RRSP’s – What are they & Are they good or bad? Part 4

So let’s now breakdown some of the Goods and Bads of RRSPs, starting with the Goods:

Good facts about RRSPs:

1.    Tax Deduction in the year you contribute

2.    Long Term Growth of Investments

3.    Deferred tax on Growth of Investments

4.    Forced Savings program

Bad facts about RRSPs:

1.    You are eventually taxed

2.    There is a limit on how much you can contribute (may be a good)

3.    Unlike other investment vehicles, you cannot use RRSPs as collateral

4.    You are restricted as to what you can invest in

5.    There are age and income restrictions to RRSPs

6.    Government is in control of the rules

7.    RRSPs are in trust for the government

8.    You cannot receive the tax favorable benefits of Capital Gains and Dividend Income inside of an RRSP

9.    You cannot deduct investment losses on your taxes

10. You cannot deduct interest and carrying charges if you borrow money to invest in an RRSP

This gives you an idea of some of the main Goods and Bads of using RRSPs.  Your bottom line is that you need to plan thoroughly to decide if using RRSPs is for you or not!  Again remember the key if you are using RRSPs is to contribute when your income is high and withdraw when your income is low.

If you are contributing to RRSPs definitely consider using a self directed RRSP as there are many advantages.  Also if you are considering withdrawing from your RRSP, do it in increments of $5,000 or less as the withholding tax is lower.  The key in withdrawing an RRSP is to have a tax plan.  Kustom Design can help you plan a tax effective RRSP withdrawl if this is what you are looking at doing.
There are many more strategies available with and without RRSPs so do come plan with Kustom Design to ensure you maximize your potential and minimize your tax.  Some of the other things you can look at is using your RRSP to give yourself a “Self Directed Mortgage”, where your RRSP holds your mortgage!  Other strategies could be tax shelters and flow through shares.  Come take our Financial Boot Camp to learn more about all of these topics and more.  You can sign up for the Financial Boot Camp on our website at www.kustomdesign.ca/.

RRSP’s – What are they & Are they good or bad? Part 2

There are many other things to consider in deciding whether or not to do an RRSP.  You must understand the basic concept of an RRSP from a tax perspective.  When you contribute to an RRSP you get a tax deduction, then when you pull the RRSP out you are taxed on that as income.  So therefore, you may not be saving tax when you contribute to an RRSP, but rather deferring tax.  The key to saving tax if you decide to do an RRSP is to contribute when you have high income and pull out the RRSP when your income is low.  You would not want to contribute into an RRSP in a low income year.  Also if you have a plan that will continuously provide high income later in life, then RRSP’s may not be good for you.

Basically there are 2 sides to the RRSP, the tax deduction (which we just discussed) and the investment side.  Once you make the RRSP contribution you can now invest the money from within your RRSP.  You can either have someone that is licensed invest it for you, or you can set it up as Self Directed RRSP and invest it yourself. 

Another thing to understand is that some RRSP’s are locked in and some or not.  This is typically a choice that must be made.  Unless you have a specific purpose for locking in the RRSP, then you are best to go with an RRSP that is not locked in.  If your RRSP is locked in then you will not be able to withdraw it until you are in your elder years (currently 71) and can transition it into a RRIF (Registered Retirement Income Fund) 

Although the majority of people that do RRSPs contribute to their own RRSP, you can also contribute to a spousal RRSP which gives you a tax deduction, but allows your spouse to withdraw it later on.  The other main type of RRSPs is group RRSPs, which are typically contributed to through employment arrangements and are deducted off of paycheques. 

Tax Season ends today! It’s tax planning time!

It is officially the end of the tax season. Today is the last day for most Canadians to file their personal income tax returns. I do hope that I have provided you with all the information and tips that you may need to save on your 2009 taxes.

With the end of the tax season, I would like to remind you that now is the time to get your tax plan in place. As I’ve always mentioned before, it is best to consult a professional to make sure that you are offered the best possible tax saving strategies applicable to you.

Here are a few reminders to get you started on your tax planning:

• The key to successful tax planning is starting as early in the year as possible, well before committing to any large purchases or transactions.
• Tax planning is not a one time deal. It is a continuous and ongoing process.
• Every transaction we make has possible tax consequences. So whether you are purchasing a business or making an investment, having a tax plan in place is your best strategy to ensure that you do not lose any money in the end.
• Tax planning must be done as a couple if you are married or have a common law partner. Because spouses’ tax returns are related, and we can split income, deductions and credits between spouses, tax planning as a couple will ensure that you do not miss out on any tax savings.
• Do personal and business tax planning together if you own a business. If you do not plan personal and business tax together, you will not be able to have an accurate tax plan.

Remember, a tax plan is an ongoing process. Start early in the year to ensure that you maximize your tax deductions and credits. You will not regret it when it’s time to file your 2010 personal income tax returns!

Step 3: Legally Minimize Taxes Paid part 2

Let’s review the tops ways you can save tax.

