Voyant Canada Product Notes

Employer Withholdings from Earnings

Employers in Canada are required to withhold income taxes, at both the federal and provincial or territorial level, from their employees. Both federal and provincial/territorial tax rates are progressive based on income. Federal rates range from 15 percent for the lowest bracket, to 33 percent for the highest earners.

For all employees aged 18 to 70, employers in Canada are also required to withhold Canada Pension Plan (CPP), contributions and Employment Insurance (EI) premiums. While those operating in Québec contribute to the Québec Pension Plan (QPP). Those contributions are deducted from wages, salaries, bonuses, and commissions.

AdviserGo accounts for these withholdings automatically.

 

Pay as You Earn (PAYE) tax and other withholdings

Earnings taxed in Canada are entered in Voyant under Income > Employment income. These earnings must be entered in gross annual amounts. The software will then automatically calculate and withhold the following from gross earnings.

• Federal income tax,
• Provincial, Territorial income tax,
• Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions, depending on province or territory of residence,
• Employment Insurance (EI).

 

Standard withholdings not currently modeled in the software:

• Québec Parental Insurance Plan (QPIP)

 

Note on Earnings from Outside of Canada – All earnings entered on the Employment screen in AdviserGo are assumed to be subject to Canadian federal and provincial, territorial taxes. If you earn income outside of Canada, enter it instead on the Income > Other Income screen as a non-taxable (i.e. net of taxes) “other” income.

Federal tax rates for 2019

The following federal tax rates for Canada are modelled in AdviserGo.

15% on the first $47,630 of taxable income, +

20.5% on the next $47,629 of taxable income (on the portion of taxable income over 47,630 up to $95,259), +

26% on the next $52,408 of taxable income (on the portion of taxable income over $95,259 up to $147,667), +

29% on the next $62,704 of taxable income (on the portion of taxable income over 147,667 up to $210,371), +

33% of taxable income over $210,371

 Source

 

Do federal tax rates and brackets increase in future years of the plan?

 

Yes, the federal tax rates and brackets usually are escalated in future years. The Default Tax Table Assumption is a preference, which is set by your firm or enterprise to apply an across-the-board annual escalation to many of the assumptions relating to taxes, as well as contribution allowances.

We code for what we know. As a rule, Voyant software is coded to account for legislated rules and only escalates tax-related assumptions once we move beyond the knownn. The Default Tax Table, which is found in the Plan Settings, is used to set this future escalation of values once we move beyond the known.

Provincial and territorial tax rates

Provincial and territorial tax rates are also progressive based on income. Income brackets and tax rates vary across the 13 provinces and territories.

The following provincial and territorial tax rates for Canada are modelled in AdviserGo.

Provincial and territorial tax rates for 2019
Province or territory	Rates
Newfoundland and Labrador	8.7% on the first $37,591 of taxable income, + 14.5% on the next $37,590, + 15.8% on the next $59,043, + 17.3% on the next $53,689, + 18.3% on the amount over $187,913
Prince Edward Island	9.8% on the first $31,984 of taxable income, + 13.8% on the next $31,985, + 16.7% on the amount over $63,969
Nova Scotia	8.79% on the first $29,590 of taxable income, + 14.95% on the next $29,590, + 16.67% on the next $33,820, + 17.5% on the next $57,000, + 21% on the amount over $150,000
New Brunswick	9.68% on the first $42,592 of taxable income, + 14.82% on the next $42,592, + 16.52% on the next $53,307, + 17.84% on the next $19,287, + 20.3% on the amount over $157,778
Québec	15% on the first $43,790 of taxable income, + 20% on the next $43,785 (on more than $43,790, but not more than $87,575), + 24% on the next $18,980 (on more than $87,575, but not more than $106,555), + 25.75% on the amount over $10,555 Source Revenu Québec Web site
Ontario	5.05% on the first $43,906 of taxable income, + 9.15% on the next $43,907, + 11.16% on the next $62,187, + 12.16% on the next $70,000, + 13.16 % on the amount over $220,000
Manitoba	10.8% on the first $32,670 of taxable income, + 12.75% on the next $37,940, + 17.4% on the amount over $70,610
Saskatchewan	10.5% on the first $45,225 of taxable income, + 12.5% on the next $83,989, + 14.5% on the amount over $129,214
Alberta	10% on the first $131,220 of taxable income, + 12% on the next $26,244, + 13% on the next $52,488, + 14% on the next $104,976, + 15% on the amount over $314,928
British Columbia	5.06% on the first $40,707 of taxable income, + 7.7% on the next $40,709, + 10.5% on the next $12,060, + 12.29% on the next $20,030, + 14.7% on the next $40,394, + 16.8% on the amount over $153,900
Yukon	6.4% on the first $47,630 of taxable income, + 9% on the next $47,629, + 10.9% on the next $52,408, + 12.8% on the next $352,333, + 15% on the amount over $500,000
Northwest Territories	5.9% on the first $43,137 of taxable income, + 8.6% on the next $43,140, + 12.2% on the next $53,990, + 14.05% on the amount over $140,267
Nunavut	4% on the first $45,414 of taxable income, + 7% on the next $45,415, + 9% on the next $56,838, + 11.5% on the amount over $147,667 Source

 

Do provincial and territorial tax rates and brackets increase in future years of the plan?

 

Yes, provincial and territorial tax rates and brackets usually are escalated in future years. The Default Tax Table Assumption is a preference, which is set by your firm or enterprise to apply an across-the-board annual escalation to many of the assumptions relating to taxes, as well as contribution allowances.

 

We code for what we know. As a rule, Voyant software is coded to account for legislated rules and only escalates tax-related assumptions once we move beyond the knownn. The Default Tax Table, which is found in the Plan Settings, is used to set this future escalation of values once we move beyond the known.

 

 

Where is my province or territory of residence set in AdviserGo?

 

For the primary client (the first person entered when initially setting up the plan), a province or territory of residence is selected when making the few initial entries required to create a new plan.

 

The province/territory selected will then serve as the default for everyone in the plan. It is assumed that the spouse/partner and any other people entered in the plan share the same province of residence and taxed accordingly. However, if a spouse/partner or other family member who is included in the plan resides in a different province, an entry noting their province/territory of residence can be entered on the Taxes screen.

Where can provincial, territorial taxes be viewed in AdviserGo?

 

Canada Pension Plan (CPP) withholdings

Provided that you are not a resident of Québec, CPP withholdings are calculated automatically by the software and are deducted from earnings. Note that higher contribution rates and maximum contribution levels are applied to self-employed individuals.

The following CPP withholdings are modelled in AdviserGo.

Year	2019	2018	2017	2016	2015
maximum pensionable earnings (YMPE)	$57,400	$55,900	$55,300	$54,900	$53,600
basic exemption	$3,500	$3,500	$3,500	$3,500	$3,500
employee/employer contribution rate	5.10%	4.95%	4.95%	4.95%	4.95%
employee/employer maximum	$2,748.90	$2,593.80	$2,564.10	$2,544.30	$2,479.95
self-employed contribution rate	10.2%	9.90%	9.90%	9.90%	9.90%
self-employed maximum	$5,497.80	$5,187.60	$5,128.20	$5,088.60	$4,959.90

 

AdviserGo determines your employment status as being employed or self-employed and applies CPP withholdings accordingly. Employment status is determined based on the selection in the Source field when entering your income on the Employment screen. If your income Source is set to Employed or Company Owner, the software will assume that you are employed and the regular employee CPP contribution rates and maximums will apply. The alternative contribution rates and maximum contribution for self-employed individuals will be applied if your income Source is set to Self Employed.

 

Do CPP withholdings increase in future years of the plan?

 

Yes, CPP withholdings usually are escalated in future years.

The Default Tax Table Assumption is a preference, which is set by your firm or enterprise to apply an across-the-board annual escalation to many of the assumptions relating to taxes, as well as contribution allowances.

We code for what we know. As a rule, Voyant software is coded to account for legislated rules and only escalates tax-related assumptions once we move beyond the known. The Default Tax Table, which is found

 

Québec Pension Plan (QPP) withholdings

If you are a resident of Québec, CPP withholdings are calculated automatically by the software and are deducted from earnings. Note that higher contribution rates and maximum contribution levels are applied to self-employed individuals.

Year	2019	2018	2017	2016	2015
maximum pensionable earnings	$57,400	$55,900	$55,300	$54,900	$53,600
basic exemption	$3,500	$3,500	$3,500	$3,500	$3,500
employee/employer contribution rate	5.55%	5.4%	5.4%	5.325%	5.25%
employee/employer maximum	$2,991.45	$2,829.60	$2,797.20	$2,737.05	$2,630.25
self-employed contribution rate	11.10%	10.8%	10.8%	10.65%	10.5%
self-employed maximum	$5,821.20	$5,659.20	$5,594.40	$5,474.10	$5,260.50

 

 

AdviserGo determines your employment status as being employed or self-employed and applies QPP withholdings accordingly. Employment status is determined based on the selection in the Source field when entering your income on the Employment screen. If your income Source is set to Employed or Company Owner, the software will assume that you are employed and the regular employee CPP contribution rates and maximums will apply. The alternative contribution rates and maximum contribution for self-employed individuals will be applied if your income Source is set to Self Employed.

 

Do withholdings for QPP increase in future years of the plan?

 

Yes, QPP withholdings usually are escalated in future years. The Default Tax Table Assumption is a preference, which is set by your firm or enterprise to apply an across-the-board annual escalation to many of the assumptions relating to taxes, as well as contribution allowances.

 

We code for what we know. As a rule, Voyant software is coded to account for legislated rules and only escalates tax-related assumptions once we move beyond the knownn. The Default Tax Table, which is found in the Plan Settings, is used to set this future escalation of values once we move beyond the known.

Where to view CPP and QPP withholdings in AdviserGo.

 

Employment Insurance (EI) premium withholdings

 

Federal EI Premium Rates and Maximums

Year	2019	2018	2017	2016	2015
maximum insurable earnings	$53,100	$51,700	$51,300	$50,800	$49,500
basic exemption	nil	nil	nil	nil	nil
employee rate	1.62%	1.66%	1.63%	1.88%	1.88%
employee maximum	$860.22	$858.22	$836.19	$955.04	$930.60
self-employed rate	1.62%	1.63%	1.63%	1.88%	1.88%
self-employed minimum earnings	$7,121	$6,947	$6,888	$6,820	$6,645
EI clawback threshold	$66,375	$64,625	$64,125	$63,500	$61,875

 

 

Québec EI Premium Rates and Maximums

Year	2019	2018	2017	2016	2015
maximum insurable earnings	$53,100	$51,700	$51,300	$50,800	$49,500
basic exemption	nil	nil	nil	nil	nil
employee rate	1.25%	1.30%	1.27%	1.52%	1.54%
employee maximum	$663.75	$672.10	$651.51	$772.16	$762.30

 

Source

Since the Québec Parental Insurance Plan (QPIP) took effect on January 1, 2006, the federal Employment Insurance plan no longer pays maternity, paternity, parental or adoption benefits for Québec contributors. Instead, Québec contributors pay a reduced rate of employment insurance contributions, which is determined by the federal government. For 2019, the reduction is set at 0.37% of insurable earnings for salaried workers. Self-employed workers who choose to participate in the sickness and compassionate care measure of the federal Employment Insurance program also benefit from a reduction equal to 0.37% of their insurable income. Source

Note – Separate withholdings for QPIP are not currently modelled in the AdviserGo.

 

 

 

Do EI premiums increase in future years of the plan?

 

Yes, withholdings for EI usually are escalated in future years. The Default Tax Table Assumption is a preference, which is set by your firm or enterprise to apply an across-the-board annual escalation to many of the assumptions relating to taxes, as well as contribution allowances.

 

We code for what we know. As a rule, Voyant software is coded to account for legislated rules and only escalates tax-related assumptions once we move beyond the knownn. The Default Tax Table, which is found in the Plan Settings, is used to set this future escalation of values once we move beyond the known

 

Tax Deductions, Credits, Adjustments and Abatements

 

There are numerous federal tax deductions and credits not to mention those offered by provinces and territories. An exhaustive list of these can be found here (federal) and here (provincial).

AdviserGo automatically applies some of the more common federal deductions, adjustments and abatements. These include:

Basic personal amount

Age amount

Refundable Québec abatement

Federal dividend tax credit

Pension adjustment

RRSP and PRPP deduction – provided an RRSP has been entered into the plan with future contributions and these contributions are being made successfully (i.e. income is available to make them)

Business investment loss  (if recorded on the Taxes screen or if future losses are set to be incurred).

Interest paid on your student loans – could be captured if the loan is entered in the plan and the setting is ticked to indicate that interest on the loan is tax deductible.

Donations and gifts

 

At the provincial, territorial level it the software also captures the following:

Basic personal amount as applied to provincial, territorial taxes

Dividend tax credit as applied to provincial, territorial taxes

 

Numerous other tax-deductible expenses could be captured in AdviserGo by entering at least the deductible amount as an expense and setting the expense as being tax deductible. These might include: 

Child care expenses,

Annual union, professional (or like dues),

Moving expenses, support payments,

Other employment expenses,

Tuition, education, and textbook amounts,

Eligible medical expenses 

Registered pension plan (RPP) deduction – note that although the software is coded to deduct employee contributions to defined benefit schemes, AdviserGo does not yet feature a field for entering these contributions. For now, they could be recorded as a tax-deductible basic expense.

 

Also, any tax refunds (as well as taxes owing) due in the first year of the plan can be added for the person to whom they apply, on the Taxes screen. Include details

 

What is the difference between a non-refundable tax credit and a tax deduction?

Tax Deduction

A tax deduction reduces the amount of income that is subject to income tax.

If your income for the year was $30,000, and you have a $1,000 tax deduction your taxable income is reduced to $29,000.

The impact on your taxes is dependent on what tax bracket your income is in once the tax deduction has been applied.

For example, a $1,000 tax deduction in a 30% tax bracket means that you will pay $300 less in taxes

 

Tax Credit

Tax credits reduce income tax!

Non-refundable tax credits are calculated by multiplying the tax credit by the lowest federal tax rate, of 15% in 2019.

For example, if you claim a $1,000 non-refundable tax credit at a rate of %15, this will reduce your tax payable for the year by $150.

What if the credit is more than what you owe? A non-refundable tax credit reduces your taxes owing, but you won't receive a refund of any amount over that.

Source - https://www.canada.ca/en/revenue-agency/news/2018/10/the-canada-pension-plan-enhancement--businesses-individuals-and-self-employed-what-it-means-for-you.html

Personal Amount

Non-refundable tax credit. Applies to federal and all provinces and territories with the exception of Québec.  Read more >>  http://www.taxtips.ca/nrcredits/tax-credits-2016-base.htm

Age Amount

Voyant accounts for federal and provincial age amount tax credits when calculating personal income tax.

Federal age amount:

The federal age amount tax credit is available to individuals who are, at the end of the taxation year, aged 65 or older. 

The federal age amount for 2019 is $7,494.  This amount is reduced by 15% of income exceeding a threshold amount of $37,790 for 2019 and is eliminated when income exceeds $87,750 for 2019.

