Alan Baggett
2014-01-28 14:24:11 UTC
RRSP scenarios change for teens, low-income retirees : CRA SOTW
By Terry McBride,
The Starphoenix January 20, 2014
For most Canadians, a Registered Retirement Savings Plan (RRSP) is a very good way to save money for retirement. However RRSPs require special consideration by three types of Canadians - teenagers, low-income earners and U.S. citizens.
Teenagers Are you eager to teach your teenager about the benefits of starting to save money at a young age? Suppose your child received wages from babysitting or mowing lawns, for example. That means your child can file tax returns to report this income, without paying tax, to generate RRSP contribution room for the following year. If your child opens an RRSP, he or she could make RRSP contributions even before reaching the age of majority (18 in Saskatchewan). Parents or grandparents should not try to help out by making additional gift-contributions to the RRSP. There is a stiff penalty charged on contributions that exceed the teenager's RRSP limit.
If a low-income teenager is not even taxable, don't waste the RRSP deduction by claiming it immediately. Defer claiming the RRSP deduction until years later when your child is earning enough (more than $43,953) to create second-bracket tax savings.
Low-income retirees The ideal, most tax-efficient scenario is to make RRSP contributions in a high tax bracket while you are working, and, years later, make withdrawals in a low tax bracket while retired.
However, the worst-case scenario is for someone to make contributions in the lowest tax bracket while working, and, years later, make withdrawals in a higher tax bracket while retired. If you are a worker in a lowwage job, contributing to a small RRSP, but hardly likely to have a retirement income over $20,000 per year, you could find yourself eligible to receive some Guaranteed Income Supplement (GIS) at age 65.
The income test for GIS means your GIS benefits are reduced by 50 cents for every dollar of taxable income from RRSP or RRIF withdrawals that you report. That 50 per cent "clawback" is on top of the 26 per cent lowest bracket rate (in Saskatchewan). It is not tax efficient to deduct RRSP contributions at 26 per cent and later pay tax at 76 per cent on withdrawals.
In that scenario, using a tax free savings account makes more sense than contributing to an RRSP.
U.S. citizens Are you a dual citizen, born in the U.S., who resides in Canada? Was one of your parents a U.S. citizen when you were born in Canada? In any case, if you are a U.S. citizen, you should know that the Internal Revenue Service (IRS) has rules, requiring you to file special forms, when you have a Canadian RRSP.
First, you cannot claim an RRSP deduction on your U.S. 1040 tax return. Second, interest
and dividends earned inside your RRSP are taxable annually, unless you file a form 8891 with your U.S. tax return to defer the tax. You must also file form 8938 to declare the value of your RRSP when it reaches a certain size. In addition, you would normally need to file form TDF 90-22.1 (FBAR) each year, separately from your U.S. 1040 tax return.
Onerous penalties apply if you fail to file these forms each year.
Calgary lawyer Roy Berg expects that by July 1, Canada will execute an intergovernmental agreement with the U.S. to administer the U.S.'s Foreign Account Tax Compliance Act (FATCA). Many non-tax-compliant U.S. citizens are "playing ostrich" and purposely not filing tax returns and the various reporting forms. Basically, FATCA will impose
U.S. filing obligations on Canadian financial institutions that have U.S. citizen clients. Therefore, if U.S. citizens living in Canada want to continue to hold financial accounts such as RRSPs, they will need to comply with the U.S. tax system.
Terry McBride, a member of Advocis, works with Raymond James Ltd. (RJL). The views of the author do not necessarily reflect those of Raymond James Ltd. (RJL). Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through
Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.
(c) Copyright (c) The StarPhoenix
-----------------------------------------------------------
Miss a Tax Tale Miss a lot!
Visit the CRA SOTW Library at http://canada.revenue.agency.angelfire.com
------------------------------------------------------------
Alan Baggett - Tax Collector's Bible - http://taxcollectorsbible.com/
By Terry McBride,
The Starphoenix January 20, 2014
For most Canadians, a Registered Retirement Savings Plan (RRSP) is a very good way to save money for retirement. However RRSPs require special consideration by three types of Canadians - teenagers, low-income earners and U.S. citizens.
Teenagers Are you eager to teach your teenager about the benefits of starting to save money at a young age? Suppose your child received wages from babysitting or mowing lawns, for example. That means your child can file tax returns to report this income, without paying tax, to generate RRSP contribution room for the following year. If your child opens an RRSP, he or she could make RRSP contributions even before reaching the age of majority (18 in Saskatchewan). Parents or grandparents should not try to help out by making additional gift-contributions to the RRSP. There is a stiff penalty charged on contributions that exceed the teenager's RRSP limit.
If a low-income teenager is not even taxable, don't waste the RRSP deduction by claiming it immediately. Defer claiming the RRSP deduction until years later when your child is earning enough (more than $43,953) to create second-bracket tax savings.
Low-income retirees The ideal, most tax-efficient scenario is to make RRSP contributions in a high tax bracket while you are working, and, years later, make withdrawals in a low tax bracket while retired.
However, the worst-case scenario is for someone to make contributions in the lowest tax bracket while working, and, years later, make withdrawals in a higher tax bracket while retired. If you are a worker in a lowwage job, contributing to a small RRSP, but hardly likely to have a retirement income over $20,000 per year, you could find yourself eligible to receive some Guaranteed Income Supplement (GIS) at age 65.
The income test for GIS means your GIS benefits are reduced by 50 cents for every dollar of taxable income from RRSP or RRIF withdrawals that you report. That 50 per cent "clawback" is on top of the 26 per cent lowest bracket rate (in Saskatchewan). It is not tax efficient to deduct RRSP contributions at 26 per cent and later pay tax at 76 per cent on withdrawals.
In that scenario, using a tax free savings account makes more sense than contributing to an RRSP.
U.S. citizens Are you a dual citizen, born in the U.S., who resides in Canada? Was one of your parents a U.S. citizen when you were born in Canada? In any case, if you are a U.S. citizen, you should know that the Internal Revenue Service (IRS) has rules, requiring you to file special forms, when you have a Canadian RRSP.
First, you cannot claim an RRSP deduction on your U.S. 1040 tax return. Second, interest
and dividends earned inside your RRSP are taxable annually, unless you file a form 8891 with your U.S. tax return to defer the tax. You must also file form 8938 to declare the value of your RRSP when it reaches a certain size. In addition, you would normally need to file form TDF 90-22.1 (FBAR) each year, separately from your U.S. 1040 tax return.
Onerous penalties apply if you fail to file these forms each year.
Calgary lawyer Roy Berg expects that by July 1, Canada will execute an intergovernmental agreement with the U.S. to administer the U.S.'s Foreign Account Tax Compliance Act (FATCA). Many non-tax-compliant U.S. citizens are "playing ostrich" and purposely not filing tax returns and the various reporting forms. Basically, FATCA will impose
U.S. filing obligations on Canadian financial institutions that have U.S. citizen clients. Therefore, if U.S. citizens living in Canada want to continue to hold financial accounts such as RRSPs, they will need to comply with the U.S. tax system.
Terry McBride, a member of Advocis, works with Raymond James Ltd. (RJL). The views of the author do not necessarily reflect those of Raymond James Ltd. (RJL). Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through
Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.
(c) Copyright (c) The StarPhoenix
-----------------------------------------------------------
Miss a Tax Tale Miss a lot!
Visit the CRA SOTW Library at http://canada.revenue.agency.angelfire.com
------------------------------------------------------------
Alan Baggett - Tax Collector's Bible - http://taxcollectorsbible.com/