Dividing Property in a Divorce

Going through a divorce is a major life change and even the most amicable splits have some element of pain and regret attached to them. It is essential when planning for the transition from “we” to “me,” that financial decisions be made with the head and not due to emotional attachments or a way to punish their former spouse.

For example, some women may decide very quickly in the separation process that they want to remain in the family home. This can be the right decision, but the benefits of staying in the same place (convenience, emotional attachment to the residence, stability for children or parents who share the home) must be weighed against the full cost of owning the house. All homes require maintenance, and the cost of repairs (major and minor), property taxes and other expenses must be considered. Another factor that should be taken into account when thinking about keeping the family home  is whether or not a loan has to be taken out to buy out their spouse’ share in the home? If so, the monthly loan repayments will need to be factored into all the previously mentioned costs.  The decision to keep the family home should only be made when you know for sure whether or not you can actually afford to keep the house.

You also need to ask yourself whether keeping the family home will be at the cost of your future retirement income. If your spouse will be retaining their pension plans, RRSPs and other assets while you keep the family home will you have the excess income required to start building your own retirement savings? Do you have enough years ahead of you to be able to adequately save for the retirement you want? Or will you be willing to downsize at a later date to help fund your retirement lifestyle?

It’s also important to take into consideration other assets such as your life insurance policies. They often can be used to help protect your income today and in the future such as child support and alimony in case your spouse should pass on.

If separation and divorce are inevitable then it is very important to get a handle on financial issues that may affect you now and later down the road.  Making uninformed decisions today can have long-term consequences. Getting your own financial advisor is a great first step in getting a clear idea of your current financial picture. A financial advisor can also help create a financial plan that takes into account different scenarios or decisions that you may need to consider throughout your separation and divorce and how they will impact your future financially security.

If you want to know what your legal rights are, ask a legal expert. A mediator is another starting point for those entering into separation or divorce.  Their role is to provide out of court dispute resolutions services to help you resolve your separation and divorce issues in a non-adversarial way.

If you are contemplating separation or divorce or are in the process of going through one and have questions about your financial situation please  contact me for a personal consultation and I would be happy to help you.

When you consider that the life expectancy for a Canadian male is 78.3 years for men and 83.0 year for women, it stands to reason that living on your own for at least a few years as a senior will be the rule, not the exception. Almost half of women over the age of 65 are widows and this number increases to three-quarters of women in the 75-and-older age group. The average age of widowhood is 56.

The divorce rate sits at approximately 40 percent for first marriages, and being part of a couple for a number of years is not a guarantee that the marriage will not break down at some point. The divorce rate for women between the ages of 55-64 is close to eight percent. Going through a marriage breakup and dividing assets and debts will likely leave the female partner in worse financial shape than before the split: a woman’s income decreases by an average of 45 percent.

Divorce is not the only threat to a senior woman’s standard of living in retirement. A 30-year-old Canadian is four times more likely to become disabled than to die before his or her 65th birthday, and one in six will be disabled for three months or more they blow out 50 candles on their birthday cake.

Financial Planning for Retirement

What does all of this mean for Canadian women? At some point, you can expect to be on your own in your retirement years. When you are looking at your financial picture, make plans based on the basic premise that you need to be independent and self-reliant. Circumstances in your life can change very quickly and while you can hope for the best, it’s also important to prepare for the worst.

Now is the time to take a good look at your assets and liabilities and consider what would happen if you had to live single in retirement. You may need to look at changing the mix of investments in your Registered Retirement Savings Plan (RRSP) and/or Tax-free Savings Account (TFSA). It’s a good idea to look at all potential sources of income available to you in retirement so that you can make decisions based on what your financial picture would look like if you had to go it alone.

Are you prepared to manage on your own in retirement if your life circumstances change? As an experienced financial planner, I can help you make decisions which can help you live well now and prepare for your future. Contact me for a personal consultation today.

Commissions on Your Stock Purchases

If you bought stocks through a broker, his or her fee is added to the cost of your purchase. If you decide to sell some or all of them, the commissions you have already paid mean that the amount of proceeds from the sale will be reduced by this amount. The amount of the broker’s commission is not tax-deductible, but it will have an impact on the amount your capital gain or loss you will be reporting on your income tax return.