The tax credit is calculated using the lowest tax rate (15%), so the maximum federal tax credit for 2019 is $1,124 ($1,100 for 2018).

Provincial age amount:

Each province except Québec has an age amount tax credit which is calculated in the same manner.

Source:   http://www.taxtips.ca/filing/ageamount.htm

 

Refundable Québec Abatement

16.5% of Federal Basic Tax (net federal tax minus non-refundable tax credits (personal amount, age amount, dividend tax credit)

Québec Federal Tax Abatement

Income Tax Act s. 120(2), Federal-Provincial Fiscal Arrangements Act R.S.C., 1985, C. F-8

Under an agreement between the federal government and Québec, most Québec taxpayers get a federal tax abatement (reduction) of 16.5% of either basic federal tax (line 57 on Schedule 1) or minimum tax, whichever is greater.  The tables of marginal tax rates for Québec include the reduction for the abatement.  For more information, see Line 440 - Refundable Québec abatement, in the Canada Revenue Agency (CRA) General Income Tax and Benefit Guide in the General Income Tax and Benefit Package.

The federal tax abatement also reduces, in effect, all federal tax credits for Québec taxpayers, because the tax credits are deducted from federal tax before the abatement is calculated. Source

 

 

Donations to Charity and the Charitable Donation Tax Credit (CDTC)

Canada has a generous tax credit system for donors to charities. The Charitable Donations Tax Credit can be up to 29 percent of the amount you donated at the federal level. You may also be entitled to an additional amount reaching up to 24 percent of your donation depending on your province of residence. There are several of rules that determine whether you qualify.

 

Eligible Donations

The CDTC is available for anyone who makes a donation to a qualifying donee. A donation is defined as a gift for which no consideration is given in return. Your donation can be money, or it can be anything else of value. If you receive something in exchange for your donation, such as tickets to a show, then the value of what you received must be subtracted from the amount you donated and you can only claim the CDTC for the difference.

 

A qualifying donee is a registered charity or one of several other public organizations, such as an amateur athletic association, which can issue tax receipts. Make sure you obtain a receipt and that the donee issuing it is legally entitled to do so. The Canada Revenue Agency provides a searchable online database that allows you to confirm whether a charity is registered and eligible to issue official donation receipts. You can also determine the status of a registered charity by calling the CRA at 1-800-267-2384.

 

Claiming and Calculating the Credit

To claim your credit, report it on your annual tax return. As a rule, at the federal level, your credit will be 15 percent of the first $200 of donations and 29 percent of your additional donations. All provinces also have similar credits, which fluctuate between 4 percent and 24 percent. The CRA provides an online tool to calculate your credit, including the provincial component.

 

Since 2013, there is an additional credit available to new donors called the First-Time Donor’s Super Credit. If you or your spouse are making your first donation since 2007, an additional credit of 25 percent of the first $1,000 in donations may be available to you.

 

Donations From Previous Years

Since the CDTC is greater for donations higher than $200, it may be worthwhile to accumulate donations and claim them all together in the same year. There are two ways to accumulate donations: you can combine them with your spouse`s on a single tax return or you can claim donations from multiple years together in the same year. Donations can be carried forward for up to five years.

Source - https://turbotax.intuit.ca/tips/tax-benefits-of-charitable-donations-5414

 

AdviserGo accounts for charitable donation tax credit if a legacy expense is entered giving money to charity.

• The user can claim eligible amounts of gifts to a limit of 75% of his/her net income.
• Voyant uses the Charitable donation tax credit rates table to calculate the charitable tax credit. https://www.canada.ca/en/revenue-agency/services/charities-giving/giving-charity-information-donors/claiming-charitable-tax-credits/charitable-donation-tax-credit-rates.html
• The Charitable Donation Tax Credit is a non-refundable tax credit.
• Any un-claimed donation can be carried forward for up to 5 years to reduce the user’s tax due in future.

 

How to Enter Charitable Donations

 

Provincial Surtax (Ontario and Prince Edward Island)

Ontario and Prince Edward Island have a surtax system where a surtax is applied to the provincial income tax (the amount of the tax before application of the surtax itself) if in excess of a thresholds noted below.

For example, Ontario’s surtax of 20% applies to provincial income tax (exclusive of the surtax) that exceeds a threshold of $4,740 (in 2019). Ontario applies an additional surtax of 36%, in addition to the 20% surtax, to provincial income tax in excess of $6,067 for a total surtax of 56%. This surtax is effectively a tax on tax.

Ontario Surtaxes
2019			2018
Surtax rate	20%	36%	Surtax rate	20%	36%
Surtax is on Ontario provincial tax that is greater than	$4,740	$6,067	Surtax is on Ontario provincial tax greater than	$4,638	$5,936
For a person with only basic personal amount, the surtax starts at taxable income of	$77,313	$91,101	For a person with only basic personal amount, the surtax starts at taxable income of	$75,657	$89,131
The 36% surtax is in addition to the 20% surtax, for a total surtax of 56%. The surtax increases the 13.16% tax rate to 20.53% (13.16% x 1.56). Surtaxes are calculated before deducting dividend tax credits.

 

Prince Edward Island Surtaxes
2019		2018
Surtax rate (included in above rates)	10%	Surtax rate (included in above rates)	10%
Surtax is on PE tax greater than	$12,500	Surtax is on PE tax greater than	$12,500
Person with only basic personal amount - surtax starts at taxable income of	$98,997	Person with only basic personal amount - surtax starts at taxable income of	$98,997
The surtax is calculated based on the net tax payable after deducting personal tax credits.

 

 

 

1. Capital Gains Tax
   1. Taxed as normal income with inclusion rate of 50% (only half of gains are taxed)
   2. Losses – Carry backward 3 yrs or forward indefinitely (no plans to model carry backward of losses since this fall out of the scope of what is modelled in Voyant Adviser/AdviserGo).
   3. Carried forward losses can only offset capital gains (NOT other income) except in the year of death.

DO WE ACCOUNT FOR CARRY-FORWARD CAPITAL LOSSES IN LEGACY OVERVIEW

Capital losses incurred and carried forward from before the start of the plan are accounted for in two ways.

- In the starting value of an investment or property compared against its cost basis, which should reflect the amount originally invested (the purchase cost) plus any gains realized to date.

- Other carry forward capital losses from investments or properties that were liquidated before the beginning of the plan can be entered om the Taxes screen. Entries on this screen are specific to the person who incurred the loss. If the losses were yours and should apply to your taxes to offset future capital gains, enter these losses on the Taxes screen under your name. 

 

2. Dividend Tax
   1. Grossed up for taxes already paid by the company
      • Eligible – 38%
      • Non-eligible – 16%
   2. Tax credit applied to grossed up amount
      • 2019 Federal - 15.0198% for eligible dividends, 9.0301% for non-eligible dividends
   3. (Eligibility is determined by company, not individual.) You will find settings to specify the percentage of dividends that are eligible and non-eligible.

 

Example: $500 eligible dividends received

Taxable dividend = $500 * 138% = $690

Federal dividend tax credit = 15.0198% * 690 = $103.64 (OR 6/11 * 190 = $103.64)

 

Registered Retirement Savings Plan (RRSP)

 

A Registered Retirement Savings Plan (RRSP) is a personal savings account, registered with the federal government, designed to help Canadians save for retirement.

 

RRSP Highlights

• RRSPs can be individual plans, groups plans, which are employer sponsored, or spousal RRSPs, which allow a you to open and contribute to an RRSP on behalf of your spouse or common law partner.
• Contributions serve to reduce your annual taxable income.
• The money you make on your RRSP investments is not taxed as long as it stays in the plan, where investments will grow tax-deferred. You will pay tax on your RRSP savings only when you withdraw them from the plan.
• Contributions to RRSPs are made with pre-tax dollars or are tax deductible, reducing your taxable income.
• There are limits on how much you can contribute to an RRSP each year. Contribution allowances are the lower of:
• 18% of your earned income in the previous year, or
• The maximum contribution amount for the current tax year: $26,500 for 2019.
• If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.

Add to this allowance any used contribution room from past years.

• If you don’t have the money to contribute in a year, you can carry forward your RRSP contribution room and use it in the future.
• An RRSP must be converted to a RRIF or used to purchase and annuity by age 71. There is no maximum limit on withdrawals after conversion to RRIF.

 

How does an RRSP work?

Contributions you make to an RRSP are tax-deferred, meaning the money is only taxed when you withdraw it. For most, withdrawing from your RRSP at a later point in life means paying much less tax as your marginal tax rate will usually be lower. Any money put into an RRSP, up to the annual limit, reduces your taxable income for that year. Your annual limit is a percentage of your earned income plus unused room from earlier years.

You can hold a variety of investments in your RRSP, like stocks, bonds, GICs, ETFs, and mutual funds. Investments that can be held in an RRSP are called qualified investments.

Because income earned inside an RRSP isn't subject to tax until it's withdrawn, RRSPs are a powerful way to save for your retirement.

 

RRSPs have three special tax advantages

Deductible contributions – You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.

Tax-sheltered earnings – The money you make on your RRSP investments is not taxed as long as it stays in the plan.

Tax deferral – You’ll pay tax on your RRSP savings when you withdraw them from the plan. That includes both your investment earnings and your contributions. But you have deferred this tax liability to the future when it’s possible that your marginal tax rate will be lower in retirement than it was during your contributing years.

 

Types of RRSPs

 

Individual RRSPs

This is an RRSP registered in your own name, and to which only you contribute.

The amount you contribute to your RRSP is tax deductible. You pay tax when you withdraw your money; if you’re in a lower tax bracket then (which will presumably be the case if you’re retired), your eventual tax bill will be lower.

If you transfer the value of your registered company pension into an individual RRSP after leaving your employer, that RRSP is “locked in,” meaning you usually can’t withdraw money from it until you retire.

 

Spousal RRSPs

This is an RRSP registered in the name of one spouse, to which the other spouse contributes.

Whether you contribute to your own RRSP or to your spouse’s spousal RRSP, your contribution counts against your own RRSP contribution limit. Your spouse’s contribution limit is not affected.

If you contribute to your spouse’s spousal RRSP, and your spouse withdraws money from it within 3 calendar years, you pay the tax, not your spouse.

Once you retire, you and your spouse can take income from your respective retirement funds and be taxed at an individual rate.

 

Group RRSPs

This is an RRSP set up in the name of a group (such as the employees of a company or the members of a professional organization).

Members of a group RRSP typically benefit from lower administration and management fees than would be applied to an individual plan.

You may also be able to contribute through payroll deductions, which allows you to invest throughout the year.

 

What are the requirements for opening an RRSP?

You can open an RRSP at any age as long as you have earned income and file a tax return in Canada. You must close your RRSP when you turn 71.

 

How much you can contribute to an RRSP?

Anyone who files an income tax return and has earned income can open and contribute to an RRSP at any age up to 71. Provided you have contribution room, you can make an RRSP contribution until the end of the year you turn age 71.

Contributions to RRSPs can come from the individual (the plan’s owner) or if it is a group RRSP, from an employer. Contributions can also be made to a spousal RRSP by a spouse or common-law partner.

The total amount you can contribute to your RRSP each year is made up of your contribution limit for the current year plus any unused contribution room carried forward from previous years.

Your RRSP contribution limit for 2019 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $26,500. For 2018, the upper limit was $26,230. If you have a company pension plan, your RRSP contribution limit is reduced.

The maximum RRSP maximum contribution limit is currently $26,500 in 2019.

In past years the contribution limit has been:

2018 - $26,230

2017 - $26,010

2016 - $25,370

 

In addition to this maximum, there are other considerations that may further limit or increase how much you can contribute to an RRSP each year.

If you don't make the maximum allowable RRSP contribution in any given year, Canada Revenue Agency (CRA) allows you to carry forward the unused contribution room indefinitely and add this to the amount you can contribute for future years at least until you turn 71.

If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the pension adjustment. The pension adjustment is calculated by your employer and reported to the CRA on your T4 each year.

If you are a member of a defined contribution registered pension plan (RPP) or defined profit-sharing plan (DPSP), your pension adjustment is the total contributions to the plan made by you and your employer. If your RPP is defined benefit, your pension adjustment is determined by a formula designed to reflect the pension benefit entitlement you earned in the year. For more information, see the CRA website.

The Notice of Assessment that the Canada Revenue Agency (CRA) sends to you each year after processing your tax return shows your RRSP contribution limit, including any unused contribution room from previous years.

 

How does AdviserGo calculate the annual RRSP contribution allowance?

In AdviserGo, your annual RRSP contribution allowance is the lower of the following:

1. 18% of your earned income from the previous year, or

Note - For first year of the plan, since AdviserGo does not require you to enter and therefore will not "know" your earnings from the year prior to the your plan's beginning, therefore it will take income limit as being sum of your first year's employment as entered into the plan,

1. The maximum annual contribution limit for the taxation year, which is $26,500 in 2019, or
2. The remaining contribution limit after any company-sponsored pension plan contributions.

 

Minus –

From this initial contribution room, the software will subtract your previous year’s pension adjustment (PA) as reported on your T4, if you were a participant of your company’s deferred profit-sharing program (DPSP) or registered pension plan (RPP).

Note - Your initial pension adjustment can be recorded in AdviserGo under Taxes. From the first year onward, AdviserGo is able to estimate your annual pension adjustment automatically, based on future pension contributions.

 

Plus +

To the adjusted contribution room, the software will add any unused contribution room from previous year(s).

Note - Unused contribution room to date (from prior to the beginning of your plan) is recorded in AdviserGo under Taxes.

In addition to Employment income, AdviserGo also considers annual contribution limits based on entries under Other Income and Windfalls. Salaried earnings (Employment income), as well as alimony received, and rental income, among other income sources, which are entered in AdviserGo under Other Income. Investment income is does not count toward the annual RRSP contribution allowance.

If you are also contributing to a spousal RRSPs, the maximum contribution allowed is based on your maximum contribution limit, the limit of the contributor, not the beneficiary. Contributions to a spousal RRSP would reduce the contribution room for your personal RRSP.

 

How long can your RRSP can stay open and when must contributions end?

You must close your RRSP in the year you turn 71. You can withdraw your RRSP savings in cash, convert your RRSP to a RRIF or buy an annuity. The year you turn 71 is also the final year you can make contributions to your RRSP.

The option is available in AdviserGo to convert an RRSP to an Registered Retirement Income Fund (RRIF) prior to age 71. Once an RRSP is converted into an RRIF, it can no longer accept contributions 

Show where RRSP conversion is found in software.

 

Where in AdviserGo can I record the unused RRSP contribution room that is currently available to me from years prior to the start of the plan?

You can carry forward unused contribution room indefinitely and add this to the amount you can contribute in future. While the software will know to track any future unused RRSP contribution room, it will not know initially about any unused contribution room carried forward from years prior to the start of the plan. This information can be recorded on the Taxes screen.

On the Dashboard screen, first expand the Taxes section. If you are recording contribution room for the primary client (the person whose details you entered when first setting up the plan), they will already have a taxes entry recording their province of residence. Click the link to their tax information.

If you don’t already have a taxes entry, click the plus (+) button and select Taxes.

 

Does the maximum contribution allowance increase in futures years, as modelled in AdviserGo?

