all - do I still get penalties for not actually doing any of the three options *on time*?

Hey Dave

If you pay what will be owed, then no you wouldn't be penalized for not overpaying on your instalments.

The caveat here is that you do want to at least overpay 'slightly' to ensure you don't have to pay instalment interest at the prescribed rate.

For anyone else - the key threshold is $1,000 in instalment interest. After this point, you end up also having to pay a penalty, which can be hefty.

THanks - just want to check you got my point that I would have "underpaid" by all three of the accounting methods at some point in the year if I don't pay what they ask for the final Q - I would not have paid 25% each quarter (1st and 2nd Qs would be under), I would not have paid "what they asked" no calc option in Q4, and I forget what the other one is - *despite* having paid enough to fully cover the actual bill... Am I making any sense?


Okay,

Let me ignore what CRA is saying and look at this practically.

If you owe $13k - you should pay $13k. Maybe pay a few bits more to ensure you aren't charged interest, but do the due diligence here and make sure you will know what you owe, and pay it as precisely as possible. I suggest TaxTips.ca as this is a good resource that is easy to use for the average person.

Under this scenario, you should owe at the most a very minimal amount of interest, and at best, nothing. Pay what you owe - don't overpay by thousands to ensure otherwise.

Does this clear it up?

CPA CB

Ya.. I think. I just don't want to pay 6% interest on some amount because I'm "under" vs the 1st and 2nd quarters. I guess the worst would be 6% on $750 for 6 months plus 6% on $750 for 3 months (as I'm under by $750 for each Q based on 13000/4 = 3250)... which is what, $22.50 + $11.25 = $33.75.

I guess then I've paid extra in the 3rd Q which offsets it ever so slightly. At 6% it seems worth paying a little extra for Q4... but when do they count it to? To when you file, or just to the end of the financial year? IE if I paid $1k over for Q4, I know the 6% offsets any interest - down to zero but no further of course - but does it do it til Dec 31, or to April 31, or when I file?

Bleh. Ok, I get it - for $30 don't worry too much!

Thanks.

It's counted from the later of January 1 or the initial instalment underpayment to the earlier of the due date or April 30.

In this sense - just plan for the worst and be surprised when it's slightly better.


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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #398 on: December 02, 2015, 10:18:23 AM »
Hey there Can'eh'dians

I'm seeing a spike in questions regarding upcoming tax reforms that the Trudeau Government is looking to enact.

You've likely noticed I haven't made significant commentary on the subject for a few reasons - 1) Leading up to an election I didn't want to dive into political discussion, and 2) Until things are in black and white, it's hard to comment on what changes to expect.

The important thing is, contribute and top up that TFSA, lest it becomes a retroactive adjustment. A $4,500 dollar loss in room is quite substantial - better to pour the funds in now than learn you've lost the room later.

In addition - should you earn greater than about $200k per annum, be prepared for a significant (i.e. 15% increase) spike in your taxes on eligible (i.e. public corporations, or GRIP dividends from private companies).

In summary - wait and see. I'll be posting a long commentary when we get some solid figures and changes. Until then, if you earn under $200k per year, assume you'll see a few extra dollars (to be taken away by an expanded CPP). If it is more than $200k, expect a bit (lot) more in 2016.

Happy Wednesday!

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Re: Can"EH"dian Tax - You have questions, I have answers
« Reply #399 on: December 02, 2015, 08:47:02 PM »
I have a question regarding inheritance and estate taxes.  My mother passed away earlier this year.  She had her monthly income from two different sources, her RRIF which is cashed out by her estate, and an annuity, which was paid out directly to me.  My wife and I plan to give some money to charity in honour of my mom and I am just trying to figure out if it makes any difference from a tax perspective if the Estate makes the contribution vs me personally. The estate will have income for the year of ~160K and myself will be ~200k

I maxed out my RRSP contribution room to minimize as much taxes as I can as I don't normally fall into such a high tax bracket, but is there anything else I can do to minimize my taxes for the year?  I don't have any losses that I can claim in my investment account as I only opened up a taxable account this year and my investments are slightly up.