Investment Planner Fees

If you have enlisted the services of an investment planner to provide expert advice about your financial goals and the level of risk you are prepared to take on, you can deduct his or her professional fees on your income tax return as long as you didn’t also pay a commission to that person.

Safe Deposit Box Fees

You may be able to deduct the fee your bank charged for your safe deposit box, depending on what types of items you have stored in it. If the box is used to keep your investment certificates safe and secure, you will be able to deduct the fee on your income tax return. On the other hand, if the box is being used to store personal papers or items, you will not be able to deduct it as an expense to earn investment income.

Subscriptions to Publications on Investing

As a savvy investor, you will want to make sure you are knowledgeable about your investment options and the factors which affect how well the market performs. If you have subscribed to or purchased investment magazines and publications to provide you with this valuable information, their cost will not be tax deductible unless you decide to treat your capital gains and losses on your investments as business income.

As you can see, investment management and broker fees where a commission is paid are not tax deductible. There are other fees and expenses which can be included on your income tax return as deductions, and you will want to make sure that you list all the ones you are entitled to claim. Before you make the decision, make sure that you discuss its impact with a tax professional.

If you have questions about your investment options, please contact me and I would be happy to help you.

Reasons Why People Don’t Have a Will

If you haven’t looked after writing a will (yet), you’re in good company. Almost half of Canadian do not have a document which sets out their final wishes about their property and who they would like to appoint as a guardian for young children. Some common reasons for not dealing with this important issue include:

• I don’t own any property to leave to someone in my will.
• I can’t afford to hire a lawyer to write one.
• I’ve got lots of time to deal with this.
• I’m young and healthy; wills are something that old people have to worry about.

What Happens if You Die Without a Will

If you die without making a will (intestate), your property will be divided according to provincial law. In British Columbia, the Estate Administration Act sets out the following guidelines for the estate of a person who has a spouse and children:

The first $65,000 of the estate goes to the spouse, who also has the right to live in the family home.
The remainder of the estate is dispersed with one-third going to the surviving spouse and the remaining two-thirds set aside for the children when they celebrate their 19th birthday.

This formula for dividing your assets may not be the way you would like your estate dealt with. If you have young children who will need to be supported for several years after your death, having a significant part of the estate held in trust for them may create financial hardship for your spouse.

Get Help to Write a Will

The best way to deal with writing a will is to get help from an attorney who deals with estate matters. Keep in mind that lawyers bill their fees by the hour; taking the time to make a list of your assets and how you would like to see your estate divided before meeting with a lawyer will save you time and money.

Assets Which Pass to a Beneficiary Outside of Your Estate

Not all of your assets are included in your estate when you die. You can name a beneficiary for certain financial products to have them transfer directly to him or her, including:

• RRSP (Registered Retirement Savings Plan)
• TFSA (Tax-free Savings Account)
• Proceeds from a life insurance policy with a named beneficiary
• Joint bank accounts
• Property transferred to a living trust

Writing a will is an important part of your estate plan. Contact me to find out more about financial products which will transfer directly to a named beneficiary. I would be happy to review your current financial situation and suggest options which will work for you.

1. How will I manage my time and my energy?

A common assumption upon entering some form of retirement is that there will be unlimited time to finally do what we have longed to do for the past years.  However, in order to apportion your time and energy in a way that leads to happiness and fulfillment, you will need a clearly established vision with goals, a sense of purpose and intentions based on your values. Without this, new retirees may come to see a year or so later that time has passed them by; that they have been busy, yet have not accomplished their most important goals or realized their dreams. Be sure to focus your energy and apportion your time in accordance with your priorities and take specific steps towards your most heartfelt desires.

2. Who will I be beyond my working title, status or profession?

Over decades of working in a business position or a profession, you are likely to have equated your personal identity with your professional role. After the initial euphoria of the first stage of retirement, you may notice a discomfort when you introduce yourself to others as a “retired ….”.  Some retirees experience a sense of disorientation when the structure of the workplace is gone along with their hard-earned title. Some even feel they are going through a sort of identity crisis.  To prevent this, you need to think through how you will redefine yourself.  Your new sense of identity can take shape from your character strengths, talents, rediscovered interests, wisdom, experience, accomplishments and the community you belong to.  Knowing more about who you are personally also naturally leads to a congruent course of action and a more fulfilling quality of life.