Yes. Future maximum RRSP contribution allowances are escalated annually based on the Default Tax Table Assumption, a Plan Setting set by your firm or enterprise to apply an across-the-board annual escalation to future taxes and contribution allowances.

 

Could withdrawals be made from an RRSP prior to its conversion into a RRIF?

Yes, and AdviserGo assumes this is the case. After your retirement, if prior to conversion money is needed from an RRSP to meet planned expenses, the software will automatically withdraw money from an RRSP before its scheduled conversion.

 

Group Registered Retirement Savings Plans (Group RRSP)

 

A group Registered Retirement Savings Plan (RRSP) is an employer-sponsored retirement savings plan, similar to an individual RRSP, but administered on a group basis by the employer. Contributions are made by payroll deduction, on a pre-tax basis, through a Group RRSP administrator.

 

How to enter a Group RRSP in AdviserGo

In AdviserGo, group RRSPs are entered as one would enter an individual RRSP, only select an account Type of RRSP – Registered Retirement Savings Plan (Employer Sponsored), which will display additional fields for Employer Contributions.

 

Employer contributions can either be “Matching”, meaning they will be matched to whatever contributions are being made by the employee (the “owner” of the RRSP) or they could be fixed, meaning contributions will be made independently of any contributions made by the employee.

 

 

 

 

Spousal RRSPs

 

Spousal Registered Retirement Savings Plans (spousal RRSPs) are one of the ways that Canadian couples (married or common law) can split income in retirement. The maximum contribution allowed to a spousal RRSP is based on the maximum contribution limit of the contributor.

Regular RRSPs are personal or group retirement savings accounts in which you save money for retirement in your own name. You (and possibly your employer for Group RRSPs) contribute in your own name and have control over the investment. If you are married or have a common-law partner, you would normally choose that person as your beneficiary. The money from your RRSP will then be transferred into a registered account in your spouse’s name if you pass away before they do.

In a spousal RRSP, the plan is registered in your spouse’s name and controlled by her or him. As for all tax situations, the rules apply equally to common-law partners and married couples.

 

How much can I contribute to a spousal RRSP?

The maximum contribution allowed to a spousal RRSP is based on the contribution room or limit of the contributor. Your contribution room is indicated on your notice of assessment. Whether you contribute to your own RRSP, a spousal RRSP or both, you cannot put in more than that contribution limit. Your spouse’s contribution limit is not affected by the money you contribute to a spousal RRSP on his or her behalf.

 

What are the advantages of contributing to a spousal RRSP?

As the contributor, you get to deduct the amount you invested in the spousal RRSP. When you turn 71 you will no longer be allowed to make further contributions into your own RRSP, which at that point will be converted into RRIF or used to purchase an annuity. You can, however, continue to contribute to a spousal RRSP until the end of the year in which your spouse turns 71.

If you are in a higher tax bracket than your spouse at the time of the spousal RRSP, the spousal RRSP deduction will save you more tax than if your spouse had made the contribution.

Spousal RRSPs are also used to balance income in retirement. As with a regular RRSP, the money you contribute is allowed to grow tax-deferred, which means you do not pay income tax on it until you withdraw it from the plan.

If only one spouse has a large amount of money in an RRSP, at retirement that will mean a high income and a higher marginal tax rate than if each spouse has the same amount divided between their RRSPs. Both spouses would then be in a lower tax bracket and pay income tax at the same lower marginal tax rate.

Source - https://turbotax.intuit.ca/tips/spousal-rrsps-in-canada-6353 

 

Pension Adjustment (PA) – Adjusting RRSP Contribution Room

A Pension Adjustment (PA) is the modification of your annual Registered Retirement Savings Plan (RRSP) contribution room based on how much money has been contributed to workplace pension plans on your behalf. Workplace pension providers submit to the Canada Revenue Agency (CRA) a total value of the contributions a member has received in a registered pension plan for the tax year.

The PA was introduced in 1990 to level the retirement savings playing field between individuals who earn a pension entitlement in Registered Pension Plans (RPP) and those who do not. The PA reduces a RPP member's RRSP contribution room for the following year to ensure individuals who belong to a RPP are not allowed to save more tax-sheltered funds for retirement than those without a RPP. The PA is intended to ensure that all taxpayers have access to comparable tax assistance, regardless of the type of pension plan in which they participate.

If you are a member of a company-sponsored registered pension plan (RPP) or a deferred profit-sharing plan (DPSP), your PA amount will appear in Box 52 of your T4 slip.

The PA is the value assigned by Canada Revenue Agency (CRA) to your accrued pension in a year. It represents a mandatory deduction applied to the your RRSP contribution room for the next calendar year. Your Notice of Assessment will show both your RRSP contribution room and your PA.

 

Where to enter a Pension Adjustment (and any carryforward RRSP contribution room) for the first year of the plan

While the software will perform future pension adjustments from the plan’s first year onward and will know to track any future unused RRSP contribution room, it will not know initially about any pension adjustment and/or unused contribution room carried forward from years prior to the start of the plan. This information can be recorded on the Taxes screen.

On the Dashboard screen, first expand the Taxes section. If you are recording contribution room for the primary client (the person whose details you entered when first setting up the plan), they will already have a taxes entry recording their province of residence. Click the link to their tax information.

If you don’t already have a taxes entry, click the plus (+) button and select Taxes.

 

How is the Pension Adjustment calculated for future years of the plan?

AdviserGo calculates and then applies pensions adjustments in future years your plan using the following formulas for the following types of workplace pensions.  

Deferred Profit-Sharing Plans (DPSP) and Defined Contribution Pension Plans (DCPP):                    

Pension adjustment = the employer’s contributions plus any employee contributions.

For example, if you contributed five per cent of your annual earnings (5% X $50,000 = $2,500) and your employer matches that amount ($2,500), your PA would be $5,000 ($2,500 + $2,500 = $5,000). Your Registered Retirement Savings Plan (RRSP) contribution room would therefore be reduced by $5,000 through Pension Adjustment.

 

Defined Benefit Pension Plans currently accruing:

If your future pension is being accrued based on years of service, AdviserGo uses the following formula to calculate the pension adjustment.

Pension adjustment = 9 * (year’s salary * percentage accrued per year of service) – 600 

 

Defined Benefit Pension Plans (Estimated Future Benefit): 

Due to the lack of information on how the pension is being accrued annually, AdviserGo is unable to calculate the pension adjustment for a defined benefit scheme if the client is currently receiving payments or is using statement to input his/her benefit amount.  

 

Where to view the annual Pension Adjustment calculated for future years of the plan

If in your plan contributions are being made to a Deferred Profit-Sharing Plan (DPSP), a Defined Contribution Pension Plan (DCPP), or if you have a defined benefit pension that is accruing based on years of service, you can view future pension adjustments, as they are being calculated and applied by the software, by viewing the annual details behind the charts.

Yearly chart details can be accessed from either the Dashboard or the Let’s See screen.

To view the details, either double-click or on a tablet long press any bar of the chart or click the chart details button, top-right.

 

The chart details will then be shown.

If you accessed the chart details by double-clicking a particular bar of the chart, the details for that selected year of the plan will be shown right away.

Otherwise, select a year by using the slider bar or by clicking the appropriate bar/year of the chart above.

You can easily move from year to year in the details by using the slider bar above or the arrow buttons below the details panel.

All the annual transactional and calculation details are found in this view, including the balances and contributions that are being made to retirement accounts, which can be accessed by selecting the Pensions tab.

If a pension adjustment is being applied, the amount of the PA will be shown together with a breakdown of the sources of the adjustment. Your adjusted maximum RRSP contribution room will then be applied to any planned contributions to registered retirement savings plans, which are also shown here in the chart details.

 

Other Special Features of RRSPs Not Currently Modelled in AdviserGo

AdviserGo models RRSPs strictly as a vehicle for retirement savings. While an RRSP is a simple way to save for retirement and pay less income tax, there are a few other useful things you can do with your RRSP that are not currently modelled in AdviserGo.

 

RRSP Home Buyers' Plan (HBP)

If you’re a first-time home buyer, you can borrow from your RRSP for the down payment, however, you are required to pay it back or pay taxes on the withdrawals.

With the federal government's RRSP Home Buyers' Plan, you can use up to $35,000 of your personal RRSP savings, $70,000 for a couple, to help finance your down payment on a home.

To qualify, the RRSP funds you're using must be on deposit for at least 90 days. You must also provide a signed agreement to buy or build a qualifying home.

The withdrawal is not taxable, provided you repay it within a 15-year period. The payback amount is at least one-fifteenth a year of the amount you withdrew from your RRSP, However, if you default on repayment to your RRSP you will have to pay tax on the portion of the loan you didn’t pay back, just like a regular pre-retirement RRSP withdrawal.

HBP loans are not currently in the scope of what is modeled in AdviserGo.

 

Lifelong Learning Plan (LLP)

You can help fund your own education by borrowing from your RRSP via the Lifelong Learning Plan (LLP).

Whether you want to enhance your existing credentials or embrace a new career, the Registered Retirement Savings Plan Lifelong Learning Plan (RRSP LLP) can help you pay for the education or training you need.

The LLP allows you to withdraw up to $10,000 per year up to a maximum of $20,000 tax-free from your RRSP for you or your spouse to pay for personal education costs. You are not allowed to use the LLP program to finance your children’s post-secondary education, which is the function of a Registered Education Savings Plan (RESP).

Lifelong Learning Plans are not currently in the scope of what is modeled in AdviserGo.

 

Registered Retirement Income Funds (RRIF)

 

A Registered Retirement Income Fund (RRIF) is a tax-deferred retirement plan registered under Canadian tax law. A RRIF functions as a drawdown account for retirement income. You can use a RRIF to withdraw income from savings accumulated under their Registered Retirement Savings Plan (RRSP). As with an RRSP, an RRIF account is registered with the Canada Revenue Agency.

RRSPs must be converted into an income option for retirement, be it a RRIF or an annuity, no later than the 31st of December in the year you reach age 71. You can convert an RRSP into an RRIF any time prior to that date. RRIFs and RRSPs are similar in many respects; but, after an RRSP gets converted into an RRIF you cannot make any additional contributions, and you must take a minimum annual withdrawal.

A minimum required withdrawal is calculated at the start of the year using a calculation taking into consideration your age, as well as the value of assets in your RRSP at the end of the previous year.

Payments from RRIFs are taxable income, which are taxed at the taxpayer’s marginal rate. Withdrawals can be made any time you want, and you can always take out more than the required minimum. There are no maximum limits on the amount that can be withdrawn from an RRIF.

Withdrawals from an RRIF have taxes withheld at identical federal and provincial withholding rates as withdrawals from an RRSP.

 

RRIF Highlights

• If you are contributing to a Registered Retirement Savings Plan (either a personal or a group plan), when you turn 71 you must convert the plan into a source of retirement income – either a RRIF or you could use your retirement savings to purchase an annuity.
• RRIFs are used strictly as a source of retirement income. They do not accept contributions.
• You must start withdrawing money from a RRIF the year after you open it. A government-mandated minimum amount must be withdrawn each year, which is called the minimum income.
• There is no maximum limit on the amount that could be withdrawn from a RRIF annually.
• A RRIF. like an RRSP, can be comprised of a variety of investments - GICs, bonds, mutual funds, stocks, etc.
• The investments in a RRIF grow tax-deferred until they are withdrawn.
• Withdrawals from a RRIF are taxable to the owner at the taxpayer’s marginal tax rate. Taxes are withheld at identical federal and provincial withholding rates as withdrawals from an RRSP.

 

How does a RRIF work?

When you reach retirement and it comes time to take regular income out of your RRSPs, the vehicle of choice is usually a Registered Retirement Income Fund (RRIF). Although you can make withdrawals directly from a RRSP, the point of a RRSP is to accumulate funds for retirement. Also by age 71 you must convert an RRSP into either a RRIF or use your retirement savings to purchase an annuity.

The RRIF is much like an RRSP in that you can invest in a variety of investments such as GICs, bonds, mutual funds, stocks, etc. And for as long as the money stays in the account, whether the account is a RRSP or RRIF, it continues to grow tax deferred. The RRIF differs from an RRSP in that you cannot put direct contributions into a RRIF and with a RRIF, you must take out a minimum amount every year. This is called the minimum income.

 

What are the Differences between a RRIF and an Registered Retirement Savings Plan (RRSP)?

• Contributions - After converting your RRSP to a RRIF, you can no longer make annual contributions to the RRIF as you could with an RRSP.
• Withdrawals - Withdrawals are optional for an RRSP, whereas for a RRIF you must make minimum annual withdrawals that is determined by the Income Tax Act and is based on your age (or the age of your spouse) and the market value of your RRIF assets at the beginning of the year.

There’s no limit to the maximum amount that can be withdrawn from a RRIF or an RRSP.

• RRIF Minimum Income Requirements - You are required to start withdrawing a minimum amount from your RRIF in the year after you open it. The annual mandatory minimum income is calculated using your age (or possibly the age of your spouse, if preferred), the market value of your RRIF holdings on December 31 of the previous year, and a prescribed RRIF factor set by the government.

For individuals who are 71 years of age or older, the prescribed factor was set by the Federal 2015 Budget and generally reduced to accommodate for the longer lifespan of Canadian retirees.

Note - When the RRIF is established, its owner also has the option to base the minimum withdrawals on the age of their spouse or common-law partner. Source  However, this option is not in the scope of what is modelled in AdviserGo.  Your spouse’s age will be used for these calculations if the RRIF is from a converted Spousal RRSP.

 

 

What is the required minimum income from a RRIF and how is it calculated?

You must start withdrawing money from your RRIF in the year after you open it. The federal government sets the minimum amount you must take out of your RRIF every year, which is called a minimum income.

To determine the required minimum withdrawal, the government applies a percentage factor corresponding to the RRIF owner’s age at the beginning of the year to the value of the RRIF assets at the beginning of the year.

When the RRIF is established, its owner also has the option to base the minimum withdrawals on the age of their spouse or common-law partner; however, this option is not in the scope of what is modelled in AdviserGo. Source

For individuals who are less than 71 years of age, the prescribed RRIF factor is calculated using the formula:

account balance * 1/(90 -age)

For example, if the owner of the RRIF is 65 and the balance of the RRIF (at the start of the year) is $500,000

Required Minimum Withdrawal Amount = 500,000 * 1/(90 -65) = 500,000 * 0.04 = $20,000

The owner would, in this case, be required to withdraw at least $20,000 from the RRIF at age 65.

 

From age 71 onward, the minimum income changes and no longer follows this formula.  The minimum income amount is instead predetermined by federal law. As you get older, the minimum percentage increases. For further reading >>

Age	2015 and later
71	5.28%
72	5.40%
73	5.53%
74	5.67%
75	5.82%
76	5.98%
77	6.17%
78	6.36%
79	6.58%
80	6.82%
81	7.08%
82	7.38%
83	7.71%
84	8.08%
85	8.51%
86	8.99%
87	9.55%
88	10.21%
89	10.99%
90	11.92%
91	13.06%
92	14.49%
93	16.34%
94	18.79%
95 and older	20.00%

 

Is there a maximum withdrawal limit on a RRIF?