Maximizing all tax deductions & credits – It’s common knowledge that all taxpayers are given the opportunity to take advantage of all tax deductions and credits applicable to them so let’s make use of them to help us save on our taxes! It is recommended to seek professional advice to identify all deductions and credits available.

For employees, consider opening a home based business – A small business is one of the best tax savings tool. We are talking about a simple sole proprietorship and not a big enterprise. The most significant benefit of full or part time self employment is that you will be able to increase the amount of deductions you are entitled to write off.

"Having a home based business allows the employed individual to write off part of the cost of running the business and part of the mortgage interest, heating, insurance and renovation bills and so on. Home Based Businesses can provide the opportunity to claim tax deductions in the beginning and give you cash flow later on." Read more at the www.kustomdesign.wordpress.com More tax saving strategies tomorrow!

Making your Mortgage Interest Tax Deductible

Introducing a powerful way for you to turn the largest debt of your lifetime into annual tax refunds, knock years off your mortgage, and build a larger retirement portfolio at the same time, using legal tools from the CRA. Because you are able to deduct interest paid on money borrowed to invest it is all about paper trail. To be able to claim this deduction you must be able to show that the borrowed money did get placed into a qualified investment. The first step to making your mortgage interest tax deductible is to get a re-advanceable mortgage, such as a home equity line of credit. Next you must get as much liquid cash as you can from assets and investments. Use this liquid cash to pay down your mortgage, and then reborrow the same amount that you paid down. Use this newly borrowed money to purchase new qualified investments and you now have a legitimate tax deduction on that portion of your mortgage interest. Now with any tax savings or other lump sums of money you get, continue to pay down your mortgage, reborrow and invest. Use this method to continue to increase your tax deduction and build your retirement portfolio!

Interest and Carrying Charges Deduction

If you borrowed money to invest you may be able to deduct the interest and charges associated with the borrowed funds. The main exception to this is if the borrowed funds were put into an RRSP, TFSA or your personal residence. However, if it is a qualified investment and you are claiming investment income, you may be able to deduct the interest and fees paid on the borrowed funds, fees for managing the investment, safety deposit box fees, associated accounting fees, brokerage fees and investment counsel fees. If you have a mortgage on your personal residence and you have other assets or investments that can be turned into cash you may be able to begin transitioning your personal residence mortgage so that you are able to deduct some or all of the interest paid. Considering personal mortgages are one of many peoples’ biggest expenses why not make the interest a tax deduction. To learn more on this see our blog “Making your Mortgage Interest Tax Deductible.”

Tips on Tax Carry Forwards

Some tax credits and tax deductions can be carried forward. If you or your spouse are unable to use specific tax credits and tax deductions during a year, and your unable to split them with your spouse then do check to see if you are able to carry them forward. Some tax credits that can be carried forward include tuition and education amounts, student loan interest and charitable donations. Some tax deductions that can be carried forward include moving expenses, employment expenses and losses. Losses are very powerful and not only are you able to carry most losses forward, but some losses can even be carried back to get taxes back from prior years. Remember that Capital Losses need to be applied against Capital Gains, however Non Capital losses can typically be applied against any income. To Carry a Loss back you must complete a T1A – Request for Loss Carry Back. Remember also that if you have missed something on a prior year’s tax return you can complete a T1 adjustment to amend that prior year’s tax return and receive a refund from tax you paid in prior years

Moving Anyone?

Did you move recently or are you planning on moving. As long as you moved at least 40 kilometers and you are now closer to where you work or go to school you can claim moving expenses. Eligible expenses include transportation, storage costs, traveling expenses (including vehicle, food & lodging), cost for up to 15 days of temporary accommodation and food, and any lease cancellation fees if you rented your old residence. If you owned your residence and sold it you can deduct the costs associated with selling the residence, including real estate commissions, legal fees, advertising and mortgage payout penalties. If the residence you are moving from is still vacant you may claim up to $5,000 of overhead costs. If you are purchasing the new residence you are moving to you may also deduct any of the associate costs with the purchase. You may also deduct incidental costs associated with moving, such as new licenses and address changes. The amount of moving expenses you can claim in a year is directly proportionate to your employment or self employment income. If your moving expenses are higher than this income, then you will only claim moving expenses up to the amount of your income and then carry forward the amount that is over your income to future years. As you can see moving expenses can be a quite large tax deduction, so if you move ensure you deduct all your expenses!

Tax Deductions

Many Tax Deductions can be split between spouses. For example moving expenses can typically be split between spouses, as long as it is a family move and a legitimate moving expense claim. Child Care expenses are typically claimed under the lower income earner except for in specific circumstances. The RRSP deduction is claimable by the contributor, but the other spouse (the Annuitant) may receive the income when you withdraw the RRSP. This is very beneficial when the spouse in the higher tax bracket has large RRSP contribution room and can “Shift” income to the lower income spouse. Interest and Carrying Charges is another example of a tax deduction that can be split. To do this you must structure your transactions compliantly from the loan to the investment.