3 .  What new purpose will I embrace?

Although leisure, travel and self-care appeals in the first stage of retirement, over time most people long for a sense of purpose to generate meaning in their life. For some, social utility may include more time helping family members while others may find joy in volunteering, locally or abroad, for a cause they care about.  Current research reveals that volunteering contributes to wellness, greater life satisfaction and longevity.  In the second half of life, happiness is created, more so than consumed as people prefer to simplify, focus on what really matters and avoid collecting more material possessions.  The three spheres of activity that make up happiness are leisure – things you do for fun; engagement – things that use your passions and skills; and meaning – involved in activities that connect you with a larger community, a cause or something greater than yourself.

As you plan for your best future, you may choose to live your life as a purposeful learning journey, rather than a series of busy days.  This helps you avoid painful regrets and it will augment the richness of meaning you can draw from your one very precious life.

Isabelle St-Jean, RSW, ACC is a Certified Retirement Coach, facilitator and author of Living Forward, Giving Back: A Practical Guide to Fulfillment in Midlife and Beyond.  To learn more about her services, visit her website at www.inspiredmomentum.com.

Given these figures, the question becomes not will you be looking at providing care for your parents in their later years, but when. This is one of the scenarios which your overall financial plan should address.

Your Financial Plan and Caring for Aging Parents

If you have to take time away from work to care for an aging parent, you may find that you exhaust your annual leave and paid personal days quickly. The employment insurance plan will provide Compassionate Care Benefits if you need to be away from work temporarily to care for a gravely ill relative when there is a significant risk of death.

Even if you qualify for EI when taking time off work, these benefits only replace a certain amount of your income. What can you do to make sure is that you minimize the loss of income and caring for a parent.

The key is to start planning for this eventuality now. Make contributions to your Tax-free Savings Account (TFSA) each year. You can contribute up to $5,000 per year to your plan and the funds can be invested in stocks, bonds, mutual funds, or held in a cash account until you need them. The money grows inside the plan on a tax-free basis and you do not pay taxes on withdrawals from the plan.

Plan for Your Own Golden Years

Along with making a plan for caring for your elderly parents, you will want to ensure that you have resources in place in case you need care later on. Your own financial plan should include long-term care insurance and critical illness coverage.

Long-term care insurance is put in place to help defray the cost of a stay in a nursing home or residential care facility, as well as services provided by caregivers in your own home. Not everyone requiring long-term care is a senior citizen; this coverage can be used to provide benefits if you become disabled as a result of illness or injury.

Critical illness insurance coverage pays a lump sum benefit if you are diagnosed with a disorder covered under your policy, including cancer, heart disease, and stroke. If the money is paid out as a lump sum and you can choose to use it for whatever purpose makes sense to you, then some recipients use the funds to cover medical expenses not paid for under their provincial health plan, while others rely on this coverage to replace income.

If you are caring for elderly parents or want to have a plan in place for this eventuality, please contact me. I would be happy to review your overall financial situation and help you come up with a plan that works.

Quick Snapshot of the Program

• To qualify, you must be over the age of 55
• You need to reapply each year to defer your taxes
• You will still have to pay interest charges and penalties annually.
• There is a set up fee ($60) and a renewal fee ($10)
• The interest rate is never greater than 2% below the bank prime rate.
• If you choose not to renew, you will be responsible for paying your property taxes in full.
• You may repay all, or part of, the deferred taxes, fees and interest at any time without penalty.
• If you rent out part of your home, or use it for business purposes, you are only eligible to defer taxes on the portion of the property you are living in.

Program Overview

To qualify for the Program, you must be a Canadian citizen or a permanent resident who has been living in the province for at least one year before applying for assistance. In addition, you must be 55 years of age or older (only one spouse must meet the age requirement), a surviving spouse (marriage partner or common law) or a person with a disability.