There is no restriction on maximum amount that can be withdrawn from a RRIF.

 

Taxes on Income from a RRIF

Income taken from RRIFs are taxable income, which are taxed at the taxpayer’s marginal rate. Withdrawals can be made any time you want, and you can always take out more than the required minimum. There are no maximum limits on the amount that can be withdrawn from an RRIF.

Withdrawals from an RRIF have taxes withheld at identical federal and provincial withholding rates as withdrawals from an RRSP.

 

How to enter an RRIF in the software?

Your entries in AdviserGo should be based on where your client’s money is being saved today.

• If are not yet 71 and you have money currently in a Registered Retirement Savings Plan (RRSP) that has yet to be converted into a RRIF, be sure to enter this account into the software as an RRSP.
• If have already converted their RRSP into a RRIF as of the beginning of the plan or plan to do so in the current year, enter their retirement savings as a RRIF account.

 

Is surplus income from a RRIFF considered spent?

 

Pension Income Splitting

 

Income splitting is a great strategy to reduce taxes if you can move income from a higher income earner to a lower income earner.  An individual who makes $80,000 per year would pay considerably more tax than a couple that earned $40,000 each. There are three common income splitting strategies available for retirees:

 

Spousal RRSPs

CPP Splitting

Pension Splitting

 

 

What is pension splitting?

Pension splitting allows a spouse to give up to 50% of their eligible pension income to their spouse for tax purposes only.  Pension splitting doesn’t involve an actual transfer of funds between accounts, it is a paper transfer done via the tax returns.

 

What is eligible pension income?

The most common form of “eligible” pension income is income from a registered company pension plan whether it is a defined benefit pension or defined contribution pension.

 

Individuals who do not have a registered workplace pension plan can still take advantage of pension splitting once they convert their RRSPs or deferred profit-sharing plans into income through a life annuity or a RRIF. 

 

Income from the Canada Pension Plan (CPP) and Old Age Security (OAS) do not qualify as eligible pension splitting.  However, CPP has its own set of rules for CPP splitting (sharing).

 

There are three conditions to pension splitting:

 

You must be married or in a common-law partnership with each other in the year.

 

Spousal RRSPs

 

Spousal RRSPs are one of the best income splitting vehicles available to Canadians. Yet, too often, in my experience as a financial advisor, spousal RRSPs are underutilized.

 

A Spousal RRSP has a number of advantages particularly if there is a significant discrepancy of income between spouses. Let's look at an example: Mary and Bob. Mary has an income of $65,000 and Bob has an income of $35,000. In this example, if Mary continues to contribute the maximum to her RRSP and Bob contributes the maximum to his RRSP, Mary will have significantly more RRSPs down the road at retirement.

 

Suppose they have 20 years to retirement, Mary can contribute $11,700 per year to her RRSP and Bob can contribute $6,300 per year. After 20 years, Mary will have almost twice as much in her RRSP ($815,000) as Bob will have in his RRSP ($439,000).

 

This disparity in assets can easily translate in a disparity of income. The ideal situation for Mary and Bob is to have their RRSP assets split equally ($626,500 each); hence the term income splitting.

 

In the ideal world, the higher income earner would make the contribution to the lower income earner's RRSP but still takes the deduction. The lower income earner would then take the RRSP out at some point in the future in a lower tax bracket than the contributor when he/she made the contribution.

 

Other important issues

 

The definition of a spouse now includes common law.

 

If you are over the age of 69, you can contribute to a spousal RRSP as long as your spouse is not over 69 years of age.

The maximum contribution allowed to a spousal RRSP is based on the maximum contribution limit of the contributor. In the previous example, the most Mary could put into Bob's spousal RRSP is her limit of $11,700.

 

You must be aware of the rules of attribution. The rule of attribution states that if you withdraw money from a spousal RRSP, the contributor will be taxed on the withdrawal if there has been a spousal contribution made in the year of the withdrawal or the two preceding years. For example, if Bob takes money out of the spousal RRSP, this year (2001) Mary would get taxed if ANY contributions were made to ANY spousal plan in 2001, 2000 or 1999.

 

If you are nearing retirement (or a period where the receiving spouse has little to no income), consider making the spousal contributions in December instead of January and February. If Mary made the contribution to Bob's spousal RRSP in December 2000, Bob could take money out of the Spousal RRSP as early as January 2003. However, if Mary made the contribution only one month later in January 2001, Bob would have to wait a full year in January 2004 to avoid the attribution rules.

 

Finally, it is more important to look at disparities in tax brackets than disparities in income. For example, if Mary's income was $55,000 and Bob's income was $35,000, there would be a significant difference in income but they would both be in the middle income tax bracket. The spousal RRSP has more merit when there is differences in tax brackets at the time of contribution and the time of withdrawal.

 

Proper income splitting requires good preparation and planning. Too often, I see couples nearing retirement realize that they should have made spousal contributions much earlier. Take the time to make some projection and do not be afraid to solicit the help of a financial advisor.

 

 

CPP/QPP Sharing

 

Special rules apply to your Canada/Quebec Pension Plan (CCP/QPP) pension benefits. They’re not eligible for pension splitting (which we discussed in detail last week), but you are allowed to “share” your CPP/QPP pension, and while this arrangement is quite different from pension splitting, the effect is still to move some of your income to a lower-income spouse (unless of course you both get the same amounts from CPP/QPP, in which case, nothing would change).

With regular pension splitting, you can choose how much you want to split with your spouse; CPP/QPP pension sharing means throwing all of your pension entitlements into a pot (excluding those that arose during the months prior to your entering into cohabitation with your spouse and any post-retirement benefits) and then splitting those benefits fifty-fifty. If both of you have CPP pensions, they both go into the pot for equal division; otherwise you split the one pension evenly. (Your CPP/QPP Statement of Contributions has all the details about your contribution history.)

“If, for example, one of you currently gets $2,000 and the other gets $10,000 and you’ve been living together since starting work, and you apply for pension sharing, you would end up getting $6,000 each,” says Daniel Laverdière, a senior manager of the Expertise Centre at National Bank Private Banking 1859 in Montreal. “But if you were working and contributing to the plan before you moved in together, the benefits from these contributions won’t be shared.

“It’s important to note that this is an actual transfer of income that will go on a cheque to the other person,” Laverdière adds. “This is different from pension splitting, which is an election you make on your tax return each year, without actually giving your spouse any money. Perhaps, if you have a spouse who spends too much, you would want to keep control of that money.”

You may not have a choice in the matter, however. According to the CPP as well as QPP rules, in some cases only a single signature is needed on the pension sharing application. In order to apply for CPP pension sharing, you will need your Social Insurance Number and your original marriage certificate or proof of your common-law relationship.

 

After debating taking CPP early, the next step for Janet is to figure out if she should split her CPP benefits with her husband. Let’s assume Janet takes CPP early and gets the $351 per month. Her total income is quite low and she only pays tax at the 25% marginal tax rate. Will on the other hand, makes $800 per month in CPP and his total income is much higher in the 36% Marginal Tax bracket with $50,000 of annual retirement income. As a result of the sharing, Will’s CPP amount will drop from $800 per month to 575 per month. Janet’s income will increase from $251 per month to $575 per month. The outcome is $225 per month of income will move from being taxed at 32% to being taxed only at 25%

 

The key to determining if CPP sharing is feasible is to look at whether the higher CPP earner is in a higher marginal tax rate than the lower CPP earner. Remember, it’s not just about the higher income earner making more money but rather whether they are in a higher tax bracket.

 

CPP remains one of the cornerstones of creating retirement income. Planning ahead will help you to know when to take CPP and whether to split benefits with a spouse are key issues.

 

Deferred Profit-Sharing Plans (DPSP)

A Deferred Profit-Sharing Plan (DPSP) is an employer-sponsored profit-sharing plan registered with the Canada Revenue Agency (CRA). A DPSP is at tax-sheltered plan set up by your employer to help you save for retirement. The plan’s sponsor shares profits from the business with the plan members by contributing to the DPSP on each plan member’s behalf. You don’t make contributions, the company does, from a portion of its profits. Member contributions are not permitted.

A DPSP gives the plan sponsor the option to link contributions to profitability of the business. There is no minimum required contribution. If there is negligible profit in a year, the sponsor is not required to contribute. However, DPSPs are subject to maximum contribution limits set by the CRA.

A DPSP is usually offered in conjunction with a group RRSP. The employee contributes to the group RRSP and the employer’s matching contributions are deposited to the DPSP.

Plan sponsors can choose to make only specific groups of employees eligible for the DPSP. For more information visit www.cra-arc.gc.ca

 

Highlights

• An employer-sponsored profit-sharing plan
• You don’t make contributions, the company does, from a portion of its profits.
• Sponsor contributions are tax-deductible for the plan sponsor, the employer, not the plan member, the employee.
• There are no minimum required contribution limits. An employer can reduce contributions if profits are negligible.
• Contributions cannot exceed the lesser of 18% of a member’s salary and other compensation for the year or 50% of the annual Money Purchase (MP) contribution limit. In 2019 this limit is $13,615.
• You do not pay income tax on DPSP contributions until funds are withdrawn. Your investment earnings are tax-sheltered. You don’t pay any tax on the earnings until you withdraw them.
• Your Registered Retirement Savings Plans (RRSP) contribution room is reduced by the DPSP contributions you received in the previous year.
• Companies often combine a DPSP with a pension plan or Group RRSP to provide retirement income for employees.
• With most plans, you decide how your DPSP money is invested. However, some companies do require employees to buy company stock with some of the contributions.
• When you leave your employer, your DPSP money can be transferred to an RRSP or RRIF, used to buy an annuity, or taken in cash, in which case it will be taxed as income in the year you receive it.

 

Contributions

Unlike a Defined Contribution Pension Plan (DCPP), you don’t contribute money to a DPSP. All contributions come from the employer. Member contributions are not allowed.

Sponsor contributions can be made in reference to profits – i.e. “out of profits”. Usually, the employer will contribute a given amount, based either on your salary or on the company’s annual profits.

There are no minimum required contribution limits and an employer could reduce contributions if profits are negligible. Contributions cannot exceed the lesser of 18% of a member’s salary and other compensation for the year or 50% of the annual Money Purchase (MP) contribution limit. In 2019 this limit is $13,615. Source

DPSP contributions will trigger a pension adjustment (PA). The pension adjustment is a correction made to your annual RRSP contribution room, based on how much money has been deposited to your group retirement and pension plans.

 

Withdrawals

Withdrawals are taxed as income. Partial withdrawals are permitted while the member is employed, although the sponsor can restrict withdrawals until termination of employment.

Unlike DCPP, the money in a DPSP is not considered “locked-in.” When you retire, you can transfer the DPSP balance over to your RRSP. You can also transfer the balance of the DPSP to your personal RRSP as cash. No need to worry about how much money you can unlock while you’re retired.

 

Investments

Members typically have control over investment decisions; however, the plan sponsor retains responsibility over investments available in the plan, including the selection of investment options and administrative providers.

 

Retirement

Accumulated savings do not need to provide lifetime retirement income. A member could:

• Transfer the funds to an RRSP
• Purchase an annuity (an option not currently modelled in AdviserGo)
• Receive payments in installments over a specified period. These payments must begin by the earliest of:
• 90 days following retirement, or
• the member’s 71 birthday.
• Receive the funds as a lump-sum payment.

 

Unless you schedule a transfer out of the DPSP, AdviserGo assumes funds in a DPSP are transferred into a Registered Retirement Savings Plan (RRSP), which is in turn converted into a Registered Retirement Income Find (RRIF) at age 71.  

 

Termination of Employment
All vested amounts become payable within 90 days of termination of employment.

A member can:

• Receive funds as a lump-sum payment,
• Transfer funds to another retirement savings plan such as a RPP, RRSP, RRIF or another DPSP,
• Purchase an annuity (an option not currently modelled in AdviserGo).

 

Unless a transfer is scheduled, AdviserGo effectively assumes funds in a DPSP are transferred into a Registered Retirement Savings Plan (RRSP), which is in turn converted into a Registered Retirement Income Find (RRIF) at age 71. No transfer of funds will be shown, the account will remain tracked in the software under its original name,

Unlike a group RRSP, you don’t have direct ownership of the money in the DPSP. With an RRSP, you would be able to withdraw your savings as cash (with a tax penalty) or transfer the money to another institution. DPSP money, on the other hand, is held in trust for you by the plan sponsor (the investment company that sets up your plan).

In many cases there is a vesting period. You would usually need to participate in the plan for 2 years before the money becomes vested. If you leave the company or leave the plan before the vesting period, your employer keeps the DPSP money. Even after the vesting period, you would not be able to withdraw or transfer DPSP funds while you’re an active employee with that company. They don’t become available to you until you’ve left the company, retired, or left the plan.

Note – Vesting periods are not in the scope of what is modelled in AdviserGo.

 

Sources -  https://www.manulife.ca/wps/wcm/connect/c7b44f25-efaa-40f6-b046-1d578c360353/grs_prod_deferredprofitsharingplans.pdf?MOD=AJPERES&CACHEID=c7b44f25-efaa-40f6-b046-1d578c360353

 

https://www.getsmarteraboutmoney.ca/plan-manage/retirement-planning/pension-savings-plans/deferred-profit-sharing-plans-dpsps/

 

Defined Contribution Pension Plan (DCPP)

A Defined Contribution Pension Plan (DCPP) is an employee-administered retirement plan that allows your employer to match your contributions up to a certain amount. DCPPs are registered with the Canadian Revenue Agency (CRA), which sets legislated maximums on annual contribution allowances.

Contributions are tax-deductible and are subject to government limits. The current annual contribution limit for DCPPs in 2019 is the lesser of 18% of your current year’s earned income, or $27,230. This amount will increase in 2020. Read more >>

With a DCPP, the employee specifies how much money from each paycheck will be deposited into the plan each pay period, and the employee also directs and runs the investment choices. In Canada, plan funds are held in a third-party trust that is separate from the company, so the company can’t use the funds in the plans.

These plans are beneficial to an employee in three major ways.

They help the employee save for retirement and possibly receive some additional money from the matching employer contributions.

A DCPP gives the employee more control over retirement funds, as the employee can choose how to allocate the funds (as opposed to a defined benefit pension plan).

The deduction of the funds from each paycheck occurs pre-tax, so the DCPP lowers the employee’s overall tax liability.

From the employer perspective, defined contribution pension plans tend to be much less expensive from a dollar standpoint than defined benefit pension plans, and DCPPs also come with less regulatory and financial risk.

Source - https://quickbooks.intuit.com/ca/resources/business/defined-contribution-pension-plans/

A DCPP has no pre-determined payout at retirement, it is based on the assets in the plan at the time you retire. The investment risk is borne by the beneficiary not the plan. They are also known as money purchase plans, reflecting the individual's contribution.

How a DCPP operates is typically company specific. Generally, they involve a fixed contribution amount or percentage of salary that are deposited into an account in your name. The amount can either be contributed by the employer, the employee, or some combination of both based on the setup of the specific plan. Your contributions as an employee are tax deductible, and the assets grow on a tax-deferred basis.

