RRSP Deposit vs. Mortgage Repayment

Determining whether to contribute to an RRSP or pay down a mortgage has always been a great debate, for each have their advantages. To begin with, an RRSP contribution is tax-deductible, and it can generate a tax refund for you or it can reduce your income tax liability. In addition, an RRSP will continue to grow and accumulate without taxation, meaning you will accumulate more over similar taxable investments. On the other hand, while paying against the principle of a mortgage is not tax deductible, it does reduce the cost of the mortgage over the long term; however, interest on a mortgage is not tax deductible either.

When determining what works best for you, either contributing to an RRSP or paying down a mortgage, we do a series of calculations comparing RRSP contributions and accumulations versus mortgage payments and accumulations. To do this, total RRSP investments accumulated at retirement age are compared using two approaches: making the RRSP contribution, or making the mortgage repayment and using the subsequent savings from the mortgage towards RRSP contributions once the mortgage is paid off. This intricate analysis is best done by a financial planner to ensure the figures used are accurate and specific to your individual case.

When doing an analysis like this, we would look at the following:

  • Current outstanding balance on your mortgage
  • Current mortgage interest rate
  • Assumed long term mortgage interest rate
  • Rights under your mortgage to make payments against the principal
  • RRSP carryforward room
  • Annual RRSP room created
  • Assumed long term rate of return in the RRSP
  • Your marginal tax bracket

An example:

Arianna (age 35) would like to figure out if she should contribute to $5,000 to her RRSP or put the same after-tax equivalent $3,000 (40% tax rate) against her mortgage.

If Arianna applies $5,000 to her RRSP contribution, the investment would accumulate to $22,338.72 by age 65 assuming 5% rate of return compounded monthly.

Alternatively, she can apply $3,000 against her current mortgage of $500,000 with an amortization of 20 years and interest rate of 4%. Her current mortgage payment is $3,029.90 (Pre-tax equivalent: $5,049.83).

By doing this, she reduces her amortization period by 2 months, making her new amortization period to 19.8 years. She then redirects her mortgage payment of $5,049.83 to her RRSP for the next 2 months at 5% rate of return, she would accumulate $18,009.40 by age 65.

In this example, she would be better off contributing to her RRSP.

It is likely that these assumptions will vary in the future and could change the outcome of the analysis. Please consult us before making a decision.

In reality, you can also do a combination of the 2 approaches, for instance by contributing to your RRSP, you can use the tax refund to pay down your mortgage, this way you can get the benefits of both strategies.

Tax Planning Tips for End of 2018

Now that we are nearing year end, it’s a good time to review your finances. 2018 saw a number of major changes to tax legislation come in force and more will apply in 2019, therefore you should consider available opportunities and planning strategies prior to year-end.

Below, we have listed some of the key areas to consider and provided you with some useful tips to make sure that you cover all of the essentials.

Key Tax Deadlines for 2018 Savings

December 31, 2018:

  • Medical expenses

  • Fees for union and professional memberships

  • Charitable gifts

  • Investment counsel fees, interest and other expenses relating to investments

  • Student loan interest payments

  • Political contributions

  • Deductible legal fees

  • Some payments for child and spousal support

  • If you reached the age of 71 in 2018, contributions to your RRSP

January 30, 2019

  • Interest on intra-family loans

  • Interest you must pay on employer loans, to reduce your taxable benefit

February 14, 2019

  • Expenses relating to personal car reimbursement to your employer

March 1, 2019

  • Contributions to provincial labour-sponsored venture capital corporations

  • Deductible contributions to a personal or spousal RRSP

Family Tax Issues
  • Check your eligibility to the Canada Child Benefit
    In order to receive the Canada Child Benefit in 2019/20, you need to file your tax returns for 2018 because the benefit is calculated using the family income from the previous year. Eligibility depends on set criteria such as your family’s income and the number and age of your children and you may qualify for full or partial amount.