In a DCPP, you are responsible for the investment choices for the contributions, from a selection of options available for your plan. The funds in a DCPP cannot be withdrawn before the owner retires. The "cost" of a DCPP can be readily calculated but the benefit is ultimately unknown as it depends on the investment returns of the plan.

The main difference between the Defined Contribution Pension Plan and a Group RRSP is the Pension is guided under pension law where the Group RRSP is administered under the income tax act. As a result, the rules around withdrawal of pension funds by the employee are more restrictive.

 

How DCPPs work?

DCPPs fall under the same regulations and legislation as Defined Benefit (DB) pension plans, even though their structure is quite different. Under a DB plan, the sponsor assumes liability for the payout, the investments, the service providers and along the way, the plan's solvency.

In a DCPP, the sponsor employer contracts with a plan administrator to provide the investment options; normally a limited menu negotiated at low cost; as well as the record-keeping for individual plan members. Because of their experience in offering group benefits, life insurers like Manulife, Sun Life and Great-West Life (including its London Life and Canada Life subsidiaries) dominate the DC pension space.

While DCPPs follow DB regulations, they are quite similar in how they work to Group RRSPs.

Some 75% of DC plans are mandatory and the rest are voluntary.

 

Matching employer contributions

Many company-defined contribution plans top up employee contributions with matching funds, often up to between 3% and 6% of earnings. This gives the employee the incentive to join and contribute to their plan.

Explain how matching is set in AdviserGo.

Accepts contributions from the employer and employee. Employers must contribute. Employees may abstain from contributions

Employers can make non-matching contributions, impendent of any contributions made by the employee

Employer and Employee contributions to DCPP will be included Pension Adjustment and reduce the RRSP contribution room in the next year.

Not relevant to modeling in Voyant, but employee contributions may be specified by the plan and could be involuntary. For further reading >>  https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html

 

Leaving your plan before retirement

Most DC plans require you to transfer your money out of the plan when you leave your employer.

In Ontario for example, you will typically have three options:

Transfer to an individual locked-in retirement account (LIRA)

Transfer to an insurance company to buy a deferred annuity

Transfer to another pension plan, if they will accept the transfer

 

Options at retirement

Typically, a DC plan does not directly pay a pension after retirement. Instead, members typically have two options to obtain an income:

Transfer their funds to a Life Income Fund (LIF), which is similar to a Registered Retirement Income Fund (RRIF), but with both minimum and maximum annual withdrawals.

Purchase an annuity from an insurance company, which guarantees an income for life.

AdviserGo assumes the funds in the DCPP are transferred into a LIF.

 

What is a Defined Contribution Pension Plan?

With Defined Contribution Pension Plans, contributions into the pension plan are typically made by both the employee and the employer.  DDPPs are very similar to Group RRSPs from the perspective that contributions into the pension plan are typically made by both the employee and the employer and they are pre-defined.

Contributions by the employer are taxable as income to the employee but they get an offsetting tax deduction as a result of the contribution.

 

What is the difference between Group Registered Retirement Savings Plan (Group RRSP) and Defined Contribution Pension Plan?

The main difference between the Defined Contribution Pension Plan and a Group Registered Retirement Savings Plan (Group RRSP) is the Pension is guided under pension law where the Group RRSP is administered under the income tax act. As a result, the rules around withdrawal of pension funds by the employee are more restrictive.

 

Investment Options

Under Defined Contribution Pension Plans there are a myriad of investment options offered including daily interest, GICs, mutual funds, segregated funds, and target date options.  In fact, the options you have available in Group RRSP plans are the same as the options in Defined Contribution Pension Plans.

Investment decisions for Defined Contribution Pension Plans are typically made by the employee so the employer and the plan provider are responsible for providing education and tools to help members make these investment decisions.

 

What is the difference between defined benefit pension plans (DBPP) and defined contribution pensions? 

In a defined benefit pension plan (DBPP), also known as a DB scheme, your employer promises to pay you a predetermined monthly income for life after retirement. The amount is calculated using different methods, but the formula is usually based on a combination of your average highest earnings and the number of years of service.

Both the employer and employee usually contribute to the plan and contributions are invested in a pension fund. The employer manages the investment and the onus is on them to make sure that payments are made regardless of the investment performance. Essentially, the employer bears all the investment risk.

In a defined contribution pension plans, both the employer and the employee contribute to the plan. The employee contributes a certain percentage of their annual income and this is often matched by the employer. This is very similar to what happens in Group RRSPs, except that defined contribution is subject to pension legislation and lock-in restrictions which prevent withdrawals prior to retirement.

Unlike in a defined benefit pension plan, contributions to a defined contribution pension plan are invested for the individual in their personal pension account where the investments can be tailored by the employee to fit their own investment goals and risk profile. At retirement, the amount received by an employee is dependent on the returns earned on the gross contributions. There are no guarantees, whereas with a defined benefit, if you work for the same employer throughout your working years, you can reliably estimate your retirement income well before retirement.

 

Locked-in Retirement Accounts (LIRAs and LRSPs)

If you have a pension and leave your employer before reaching the minimum pension age, your accumulated pension funds can either be paid out to you in cash (provided they are not yet locked-in or via the “small benefit rule”) or transferred to a locked-in retirement account – i.e. a Locked-in Retirement Account (LIRA) or Locked-in Retirement Savings Plan (LRSP).

 

Locked-in Retirement Account Highlights

• Hold accumulated pension funds in the event of early departure from the company or death before retirement
• Withdrawals are not allowed from locked-in retirement accounts except in certain special circumstances, which are not modelled in AdviserGo.
• Additional contributions cannot be made to a locked-in retirement account.
• A Locked-in Retirement Account (LIRA) is regulated using provincial legislation, while a Locked-in Retirement Savings Plan (LRSP) is subject to federal legislation.
• In order to provide retirement income, a locked-in retirement account must be converted into a retirement income fund – a Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF), Restricted Life Income Fund (RLIF), or Prescribed Retirement Income Fund (PRIF or PRRIF) – or used to purchase a lifetime annuity or a combination of the two.
• Conversion of the locked-in retirement account to a retirement income fund must occur before age 71.
• Locked-in retirement accounts have rules that are jurisdictionally specific. In AdviserGo, LIRAs have a jurisdiction selection to the set the provincial rules that will later apply, setting the appropriate minimum and maximum withdrawal rates, once the account is assumed to be converted to retirement income fund (a LIF, LRIF or PRRIF). Federal rules are assumed to apply to LRSPs.
• Once a locked-in retirement account is converted, Income splitting between spouses is allowed for up to 50% of pension income.
• Allow for open investment options.

 

What is a LIRA or LRSP?

Your age will be the primary factor determining where your money goes if you leave your employer and have not yet reached the minimum pension age. In most provinces, the minimum pension age is 55 years (50 years for Alberta). This means that if you are less than 55 years old, your vested pension funds must be transferred into a locked-in retirement account where it continues to grow tax-deferred.

You are generally not allowed to make withdrawals until retirement. However, depending on your provincial legislation, there may be special circumstances in which you can unlock your account and withdraw funds. These exceptions are not modelled in AdviserGo. The general rules for locking in funds and later converting them are assumed to apply.  

LIRAs and LRSPs are essentially identical in structure and serve identical purposes. The major difference between these two types of accounts is that a Locked-in Retirement Account (LIRA) is regulated using provincial legislation, while a Locked-in Retirement Savings Plan (LRSP) is subject to federal legislation. As such, you can move pension funds received from a provincially regulated employer-sponsored pension plan into a LIRA and for those established under federal regulation, you can put the funds into a LRSP.

LIRAs and LRSPs are also quite like Registered Retirement Savings Plans (RRSPs), except that funds are locked-in and you cannot withdraw or make additional contributions. Like an RRSP however, you are in control of the investments you hold in your account. When you turn 71 years of age, you are required to convert your LIRA or LRSP into one or a combination of the following:

• Life Income Fund (LIF)
• Locked-in Retirement Income Fund (LRIF)
• Restricted Life Income Fund (RLIF)
• Prescribed Retirement Income Fund (PRIF or PRRIF)
• Life Annuity

 

Meaning of Locked-In

The distinction between a LIRA / LRSP and a Registered Retirement Savings Plan (RRSP) is that, where RRSPs can be cashed in at any time, a LIRA / LRSP cannot. Instead, the investment held in the LIRA / LRSP is "locked-in" and cannot be removed until either retirement or a specified age outlined in the applicable pension legislation.

Under certain circumstances, you might be allowed to access money in your locked-in retirement account. These may vary depending on the jurisdiction your pension is registered in (federally or in a specific province). Exceptions could include reduced life expectancy due to terminal illness, long-term unemployment, or facing foreclosure on your mortgage. You also might be able to withdraw the money if you have a low balance. However, these special exceptions are not modeled in AdviserGo.

Another important distinction between regular RRSPs and LIRAs / LRSPs is that once funds have been transferred from a company pension plan to a LIRA / LRSP, further contributions cannot be made into said LIRA / LRSP. Any monetary amounts earned in the LIRA / LRSP through investment are also considered to be locked-in.

 

Provisions for holding a LIRA / LRSP

Employees who have Registered Pension Plans (RPP) and who remain with their company until retirement age will receive income for life at time of retirement. However, at the time of termination of membership in a company pension plan before retirement, death before retirement (whereby funds become property of surviving spouse or partner), or the breakup of marriage or common-law relationship, holders can transfer their RPP funds into a LIRA / LRSP and hold them there until retirement.

 

Converting LIRA / LRSP to Registered Income Fund or Life Annuity

In order to withdraw retirement income, holders need to convert their LIRAs / LRSPs into Life Income Funds (LIFs), or federally regulated Restricted Locked-In Income Funds (RLIF), as these allow for periodic withdrawal of pension income during retirement. Instead of converting to a LIF / RLIF, holders may opt to use the proceeds of their LIRA / LRSP to purchase a life annuity from an insurance company. The provision that used to exist mandating a conversion from LIF / RLIF to an Annuity at a specific age is no longer in force for most jurisdictions (although it still is for Newfoundland at age 80).

Variations exist between jurisdictions as to the holder's minimum age when plan conversion is allowed and the maximum age for mandatory plan conversion. Under Saskatchewan legislation, LIFs / RLIFs are no longer permitted since 2002 and LIRA there are now transferred to Prescribed Retirement Income Funds (PRIF). Manitoba also offers a PRIF alternative. Newfoundland offers a Locked-in Retirement Income Fund (LRIF), though other provinces also did in the past, which is available starting at age 55 and never needs to be converted to an Annuity.

Note – AdviserGo does not currently have a facility for scheduling the future purchase of a life annuity using funds from a locked-in retirement accounts (LIRA or LRSP). The software currently assumes that LIRAs and LRSPs are converted to a retirement income fund. 

 

Pension legislation differences

LIRAs / LRSPs are registered provincially / federally at the time of transfer from the company pension plan to the LIRA / LRSP. Though some LIF accounts are registered federally (RLIFs), the bulk of locked-in accounts are registered under the legislation of a specific province. The primary differences which exist from province to province involve the minimum age required for withdrawal (i.e. when conversion to LIFs / RLIFs / LRIFs / PRIFs is possible), the special provisions by which locked-in funds may be unlocked early, and the maximum amounts that may be withdrawn each year.

For example, the Saskatchewan and Manitoba Prescribed Retirement Income Funds (PRIF) have no maximum limit on withdrawals per year. The Newfoundland Locked-in Retirement Income Fund (LRIF) has more generous maximum withdrawal limits per year than for a corresponding LIF.

 

Retirement Income Funds for Locked-in Accounts (LIFs, LRIFs, RLIFs and PRIFs)

If you have a pension and leave your employer before reaching the minimum pension age, your accumulated pension funds can either be paid out to you in cash (provided they are not yet locked-in or via the “small benefit rule”) or transferred to a locked-in retirement account (i.e. a LRSP or LIRA).

In order to later withdraw retirement income from a locked-in retirement account, holders must convert their LIRAs / LRSPs into one or a combination of the following before age 71:

• Life Income Fund (LIF)
• Locked-in Retirement Income Fund (LRIF)
• Restricted Life Income Fund (RLIF)
• Prescribed Retirement Income Fund (PRIF)
• Life Annuity

 

Retirement Income Fund Highlights

• In order to provide retirement income, a locked-in retirement account (an LRSP or LIRA) must be converted into a retirement income fund – a Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF), Restricted Life Income Fund (RLIF), or Prescribed Retirement Income Fund (PRIF or PRRIF) – or used to purchase a lifetime annuity or a combination of the two.
• Conversion of the locked-in retirement account to a retirement income fund must occur before age 71.
• Locked-in retirement accounts have rules that are jurisdictionally specific. In AdviserGo, LIRAs have a jurisdiction selection to the set the provincial rules that will later apply, setting the appropriate minimum and maximum withdrawal rates, once the account is assumed to be converted to retirement income fund (a LIF, LRIF or PRRIF). Federal rules are assumed to apply to LRSPs.
• Once a locked-in retirement account is converted, Income splitting between spouses is allowed for up to 50% of pension income.

 

What is a LIRA or LRSP?

Your age will be the primary factor determining where your money goes if you leave your employer and have not yet reached the minimum pension age. In most provinces, the minimum pension age is 55 years (50 years for Alberta). This means that if you are less than 55 years old, your vested pension funds must be transferred into a locked-in retirement account where it continues to grow tax-deferred.

You are generally not allowed to make withdrawals until retirement. However, depending on your provincial legislation, there may be special circumstances in which you can unlock your account and withdraw funds. These exceptions are not modelled in AdviserGo. The general rules for locking in funds and later converting them are assumed to apply.  

LIRAs and LRSPs are essentially identical in structure and serve identical purposes. The major difference between these two types of accounts is that a Locked-in Retirement Account (LIRA) is regulated using provincial legislation, while a Locked-in Retirement Savings Plan (LRSP) is subject to federal legislation. As such, you can move pension funds received from a provincially regulated employer-sponsored pension plan into a LIRA and for those established under federal regulation, you can put the funds into a LRSP.

LIRAs and LRSPs are also quite like Registered Retirement Savings Plans (RRSPs), except that funds are locked-in and you cannot withdraw or make additional contributions. Like an RRSP however, you are in control of the investments you hold in your account.

 

 

Converting LIRA / LRSP to registered Income Fund or Life Annuity

In order to withdraw retirement income, holders need to convert their LIRAs / LRSPs into Life Income Funds (LIFs), or federally regulated Restricted Locked-In Income Funds (RLIF), as these allow for periodic withdrawal of pension income during retirement. Instead of converting to a LIF / RLIF, holders may opt to use the proceeds of their LIRA / LRSP to purchase a life annuity from an insurance company. The provision that used to exist mandating a conversion from LIF / RLIF to an Annuity at a specific age is no longer in force for most jurisdictions (although it still is for Newfoundland at age 80).

Variations exist between jurisdictions as to the holder's minimum age when plan conversion is allowed and the maximum age for mandatory plan conversion. Under Saskatchewan legislation, LIFs / RLIFs are no longer permitted since 2002 and LIRA there are now transferred to Prescribed Retirement Income Funds (PRIF). Manitoba also offers a PRIF alternative. Newfoundland offers a Locked-in Retirement Income Fund (LRIF), though other provinces also did in the past, which is available starting at age 55 and never needs to be converted to an Annuity.

Note – AdviserGo does not currently have a facility for scheduling the future purchase of a life annuity using funds from a locked-in retirement accounts (LIRA or LRSP). The software currently assumes that LIRAs and LRSPs are converted to a retirement income fund. 

 

Life Income Fund – LIF

A life income fund (LIF) is a type of registered retirement income fund (RRIF) offered in Canada that is used to hold pension funds and eventually payout retirement income. The life income fund cannot be withdrawn in a lump sum. Owners must use the fund in a manner that supports retirement income for their lifetime. Each year's Income Tax Act specifies the minimum and maximum withdrawal amounts for LIF owners, which takes into consideration the LIF fund balance and an annuity factor.

 

Understanding Life Income Fund

Life income funds are offered by Canadian financial institutions. They offer individuals an investment vehicle for managing the payouts from pension fund assets. In many cases, pension assets managed in other investment vehicles may require conversion to a life income fund when the owner is ready to begin taking withdrawals.

Life income fund payouts are determined by a government formula. Most provinces in Canada require that life income fund assets be invested in a life annuity. In most provinces, LIF withdrawals can begin at any age as long as the income is used for retirement income. Once an investor begins taking LIF payouts they must monitor the minimum and maximum amounts that can be withdrawn. These amounts are disclosed in the annual Income Tax Act. Minimum withdrawals are based on the formula for registered retirement income funds under the Income Tax Act. The maximum LIF withdrawal is the larger of two formulas both defined as a percentage of the total investments.

The financial institution from which the LIF is issued must provide an annual statement to the LIF owner. Based on the annual statement, the LIF owner must specify at the beginning of each fiscal year the amount of income he or she would like to withdraw. This must be within a defined range to ensure the account holds enough funds to provide lifetime income for the LIF owner.

 

What is a LIF?

LIFs and LRIFs are very similar. The main differences between them are:

LRIFs are only available in Newfoundland and Labrador

The maximum amount that can be withdrawn from an LRIF is calculated differently

In general, LIF and LRIF act like an RRIF in retirement and are a pension vehicle for receiving regular income. Like an RRIF, you are also required to withdraw a minimum income from your account annually, and income earned is tax-sheltered until it’s withdrawn.

 

A few differences between a LIF and RRIF are as follows:

Unlike an RRIF, you can only transfer locked-in pension funds into a LIF

There’s a maximum cap on the maximum amount you can withdraw from a LIF per year

In Newfoundland and Labrador, LIFs must be converted and used to purchase a life annuity when you turn 80. However, this restriction does not apply to an LRIF.

Related: Understanding Annuities and Retirement Planning

 

RESTRICTED LIFE INCOME FUNDS (RLIF)

The RLIF is slightly different from a LIF in that it gives you a one-time opportunity to transfer up to 50% of your pension funds into a regular RRSP or RRIF. It is set up to cater to retirees with pensions that are federally regulated, and they can transfer their federal pensions, LRSPs, and LIFs into an RLIF.

One similarity between an RLIF, LIF and LRIF is that annual minimum and maximum withdrawals apply to all three. The maximum limits are generally calculated using your age, the applicable CANSIM rate, and the value of your pension plan.

 

PRESCRIBED REGISTERED RETIREMENT INCOME FUNDS (PRIF)

Manitoba and Saskatchewan have RRIFs that are governed under provincial pension legislation. The plan is referred to as a prescribed RIF and is designed to provide seniors with greater flexibility.

You can transfer money from the Saskatchewan Pension Plan, a LIRA, LIF, or LRIF into a PRIF.

 

LIFE ANNUITY

A life annuity is a pension offered by a life insurance company which pays a regular income to the policyholder for life. It’s one of the options available when you want to convert your LIRA or LRSP

 

Defined Benefit Pension Plans (DBPP)

In a defined benefit pension plan (DBPP), also known as a DB scheme or final salary, your employer promises to pay you a predetermined monthly income for life after retirement. The amount is calculated using different methods, but the formula is usually based on a combination of your average highest earnings and the number of years of service.

For example, a popular formula for Annual Pension = 2% X average yearly pensionable earnings during the highest five earning years X years of pensionable service.

This formula may vary from employer to employer, but the idea is the same.

Both the employer and employee usually contribute to the plan and contributions are invested in a pension fund. The employer manages the investment and the onus is on them to make sure that payments are made regardless of the investment performance. Essentially, the employer bears all the investment risk.

 

What is the difference between defined benefit pension plans and defined contribution pensions? 

In a defined contribution pension plan, both the employer and the employee contribute to the plan. The employee contributes a certain percentage of their annual income and this is often matched by the employer. This is very similar to what happens in Group RRSPs, except that defined contribution is subject to pension legislation and lock-in restrictions which prevent withdrawals prior to retirement.

Unlike in a defined benefit pension plan, contributions to a defined contribution pension plan are invested for the individual in their personal pension account where the investments can be tailored by the employee to fit their own investment goals and risk profile.

At retirement, the amount received by an employee is dependent on the returns earned on the gross contributions. There are no guarantees.

 

OTHER BENEFITS OF THE DEFINED BENEFIT PENSION PLAN

1. Planning for retirement made easier: If you work for the same employer throughout your working years, you can reliably estimate your retirement income well before retirement.

If you change employers, you have the options to leave the pension in the current plan, transfer it to another pension plan or transfer it to a locked-in retirement savings account (LIRA).

2. Flexible dates for retirement: Depending on the plan, you may qualify to start receiving a full or reduced pension before you attain the age of 65.
3. Flexible pay-outs: You can integrate your pension with the Canada Pension Plan (CPP) or Old Age Pension (OAS) in such a way that maximizes your income throughout retirement.
4. Survivor Pension: Pension plans have the survivor option where the surviving spouse continues to receive a certain percentage of the pension depending on the option chosen.
5. Indexing: The pension amount you receive is typically indexed for inflation using the Consumer Price Index (CPI). This ensures that your pension amount factors in the rising cost of living on an annual basis.

Source - https://www.savvynewcanadians.com/the-defined-benefit-pension-plan/

 

How to Enter a Defined Benefit Pension Plan in AdviserGo

 

Where to View Income from a Defined Benefit Pension in the Charts

You may notice that DB schemes do not factor into your NetWorth or Liquid Assets charts in the way that other retirement plans do. This is because you do not control the DB scheme, your employer does. It does not comprise part of your wealth nor is it part of your estate. It is a benefit paid out to you in retirement that may also provide a death benefit to your survivors.

 

Modelling Bridge Benefits

 

Canada Pension Plan (CPP) and the Québec Penson Plan (QPP)

 

The CPP is the Canadian version is a social security program similar to the State Penson Service in the UK or the Social Security Administration in the US. All working Canadians over the age of 18 must contribute to the CPP at a rate of 4.95% (based on gross income from employment) over CAD 3,500 - up to the maximum contribution (CAD 2,480). Employers match employee contributions. Those who are self-employed must pay the employer and the employee portion of the CPP tax. A taxpayer is able to apply for CPP benefits starting at age 60, until they reach age 70.

 

The Canada Pension Plan (CPP) provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death. Almost all individuals who work in Canada outside Québec contribute to the CPP.

The CPP operates throughout Canada, except in Québec, where the Québec Pension Plan (QPP) provides similar benefits.

The CPP and QPP work together to ensure that all contributors are protected, no matter where they live. If you have contributed to both the CPP and QPP, you must apply for the QPP if you live in Québec or for the CPP if you live elsewhere in Canada.  Your benefit will be paid by the plan according to your place of residence. The benefit amount you will be paid will take into consideration all contributions made to both plans.  Source

Canada considers CPP payments to be taxable income, so the particular tax rate depends on all of the taxpayer’s other income that year.

 

Canada Pension Plan, Québec Pension Plan Highlights

• Based on contributions made after age 18
• Retirement pension - You can apply for and receive a full CPP retirement pension at age 65. You can also receive it as early as age 60 with a permanent reduction, or as late as age 70 with a permanent increase.
• Post-retirement benefit - If you continue to work while receiving your CPP retirement pension, and are under age 70, you can continue to contribute to the CPP. Your CPP contributions will go toward post-retirement benefits, which will increase your retirement income.
• Normal age to receive retirement pension – 65
• Contributors may opt to receive a retirement pension between ages 60 and 70
• Taking your pension before age 65 - If you take the CPP retirement pension early, it is reduced by 0.6% for each month you receive it before age 65 (7.2% per year). This means that, an individual who starts receiving their CPP retirement pension at the age of 60 will receive 36% less than if they had taken it at 65.
• Taking your pension after age 65 - If you take your pension late, your monthly payment amount will increase by 0.7% for each month after age 65 that you delay receiving it up to age 70 (8.4% per year). This means that, an individual who starts receiving their retirement pension at the age of 70 will receive 42% more than if they had taken it at 65.
• Payments are taxed as income
• Survivor's pension - When you die, a pension may be paid to your surviving spouse or common-law partner.
• Death benefit - If you die and are a CPP contributor, the Death benefit provides a one-time payment to (or on behalf of) your estate.
• Pension sharing - If you are married or have a common-law spouse, you may voluntarily share CPP retirement pensions with your spouse.
• Future pension payments, including survivor’s pensions, are indexed to the Consumer Price Index, which when modelled in the software, are escalated based on the Default Tax Table setting.

 

Additional CPP, QPP features that are not currently modelled in AdviserGo

• Disability benefits - If you are under age 65 and become severely disabled to the extent that you cannot work at any job on a regular basis, you may receive a monthly benefit.
• Children's benefits - If you die or become severely disabled and made sufficient CPP contributions, the CPP Children's benefits provides monthly payments to your dependent children.
• Credit splitting for divorced or separated couples - The CPP contributions you and your spouse or common-law partner made during the time you lived together can be equally divided after a divorce or separation.
• Child rearing provisions - If you stopped working or have lower earnings while you raise your children, you may be able to use the CPP’s child-rearing provisions to increase your CPP benefits.

 

How to Enter CPP/QPP Benefits into AdviserGo

Voyant input options – In payment, calculated from employment, or percent of maximum benefit

 

Do CPP/QPP retirement pension payments increase in the future?

CPP payment amounts are adjusted every January if there is an increase in the cost of living as measured by the Consumer Price Index. Subsequent to the increase in the Consumer Price Index, CPP benefit amounts will increase by 2.3% in January 2019. Source

In AdviserGo, CPP pension payments are also usually set to be escalated in future years. The Default Tax Table Assumption is a preference, which is set by your firm or enterprise to apply an across-the-board annual escalation to many of the assumptions relating to taxes, as well as contribution allowances.

We code for what we know. As a rule, Voyant software is coded to account for legislated rules and only escalates tax-related assumptions once we move beyond the known. The Default Tax Table, which is found in the Plan Settings, is used to set this future escalation of values once we move beyond the known.

 

CPP/QPP Retirement Pension Sharing (CPP Split)

You can share your Canada Pension Plan (CPP) or Québec Pension Plan (QPP) retirement pension with your spouse or common-law partner. To do so, you must be receiving your pension, or be eligible to receive it, and be living with your spouse or common-law partner.

There are two ways to share a pension:

If only one person in a couple (married or common-law spouses) contributed to the Canada Pension Plan (CPP) or the Québec Pension Plan (QPP), you can share the one pension.

If both of you contributed, you and your spouse or common-law partner may receive a share of both pensions. The combined total amount of the two pensions stays the same whether you decide to share your pensions or not.

Technically, the portion of your pension that can be shared is based on the number of months you and your spouse or common-law partner lived together during your joint contributory period. This period is the time when either one of you could have contributed to the CPP and/or QPP. Your Statement of Contributions has all the details about your contributions.  Source  However, to keep financial planning simple and streamlined in AdviserGo we intentionally avoid capturing this level of detail. If CPP/QPP splitting is switched on, the pension income is split evenly between the couple.

The software is normally set to assume that CPP/QPP sharing does not occur unless you chose to switch on this option. There are three places in which to switch on CPP/QPP sharing in your plan when applicable.

“Apply CPP Split” is an option on the Incomes > CPP/QPP screen, allowing you to switch on sharing as you enter CPP/QPP benefits.

In Plan Settings a CPP/QPP Pension Split can also be set as an initial default for any CPP/QPP benefits entered into the plan.

CPP/QPP pension splitting can also be switched on when entering your personal tax related assumptions on the Taxes screen.

A breakdown of the CPP pension split can be viewed in the annual taxation details.

 

What are the differences between Pension Splitting and CPP Sharing?

CPP sharing (or splitting) applies to income from CPP whereas pension splitting applies to eligible pension income, which does not include CPP, such as withdrawals from a RRIF.

Pension splitting is a one-directional split, which means you can give up to half of your pension income to your spouse or partner with no expectation of returned income.

CPP sharing is a two-way split.  You can give your spouse or partner half of your CPP but your spouse or partner must, in return, give half of their CPP income back to you. 

 

Canada Pension Plan (CPP) survivor benefits

There are three types of CPP Survivor Benefits:

• The death benefit is a one-time payment to, or on behalf of, the estate of a deceased CPP contributor.
• The survivor's pension is a monthly benefit paid to a deceased contributor's surviving spouse or common-law partner if the survivor meets the eligibility requirements.
• The children's benefit is a monthly benefit for dependent children of a deceased contributor.

Source

Note – At present, AdviserGo models only the CPP/QPP death benefit and survivor’s pension. The children’s benefit is not calculated.

 

CPP Death Benefit

The Canada Pension Plan (CPP) death benefit is a one-time, lump-sum payment to the estate on behalf of a deceased CPP contributor. As of January 1, 2019, the amount of the death benefit for all eligible contributors is a flat rate of $2,500.

In AdviserGo this benefit is currently set to a fixed onetime payment of $2,500, which is not escalated. This payment will appear as a onetime payment to the survivor in the year of the spouse or partner’s death or when running the Life Insurance Need simulation. Source

 

CPP Survivor’s Pension

The Canada Pension Plan (CPP) survivor's pension is paid to the person who, at the time of death, is the legal spouse or common-law partner of the deceased contributor. The amount a surviving spouse or common-law partner will receive is calculated as follows.

 

If the survivor is:	Then the survivor's pension is:
age 65 or more	60% of the contributor's retirement pension
under age 65	a flat rate portion (this flat rate is inflated by Default Tax Table Assumption) plus 37.5% of the contributor's CPP/QPP retirement pension

 

Old Age Security (OAS)

 

The Old Age Security (OAS) program is the Government of Canada's largest pension program. It is funded out of the general tax revenues of the Government of Canada. This means that you do not pay into it directly as you do the Canadian Pension Plan (CPP) or Québec Pension Plan (QPP). Different than the CPP or QPP, a person can receive OAS payments even if they have never been employed.