  • Consider family income splitting
    The CRA offers a low interest rate on loans and it therefore makes sense to consider setting up an income splitting loan arrangements with members of your family, whereby you can potentially lock in the family loan at a low interest rate of 2% and subsequently invest the borrowed monies into a higher return investment and benefit from the lower tax status of your family member. Don’t forget to adhere to the new Tax on Split Income rules.

  • Have you sold your main residence this year?
    If so, your 2018 personal tax return must include information regarding the sale or you may lose any “principal residence” exemptions on the capital gains from the sale and thus make the sale taxable.

  • If you’re moving, think carefully about your moving date
    If you are moving to a new province, it’s worth noting that your residence at December 31, 2018 is likely to be the one that your taxes are due to for the whole of the 2018 year. Therefore, if your move is to a province with higher taxes, putting your move off until 2019 may therefore make sense, and vice versa if you are moving to a lower tax province.

Managing Your Investments
  • Use up your TFSA contribution room
    If you are able, it’s worth contributing the full $5,500 to your TFSA for 2018. You can also contribute more (up to $57,500) if you are 27 or older and haven’t made any previous TFSA contributions.

  • Check if you have investments in a corporation
    The new passive investment income rules apply to tax years from 2018 and you therefore need to plan ahead if the rules affect you. They state that the small business deduction is reduced for companies which are affected with between $50,000 and $150,000 of investment income, therefore the small business deduction has been stopped completely for corporations which earn passive investment income of more than $150,000.

  • Think about selling any investments with unrealized capital losses
    It might be worth doing this before year-end in order to apply the loss against any net capital gains achieved during the last three years. Any late trades should ideally be completed on or prior to December 21, 2018 and subsequently confirmed with your broker. Conversely, if you have investments with unrealized capital gains which are not able to be offset with capital losses, it may be worth selling them after 2018 in order to be taxed on the income the following year.

Estate and Retirement Planning
  • Make the most of your RRSP
    The deadline for making contributions to your RRSP for the year 2018 is March 1, 2019. There are three things that affect how much you may contribution towards your RRSP, as follows:

    • 18% of your previous year’s earned income

    • Up to a maximum of $26,230 for 2018 and $26,500 for 2019

    • Your pension adjustment

Remember that deducting your RRSP contribution reduces your after-tax cost of making said contribution.

  • Check when your RRSP is due to end
    You should wind-up your RRSP if you reached the age of 71 during 2018 and your final contributions should be made by December 31, 2018.

Other Considerations
  • Make your personal tax instalments
    If you pay your final 2018 personal tax instalment by December 15, 2018, you won’t pay interest or penalty charges. Similarly, if you are behind on these instalments, you should try to make “catch-up” payments by that date. You can also offset part or all of the non-deductible interest that you would have been assessed if you make early or additional instalment payments.

  • Remember the deadline for making a taxpayer-relief request
    The deadline is December 31, 2018 for making a tax-payer relief request related to the 2008 tax year.

  • Consider how to minimize the taxable benefit for your company car
    The taxable benefit applied to company cars is comprised of two parts – a stand-by charge and an operating-cost benefit. If you drive a company car, it’s worth considering how to potentially minimize both of these elements. The taxable benefit for operating costs is $0.26 per km of personal use, therefore you should make sure that you reimburse your employer where relevant, by the deadline of February 14, 2019.

Contact us if you have any questions, we can help.

The Benefits of Consolidation

When putting together your financial plan, there is no question about the benefits of consolidation. It’s common to have your finances all over the place. Savings at the bank, investments with several financial institutions, retirement savings at another. The importance of having a financial plan is the ability to coordinate, consolidate and be able to implement your plan to achieve your goals.

By putting it all together, it allows for better planning where there’s less confusion, more control over your finances, efficient investing and tax planning and creates a clear picture of what needs to be done to fulfill your financial goals.

Consolidation means you have an accountability partner on your side that will keep you on track and stay the course and address gaps in your plan and introduce you to specialists if needed.