The OAS pension is a monthly payment available to seniors aged 65 and older who meet the Canadian legal status and residence requirements.  Source

 

OAS Highlights

 

• Based on number of years of Canadian residency after age 18
• Pension payments become available at age 65
• Additional Benefits, not modelled in AdviserGo, include Guaranteed Income Supplement, Spouse Allowance, Survivor’s Allowance
• Monthly income is adjusted quarterly. For Q4 2018, monthly income was set to $67. In Q1 2019 this was increased to $601.45.
• If your taxable income is above the OAS clawback threshold ($77,580 in 2019), 15% of the difference between taxable income and the threshold is deducted (“clawed back”) from OAS payments. OAS clawback results in a reduction of OAS benefits by 15 cents for every $1 above the threshold amount, which is essentially an additional 15% tax “recovery tax”.
• Canadian Residency Requirements - To receive OAS benefits, you must be age 65 or older and must have been a resident of Canada for at least 10 years after age 18.

To qualify for a full OAS pension, you must have lived in Canada for at least 40 years after age 18.  You will receive a partial pension benefit if you haven’t resided in Canada for the full 40 years. The partial pension benefit is 1/40th of the full pension amount for each complete year you lived in Canada after age 18.

 

 

Old Age Security pensions in AdviserGo

While the software will do most of the future benefit calculations for you, OAS benefits, like payments from the Canada Pension Plan (CPP) and Québec Pension Plan (CPP), must be entered as items in AdviserGo if they are to be included in your plan.

OAS benefits are entered by first opening or entering your plan in AdviserGo. 

(1) Click the plus (+) button, bottom right.

(2) Select Income and then click Old Age Security (3).

 

 

Owner - Select the person (4) who will be the recipient of these current or future OAS payments.

Type – Either allow the software to estimate these benfits (5)  or if you are currently reciveing benefits from OAS, enter the amount and for purposes of calculating potential OAS clawback, your previous taxable incoem from the previous year – i.e. the year before your plan’s start.

Have you been a Canadian resident for over forty years since since turning 18? If not, enter your years in residence since age 18.

Note –  To receive OAS benefits, you must be age 65 or older and must have been a resident of Canada for at least 10 years after age 18. The rule is 20 years of residency after age 18 to have benefits paid outside Canada; however, this caveat  is out of the scope of what is modelled in AdviserGo.

To qualify for a full OAS pension, you must have lived in Canada for at least 40 years after age 18.  You will receive a partial pension benefit if you haven’t resided in Canada for the full 40 years. The partial pension benefit is 1/40th of the full pension amount for each complete year you lived in Canada after age 18. For example, if you had lived in Canada for 20 years as an adult, you may qualify to receive 20/40th or one-half of the full benefit.

Old Age Security Plan Start – Select the age at which pension benefits are to begin.

 

Canadian Residency Requirements

To receive OAS benefits, you must be age 65 or older and must have been a resident of Canada for at least 10 years after age 18. The rule is 20 years of residency after age 18 to have benefits paid outside Canada; however, this caveat is currently out of the scope of what is modelled in AdviserGo.

To qualify for a full OAS pension, you must have lived in Canada for at least 40 years after age 18.  You will receive a partial pension benefit if you haven’t resided in Canada for the full 40 years. The partial pension benefit is 1/40th of the full pension amount for each complete year you lived in Canada after age 18. For example, if you had lived in Canada for 20 years as an adult, you may qualify to receive 20/40th or one-half of the full benefit.

 

OAS Clawback (Recovery Tax)

If your taxable income is above the OAS clawback threshold ($77,580 in 2019), 15% of the difference between your taxable income and the threshold is deducted (“clawed back”) from OAS payments. OAS clawback results in a reduction of OAS benefits by 15 cents for every $1 above the threshold amount, which is essentially an additional 15% tax. In fact, this clawback is officially referred to as a Recovery Tax.

In AdviserGo, the taxable income considered in the clawback calculation includes earnings from employment, taxable “other” income such as rental income, and investment income such as dividends, interest and any realized capital gains. The total amount considered is your individual income, not family income.

 

Where to View the OAS Clawback

If you are receiving OAS benefits and your individual, taxable income exceeds the clawback threshold, the amount deducted from regular OAS payments will be shown in the chart details.

To view the OAS clawback, double-click (or if on a tablet, long press) on a bar/year of the chart in which income exceeds the OAS clawback threshold or alternatively, click the chart details button, top-right.

 

The yearly chart details will be shown. Use the chart slider to select a year in which income exceeds the OAS clawback threshold or click on a corresponding bar/year in the chart above.

Click the Pensions tab.

A total of your Old Age Security pension payments for the year will be shown. This total will already be adjusted to account for any recovery tax.

Click on this listing to expand it.  The listing will only expand to show additional details if an OAS clawback (aka recovery tax) is being levied.

The total OAS payments received for the year, shown to the right side of the panel, will already be adjusted, deducting the clawback amount shown in the expandable details.

 

Is the OAS clawback threshold assumed to increase in the future?

Generally, yes, unless you set the software to assume otherwise. The Default Tax Table Assumption is a plan setting used to apply an across-the-board annual escalation to many of the assumptions relating to taxes and contribution allowances. The future OAS clawback threshold is among the assumptions escalated by the Default Tax Table Assumption.

You can view this setting by going to the Dashboard. Scroll down the bottommost section in the middle of the screen and click Plan Settings.

The first tab of this screen, Inflation / Growth, will display the Default Tax Table Assumption and depending on whether your firm has this setting locked down, you may be able to edit this assumption if necessary.

 

Tax-Free Savings Accounts (TFSA)

The Tax-Free Savings Account (TFSA) program, which began in 2009, offers a way for individuals who are 18 and older and who have a valid social insurance number to set money aside tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.  Source

TFSAs can hold mutual funds, certain bonds and stocks, GICs, and cash.

A drawback to an TFSA is that, although gains are not taxed, contributions are with after-tax money and cannot be deducted from income for tax purposes in the way that RRSP contributions can.

 

TFSA Highlights

• The current TFSA contribution limit in 2019 is $6,000.
• You can contribute up to your TFSA contribution room.
• You will accumulate TFSA contribution room for each year from age 18, provided you are a Canadian taxpayer, even if you do not open a TFSA.
• Any unused contribution room is carried forward indefinitely.
• There are no limits are penalties on withdrawals.
• Withdrawals will be added to your TFSA contribution room at the beginning of the following year, allowing you to pay back into the TFSA any amount that was withdrawn in the previous year.
• There is no lifetime maximum on contributions to TFSAs. The ceiling on contributions is set only by your available contribution room to date.
• There is no tax on income, dividends, or gains.
• Contributions made to a TFSA are nottax-deductible.

 

TFSA contribution room

Your TFSA contribution room is the maximum amount that you can contribute to your TFSA.

Starting in 2009, TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. You will accumulate TFSA contribution room for each year even if you do not open a TFSA.

You will accumulate TFSA contribution room for each year even if you do not open a TFSA.

The annual TFSA dollar limit for the years:

• 2009, 2010, 2011 and 2012 was $5,000;
• 2013 and 2014 was $5,500;
• 2015 was $10,000;
• 2016, 2017 and 2018 was $5,500;
• 2019 is $6,000.

 

Your current TFSA contribution room is comprised of:

1. Your current annual TFSA dollar limit, which in 2019 is $6,000 +
2. Any unused TFSA contribution room from previous years in which you were eligible to contribute to a TFSA, usually based on unused past allowances from age 18 onward +
3. Any withdrawals made from the TFSA made in the previous year.

 

Note - AdviserGo does not currently enforce the minimum age of 18 requirement for contributions

 

How to capture additional TFSA contribution room available at plan start

AdviserGo cannot automatically calculate your client's current carry-forward contribution room from the years predating the start of the plan. While the software knows how to handle withdrawals and unused contribution room in future years, it has no information about unused contribution allowances from the past or withdrawals from the TFSA taken in the year prior to the plan’s beginning.

To record your current carryforward contribution room...

 

How is future TFSA contribution room calculated in AdviserGo?

Future TFSA contribution room will be indexed to inflation or more specifically, using the software's Default Tax Table Assumption setting, which is usually set to match inflation. Annual increases are rounded to the nearest $500 each year going forward. 

For example, the current allowance of $6000 in 2019, if escalated at a Default Tax Table Assumption rate of 2% per annum, with rounding to the nearest $500, would increase from $6000 to $6500 in 2022, from $6500 to $7000 in 2025, and so forth. Of course, if in future years we receive a different direction from the government, the contribution allowance will be adjusted accordingly. 

Note - The software models the future escalation of TFSA contribution allowances using the Default Tax Table Assumption, a setting found in the software's Plan Settings. This setting is used in place of the inflation rate, which is used separately for the escalation of future expenses. While the Default Tax Table Assumption is often set to match inflation, it is up to the firm or enterprise to choose and set what it deems to be a reasonable escalation rate for this setting. Read more >> about the Default Tax Table Assumption

When calculating your future TFSA contribution room, software will use the following:

1. Your annual TFSA dollar limit with future indexation factored in +
2. Withdrawals made from the TFSA made in the previous year of the plan +
3. Your unused TFSA contribution room from previous years of the plan in AdviserGo +
4. Any unused allowances and from age 18 onward that predate the start of the plan in AdviserGo, as entered for the account owner on the Taxes screen.

 

When making future contributions, the software will utilize your annual contribution room in the following order:

1. Last year’s withdrawals,
2. The annual base TFSA contribution allowance,
3. Contribution room carried forward from previous years.

If the annual base TFSA contribution allowance is not used, it will be added to the total contribution room carried forward to the next year. Your unused contribution room is carried forward indefinitely.

 

Registered Education Savings Plans (RESP)

 

The Registered Education Savings Plan (RESP) is a government registered savings plan that helps parents to save for their child’s post-secondary education in Canada. Contributions are made into the plan by individuals and also via government grants. Investment returns and growth on the savings are sheltered from taxes until withdrawal.

 

RESP Highlights

• Anyone can open an RESP for a child including parents, grandparents, family friends and relatives.
• Most RESPs are opened for children, but you can open an RESP for yourself or another adult.
• There is no maximum annual contribution allowance. There is a lifetime contribution limit of $50,000 per child or beneficiary (2019). This limit is exclusive of government grants, which can be made
• Contributions are not tax deductible, but you can withdraw them tax free from the plan at any time for any reason. There is no additional tax on contributions when they are withdrawn.
• Savings grow tax-deferred. There are no taxes due until funds are taken out to pay for a child’s education. At that time, contributions made into the RESP are returned tax-free. The contributors’ earnings from the plan are taxed. Money the government pays out is taxed to the students. However, since a large number of students have little to no income, many can withdraw the money tax-free.
• If you save for a child age 17 and under, the federal government also puts money into the RESP as a grant or bond. Through the Canada Education Savings Grant (CESG), the federal government provides 20 cents on every dollar you contribute up to a maximum benefit of $500 on an annual contribution of $2500 (i.e. 20% of $2500).
• The lifetime maximum a child can receive through the CESG is $7,200.
• Your child can take money out of the RESP when they enroll in university or college or another qualifying education program or specified education program.
• You can make contributions into the RESP until 31 years after the plan purchase year.
• An RESP can stay open for up to 36 years.

 

How do RESPs work?

Anyone can open an RESP for a child including parents, grandparents, family friends and relatives. Most RESPs are opened for children, but you can open an RESP for yourself or another adult.

The person who opens the plan is called the subscriber. The subscriber can set up one or more beneficiaries under the plan. A child can be named the beneficiary of more than one RESP plan.

You can open an RESP for your child or another family member who is under 21. A child can be the beneficiary of any number of RESPs, but the lifetime maximum that can be contributed into RESPs is $50,000 per child (beneficiary). 

After high school, if your child is enrolled in an eligible college or university program, they will receive this money to cover some or all of their education costs.

The federal government then matches the money up to a certain percentage and deposits it into the child’s RESP. The extra funds the government deposits are called the Canadian Education and Savings Grant. The amount provided is graduated, based on family income. Matching benefits apply only on the first $2,500 in contribution per year. The amount of the grant is capped at a maximum of $7,200.

When your child enrolls in post-secondary education, they can start taking payments, called educational assistance payments (EAPs) from their RESP. EAPs are made up of the investment earnings and government grant money in the RESP. The person who is named to receive EAPs under the plan is called the beneficiary.

Contributors do not receive a tax deduction for investments in an RESP. There are no taxes due until funds are taken out to pay for a child’s education. At that time, contributions made into the RESP are returned tax-free, although contributors’ earnings from the plan are taxed. Money the government pays out is taxed to the students. However, since a large number of students have little to no income, many can withdraw the money tax-free.

 

Types of RESPs

There are effectively two types of RESPs modelled in AdviserGo.

1. Individual Plan: Only one beneficiary is named in the RESP.
2. Family Plan: Can have many beneficiaries. This is an ideal plan for a family with more than one child. Growth or earnings on the plan can be shared by all the beneficiaries.

Another type of RESP, Group Plans, where contributions of subscribers are pooled together by a firm offering a group scholarship plan are not specifically modelled in AdviserGo. Group Plans usually retain any unused contributions for other members of the group.

 

Contributing to an RESP

You can open and start contributing to a child’s RESP as soon as they are born. All you need to open the account is their Social Insurance Number (SIN).

As you contribute money to the plan, the government also contributes to your savings through education grants. You can contribute any amount to an RESP up to a lifetime maximum of $50,000 per child.

Through the Canada Education Savings Grant (CESG), the federal government provides 20 cents on every dollar you contribute up to a maximum benefit of $500 on an annual contribution of $2500 (i.e. 20% of $2500). You could contribute more, but the 20% grant is only matched by the government up to $2,500 per year.

You do not have to contribute $2500 per year and can carry forward unused CESG room to future years. The CESG is available until the end of the year in which the child (beneficiary) turns 17. The lifetime maximum you can receive through the CESG is $7,200.

 

Can you Contribute to an RESP After the Beneficiary Turns 18?

Yes. A subscriber can make contributions into an RESP until 31 years after they first opened it. After that time, however, you can transfer savings from other RESPs into a single plan.

Note - Transfers between RESPs are out of the scope of what is modelled in AdviserGo.

When entering an RESP in AdviserGo, you will be asked to provide a Plan Purchase Year to indicate when the subscriber first opened the RESP.  You can make contributions into the RESP until 31 years after the plan purchase year. 

An RESP can stay open for up to 36 years. You will have until the end of the 35th year after the plan was first opened (the Plan Purchase Year) to use the funds before the RESP expires and is closed. When an RESP expires, funds left in the account are moved to the subscriber’s cash account and the RESP account is closed.

 

Withdrawals from an RESP

When your child enrolls in a qualifying post-secondary education or training, they can start receiving payments from the RESP to fund their education. The payments are referred to as Educational Assistance Payments (EAPs). The child will claim the EAP as income on their tax return in the year in which it is received.

Usually, this will have little or no tax implications because the child will likely be in the lowest tax bracket and will have little or no other income.

There are two main types of RESP withdrawal scenarios. The first type is when money is being withdrawn from the RESP account to be used by the beneficiary for their educational costs. The second type is when the subscriber decides to collapse the RESP plan, usually because the beneficiary has decided not to pursue post-secondary education.

Withdrawals from RESPs have two components:

 

Contribution amount - The contribution amount for any RESP account refers to the sum of all the contributions made to the account over the years. It doesn't matter if the investment value has gone up or down, the contribution amounts stay the same.

 

Non-contribution amount - The non-contribution amount is made up of the RESP government grants, capital gains (equal to any increase in value of your investments), interest payments and dividend payments earned in the account. This is any money in the RESP account that is not a contribution.

 

Withdrawal Rules If Child Attends Post-Secondary Education

There are two types of withdrawals you can make from an RESP account when your child is going to school.

 

1 Post-Secondary Education Payments (PSE)

These payments are taken from the contribution amount portion of the RESP account. These payments are not taxable. There are no limits to the amount of contributions that can be withdrawn once the child is attending post-secondary education.

 

2 Educational Assistance Payments (EAP)

These payments are from the non-contribution portion of the RESP account. EAP payments are taxable in the hands of the student. There are no withholding taxes on EAP payments. If the student is expecting to pay income tax that year, he should set money aside to pay his tax bill the following year.

Only $5,000 of the non-contribution portion of your RESP account can be withdrawn in the first thirteen weeks of school. After the initial thirteen weeks, there is no limit to the non-contribution amount that can be withdrawn.

Most students have enough tuition and education tax credits and a low enough income that they will likely pay very little or no income tax as a result of RESP withdrawals during their post-secondary education.

Source

 

How does AdviserGo Take Withdrawals from an RESP to Pay for Education Expenses?

When taking withdrawals from RESPs to meet eligible expenses, which in AdviserGo would be an education goal or education expense, the software first draws taxable Education Assistance Payments (EAP) from grant money first and then earnings. Once the available EAP is exhausted, the software will then take non-taxable withdrawals of the RESP subscriber’s original contributions - Post-Secondary Education Payments (PSE).

 

What if the child decides not to pursue post-secondary education?

If the beneficiary of the RESP plan decides to not pursue further education or training, there are a number of things you can do with the money in the plan:

 

1. Keep the RESP open

An RESP can stay open for 36 years after the year the account was initially opened. Your child may change their mind between 18 and 35, so you may want to wait and see.

 

2. Transfer the RESP to another Beneficiary

In a family RESP plan, you can just use the funds for another child named under the plan. If the RESP was setup as an individual plan, you can transfer the plan to another beneficiary as long as they are under 21 years of age and a brother or sister of the original beneficiary. If both conditions are not met, all or some of the grant money may have to be repaid to the government.

 

3. Transfer the funds to your RRSP

You can transfer up to $50,000 from the RESP to your Retirement Plan (RRSP) tax-free if:

• You have enough RRSP contribution room
• The RESP account is at least 10 years old
• The beneficiary is at least 21 years old and not pursuing post-secondary education
• You are a Canadian resident

 

4. Close the RESP

You can always withdraw your direct contributions at any time tax-free. However, all federal and provincial government grants must be returned as they can only be used to pay for post-secondary education. Taxes and a 20% penalty are due on investment earnings.

 

5. Transfer the funds to an RDSP

Investment earnings from an RESP can be transferred to a Registered Disability Savings Plan if they share a common beneficiary. In this case, any government grants must be repaid. 

Source

 

How Long Can an RESP Remain Open?

An RESP can stay open for up to 36 years.

When entering an RESP in AdviserGo, you will be asked to provide a Purchase Year to indicate when the subscriber first opened the RESP.  

You can make contributions into the RESP until 31 years after the plan purchase year. 

You will then have until the end of the 35th year after the plan was first opened to use the funds before the RESP expires and is closed. When an RESP expires, funds left in the account are moved to the subscriber’s cash account and the RESP account is closed.

 

What does AdviserGo assume happens to funds left unspent in an RESP?

When entering an RESP, the software will require you to provide a year of purchase for the plan. You can make contributions into the RESP until 31 years after the plan’s purchase year.  You will then have until the end of the 35th year after the plan was first opened to use the funds before the RESP expires and is closed automatically by the software.

When the RESP expires:

• Unused grants are immediately deducted from the account balance to model their repayment to the government.
• Unspent contributions are returned to the subscriber free of any additional tax.
• Tax-deferred earnings on the account are assessed a 20% penalty, which is paid from the balance on year of disposal.
• In addition to this penalty, unpaid taxes on account earnings are assessed and paid in the following year of the plan.

Note – The software does not currently model options for transferring unused balances from RESPs into Registered Retirement Savings Plans (RRSPs) or Registered Disability Savings Plan (RDSPs).

 

Canada Education Savings Grant (CESG)

If you contribute to an RESP for a child or grandchild who is 17 or younger, they may be eligible for up to a maximum of $7,200 in supplementary contributions through the Canada Education Savings Grant (CESG).

Through the Canada Education Savings Grant (CESG), the federal government provides 20 cents on every dollar you contribute up to a maximum benefit of $500 on an annual contribution of $2500 (i.e. 20% of $2500). The lifetime maximum a child can receive through the CESG is $7,200.

Any unused CESG entitlement can be carried forward until the end of the calendar year in which the child turns 17. If you cannot make a contribution in any given year, you can carry over unused Basic CESG. By contributing more than $2,500 in subsequent years, you can get up to $1,000 of Basic CESG per calendar year if unused CESG amounts are available.

When using carried forward CESG entitlements, the software will calculate the maximum CESG in any one year as being the lesser of $1000 or 20% of the contribution.

Canada Education Savings Grant (CESG) Highlights
Eligibility	All RESPs are eligible for Basic Canada Education Savings Grant (CESG) Beneficiary and subscriber must have a valid SIN and be a Canadian resident Grants are available to children 17 years and younger. Grant money is available until the end of the calendar year in which the child turns 17
Amount	The basic CESG matches 20% of the first $2,500 of annual contributions per beneficiary per year
Missed years	If you are unable to contribute in any given year, the unused Basic CESG entitlement can be carried over until the end of the calendar year in which the child turns 17. By contributing more than $2,500 in subsequent years, you can get up to $1,000 of Basic CESG per calendar year if unused CESG amounts are available.
Maximum	The lifetime CESG limit is $7200 per eligible beneficiary. Of the $50,000 lifetime RESP contribution limit (per beneficiary), only $36,000 would qualify for the 20% CESG grant before maximizing the $7200 limit.
Family Plan RESPs	CESG grant money paid into a Family Plan RESP may be used by any beneficiary of the RESP to a lifetime maximum of $7,200 per beneficiary

 

Additional CESG (A-CESG)

Depending on the family income, a child may also be eligible for an additional 10 to 20 percent contribution placed into their RESP from the Canada Education Savings Grant.  The Additional CESG (A-CESG) is money provided by the Canadian Government to children that come from low-income and middle-income families and is added to the child’s RESP to help them receive the maximum grant amount.

The A-CESG grant money is in addition to any money they receive through the Basic CESG program. Through the basic CESG, the Canadian government will match 20% of any RESP contributions, up to an annual maximum of $500. The lifetime maximum of the Basic CESG and the A-CESG is $7,200 total.

With the basic CESG, it doesn’t matter how much a family earns. You still qualify for the 20% basic CESG. But the government offers additional grants based on family income.

Like the Basic CESG, any money received from the A-CESG can be used after high school to help pay for either full-time or part-time studies in an accredited apprenticeship program, CEGEP, trade school, college, or university.

There are two different income levels that qualify for the A-CESG. Depending on the family’s income, the beneficiary could receive an extra 10% or 20% on every dollar of the first $500.00 contributed to the RESP annually.

A family with a net income of $47,630 (in 2019) or less is eligible for an extra 20% grant on the first $500.00 of annual contributions, for a total of $100.00 per year. When combined with the basic CESG, this adds $600.00 in annual contributions to the RESP.

Families with a net income between $47,631 and $95,259 (in 2019)  are eligible for an extra 10% grant on the first $500.00 of contributions each year for a total of $50.00. When combined with the basic CESG, a child you receive $550.00 annually.

Year	First threshold (adjusted income bracket) 20% Additional CESG	Second threshold (adjusted income bracket) 10% Additional CESG
2019	$0 - $47,630	greater than $47,630 but not more than $95,259
2018	$0 - $46,605	greater than $46,605 but not more than $93,208
2017	$0 - $45,916	greater than $45,916 but not more than $91,831 Source

 

 

 

 

 

 

 

 

Where to Enter Unused Basic CESG Grants from Years Prior to the Start of Your Plan

 

How are Contributions to a Family RESP Set for Multiple Beneficiaries?

 

 

Registered Disability Savings Plans (RDSP)

 

A Registered Disability Savings Plan (RDSP) is a tax-deferred, registered savings plan open to Canadians eligible for the Disability Tax Credit (DTC). It was designed to give people with disabilities an effective way to save and invest for their long-term financial security.

Up to $200,000 can be invested in the plan and although contributions are not tax-deductible, all earnings and growth accrue tax-deferred until withdrawn from the plan. What's more, the government offers incentives in the form of grants and bonds to help you accumulate more.

 

RDSP Highlights

• Contributions can be made until the beneficiary turns 60.
• No annual contribution limits.
• Lifetime contribution limit is $200,000 (2019)
• Accepts roll-overs from retirement plans
• Earnings and growth accrue tax-deferred until withdrawn from the plan
• Government grants, Canada Disability Savings Grant (CDSG), matches personal contribution up to $3,500 per year with a limit of $70,000 over one’s lifetime
• Families who have income below $31,120 can also receive Government bonds, Canada Disability Savings Bonds (CDSBs) of $1,000 annually, up to a lifetime maximum of $20,000.

 

How can a disability savings plan help?

RDSPs offer three important advantages:

• As a registered savings plan, earnings grow tax-free until money is withdrawn. This means RDSP contributions can grow faster, helping to accumulate more in the plan.
• RDSPs may be eligible for government incentives of up to an annual amount of $3,500 to a lifetime maximum of $70,000 in grants and an annual amount of $1,000 to a lifetime maximum of $20,000 in bonds, which can substantially boost an RDSP's value.
• Income payments from RDSPs do not affect income-tested federal government programs, including Old Age Security, the Guaranteed Income Supplement and the Canada Pension Plan. In most provinces and territories, you will still qualify for existing provincial social assistance programs if you have an RDSP.

Source - https://www.bmo.com/main/personal/investments/disability-savings/what-is-rdsp

 

Who can take advantage of an RDSP?

Anyone who is eligible for the Disability Tax Credit may be the beneficiary of an RDSP. To qualify, the beneficiary must:

• Be a Canadian resident
• Have a valid Social Insurance Number
• Be under the age of 60
• Complete a Disability Tax Credit Certificate (Canada Revenue Agency Form T2201) with the assistance of a qualified practitioner and receive notification of approval from the Canada Revenue Agency.

 

Who Can Contribute to an RDSP?

Anyone can contribute to an RDSP as long as they have written permission from the account holder. There is no annual limit on contributions and the lifetime maximum is $200,000. However, contributions must cease by the end of the year in which the beneficiary reaches age 59, no longer lives in Canada, no longer qualifies for the Disability Tax Credit, or when the beneficiary dies.

Source - https://www.bmo.com/main/personal/investments/disability-savings/what-is-rdsp

 

What is the contribution limit for RDSPs?

There is no annual limit on amounts that can be contributed to an RDSP of a beneficiary in a given year. However, the overall lifetime limit for a beneficiary is $200,000 (all previous contributions and rollovers that have been made to an RDSP of a beneficiary will reduce this amount). Contributions are permitted until the end of the year in which the beneficiary turns 59.

Source - https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/registered-disability-savings-plan-rdsp/rdsp-limits-transfers-rollovers.html

 

 

How to enter an RDSP

 

How to take income from an RDSP

 

Where to view an RDSP in the charts and chart details.

 

Where to enter carry-over grant and bond entitlements

 

 

 

 

 

Grants and Bonds

The main appeal of the more well-known registered plans, such as RRSPs, RRIFs or TFSAs, is the ability to earn tax-deferred or tax-free investment income. While this holds true for the RDSP, its main advantage is the ability to supplement the plan with matching government funds: the Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs), both potentially available for RDSP beneficiaries age 49 and under.

CDSGs and CDSBs are based on “family” income, which includes income of the beneficiary’s parents if the RDSP beneficiary is under 19. Once the beneficiary reaches age 19, it’s the beneficiary’s own family income that is used to determine the amount of government assistance.

When family income is below $95,259 in 2019, CDSGs are equal to 300 per cent of the first $500 of annual contributions and 200 per cent on the next $1,000 for a maximum annual entitlement of $3,500, subject to a lifetime maximum of $70,000. If family income is over that amount, the CDSG is simply 100 per cent on the first $1,000 of annual contributions.

Families who have income below $31,120 can also receive CDSBs of $1,000 annually, up to a lifetime maximum of $20,000. The $1,000 CDSB is then phased out gradually as income increases above this amount until it’s fully eliminated once family income reaches $47,630. Note that unlike the CDSG, the CDSB is not a matching amount, meaning that no contributions are required to get up to $1,000 in CDSBs annually, depending on family income.

 

Canada Disability Savings Grant (CDSG)

The Canada Disability Savings Grant (CDSG) is an amount that the Government of Canada pays into an registered disability savings plan (RDSP). The Government will pay matching grants of 300%, 200%, or 100%, depending on the beneficiary’s adjusted family net income and the amount contributed.

An RDSP can receive a maximum of $3,500 in matching grants in one year, and up to $70,000 over the beneficiary’s lifetime. A beneficiary's RDSP can receive a grant on contributions made until the end of the year in which the beneficiary turns 49.

*The beneficiary adjusted family net income thresholds are indexed each year to inflation.

 

Amount of CDSG grant when family income is $93,208 or less:

On the first $500 contribution- $3 grant for every 1 dollar contributed, up to $1,500 a year.

On the next $1,000 contribution - $2 grant for every 1 dollar contributed, up to $2,000 a year.

 

Amount of CDSG grant when family income is more than $93,208:

On the first $1,000 contribution—$1 grant for every 1 dollar contributed, up to $1,000 a year.

 

Canada Disability Savings Bond (CDSB)

The Canada Disability Savings Bond (CDSB) is an amount paid by the Government of Canada directly into an RDSP. The Government will pay bonds of up to $1,000 a year to low-income Canadians with disabilities. Importantly, this is not a matching program. No RDSP contributions are required to get the bond. The lifetime bond limit is $20,000. A bond can be paid into an RDSP until the year in which the beneficiary turns 49.

The amount of the bond is based on the beneficiary’s adjusted family net income as follows:

• If family net income is $30,450 or less (or if the holder is a public institution), the bond will be $1,000,
• If family net income is between $30,450 and $46,605, part of the $1,000 will be paid based on the formula in the Canada Disability Savings Act,
• If family net income is more than $46,605, no bond will be paid.

 

Carrying forward unused grant and bond entitlements

Before the end of the year you turn 49 years of age, you can carry forward up to 10 years of unused grant and bond entitlements to future years, as long as you met the eligibility requirements during the carry-forward years (for example, if you were eligible for the disability tax credit and you were a Canadian resident). If an RDSP was opened:

In 2018, the carry forward period was from 2008 (the year RDSPs became available) to 2018;

In 2020, the carry forward period would be from 2010 to 2019.

The grant and bond will be paid on unused entitlements up to an annual maximum of $10,500 for the grant and $11,000 for the bond.