Financial Planning issues that should be addressed are: 

  • Wealth Protection
  • Is your disability insurance adequate? 
  • What about your life insurance in case of premature death? 
  • What do you do in case of a critical illness? 
  • Estate Planning- what’s the primary goal of your estate plan? 
  • Wealth Accumulation
  • Are you looking to preserve or grow your investments? 
  • Is your investment mix suitable for you? 
  • Are your investments tax efficient? 
  • When do you plan to retire? 

These issues are just scraping the surface, talk to us and we can chat further on how we can help.  

Paying for Education

Post-secondary education can be expensive, however having the opportunity to plan for it helps with making sure that you’re capable to meet the costs of education. In addition, when you have a plan, it’s easer to make financial decisions that align with your goals and provide peace of mind. In the infographic, we outline 7 sources of funds for paying for post-secondary education:

 

 

  • Registered Education Savings Plan
  • Tax Free Savings Account
  • Life Insurance
  • Scholarships, grants, bursaries
  • Personal Loans, Lines of Credit
  • Government Student Loan
  • Personal Savings

Registered Disability Savings Plan (RDSP)

EXTENDING TEMPORARY PROXIES FOR REGISTERED DISABILITY SAVINGS PLAN (RDSP) HOLDERS

Helping people who lack contractual capacity create an RDSP even when they don’t have a substitute decision maker

Every estate planner recommends that you appoint someone to make decisions for you if you reach a point where you can’t make those decisions yourself. Typically, you do so by signing a power of attorney appointing a trusted person to make decisions about your property and personal care if you become unable to make those decisions.

If you don’t have a power of attorney, and if you become incapacitated, a trusted individual, like a family member, has to go to the Public Trustee’s office to secure the right to make decisions concerning your property, and before a judge to get the right to make decisions about your personal care. Both are time consuming processes.

Federal law provides that if you can’t establish an RDSP yourself, the plan holder has to be your legal representative, according to provincial or territorial law(subsection 146.4(1) of the Income Tax Act, c.f. “qualifying family member” and “qualifying person”)

Some provinces and territories have streamlined their provisions to let a trusted individual manage an incapacitated person’s property, while others have yet to develop such systems. For those provinces and territories that have yet to develop their systems, the federal government provides a temporary streamlined process that allows a family member (parent, spouse or common-law partner) to be an RDSP plan holder. This measure was set to expire at the end of 2018, but will be extended until the end of 2023, to allow all provinces and territories to amend their laws.

For more information on the 2018 federal budget, please visit www.budget.gc.ca

The Best Way to Buy Mortgage Insurance

Before buying insurance from your bank to cover your mortgage, please consider your options. What does the insurance cover?  

  • From the bank: only the balance of your mortgage
  • From us: whatever you need it to cover such as debts, line of credit

What happens as my mortgage balance decreases? 

  • From the bank: the coverage amount decreases as your balance decreases.
  • From us: the coverage stays the same for as long as you own your policy

What if I switch banks?  

  • From the bank: You might lose your coverage and need to reapply
  • From us: Your coverage stays the same, since it’s not tied to your mortgage

Who gets the benefit if I die? 

  • From the bank: The Bank
  • From us: You decide who gets the insurance and how to use it, such as to pay your mortgage, medical expenses or child’s education- whatever is best for your family

Talk to us, we can help.

The Importance of a Financial Plan

Working with us to create your financial plan helps you identify your long and short term life goals. When you have a plan, it’s easier to make decisions that align with your goals. We outline 8 key areas of financial planning:

  • Income: learn to manage your income effectively through planning
  • Cash Flow: monitoring your cash flow, will help you keep more of your cash
  • Understanding: understanding provides you an effective way to make financial decisions that align with your goals
  • Family Security: having proper coverage will provide peace of mind for your family
  • Investment: proper planning guides you in choosing the investments that fit your goals
  • Assets: learn the true value of your assets. (Assets – Liabilities)
  • Savings: life happens, it’s important to have access to an emergency fund
  • Review: reviewing on a regular basis is important to make sure your plan continues to meet your goal