Person with a Disability

To qualify for property tax deferment help as a disabled person, an applicant must provide one of the following:

• A letter confirming his or her Persons with Disabilities designation
• Release of Information Form from the Ministry of Social Development confirming the designation
• Physician Certification Form signed by your doctor

Minimum Home Equity Required

Applicants for the British Columbia Property Tax Deferment Program must have a minimum equity of 25% of the current BC assessment value in their home after all outstanding mortgages, lines of credit and other charges have been deducted.

Does your Home Qualify?

If you are currently living in your home you may qualify to defer taxes. Unfortunately, your cottage, rental properties or properties registered in your business’s name do not qualify.

How to Apply for a Property Tax Deferment

After you have received your property tax notice, complete an Application and Agreement for Deferment of Property Taxes form (available online or at municipal or Service BC-Government Agent) offices. Return the form to your municipal tax office with your completed home owner grant application before your tax due date.

If you are interested in applying for a deferment, you have until December 31 of the current year to do so. You must pay all previous years’ property taxes, penalties, interest and utility user fees before you apply, as these outstanding amounts cannot be deferred.

It may take several months for you to find out whether you are eligible for the Program. If you are approved, the property tax deferral agreement is registered as a lien against your property and the deferment program pays your property taxes for you.

The property taxes may be deferred as long as you own and live in the home, as long as you qualify for the program. If your house is sold, the amount held in the property tax deferment account must be paid in full.

Application and Renewal Fee

First-time applicants are charged an administrative fee of $60 for a new approved agreement. The fee for approved renewals is $10. Homeowners do not need to pay these fees up front; they are added to the deferment account instead.

Interest Charges

Interest charges commence from the date your property taxes are due or the date you applied to defer. Which ever is later. The interest rate is never greater than 2% below the bank’s prime rate. The current rates are found at www.sbr.gov.bc.ca/individuals/Property_Taxes/Property_Tax_Deferment/interest_rates.htm

To find out more about ways you can defer tax and create a more comfortable retirement lifestyle, please contact me. I would be happy to review your financial situation and offer solutions which fit your needs and goals.

The types of things that a person may want to save money for will vary, depending on his or her own personal goals. A taxpayer can contribute up to $5,000 per year into a TFSA. Any unused contribution room is carried forward, which means that someone who has more income in later years can make higher contributions to his or her TFSA without incurring a penalty.

Withdrawing Funds from a TFSA

Another way that TFSAs are flexible is that funds which are withdrawn from the plan can be replaced later without having an impact on a person’s allowable contribution room.

Here’s an example of how this provision works: Julia contributes $5,000 per year for 10 years into a TFSA and earns investment income on the money held in the plan. Over that time, her TFSA grew to $53,000. She decides to withdraw the funds so that she can start a business. She can withdraw the full $53,000 and will pay no tax on any of the $3,000 earnings. Ten years later, Julia decides to sell her business. She can take $50,000 out of the proceeds of the sale and contribute back into her TFSA without reducing her contribution room which is now at $100,000 ($5,000 a year for 20 years).

If Julia had withdrawn funds from her RRSP to fund her business venture, a certain amount would have been deducted for taxes before it got into her hands. For example, is she withdrew the $53,000 from the RRSP she would have had to include the full amount as income when doing her annual taxes and would have had to pay tax at her marginal rate on the full amount. She may have been able to contribute back the $50,000 to her RRSP if she had the contribution room available, but once the funds are withdrawn, she isn’t able to get that past contribution room back.

No TFSA Spousal Plan

Unlike RRSPs, TFSAs don’t have a spousal plan option. A person can give money to a spouse or common-law spouse to invest in his or her own TFSA, though, and the funds can be withdrawn at any time without being attributed back to the person who provided them. Special rules are in place for spousal RRSPs and the funds must be held in the plan for a minimum amount of time or the contributing spouse will have to pay tax on the amount withdrawn.

TFSAs and Turning 71

The funds held in a TFSA don’t have to be converted into a retirement income plan once a person turns 71. There is no minimum withdrawal requirement, and the plan holder can make withdrawals to suit his or her needs instead.

To find out more about the flexibility of TFSAs and how they fit into an overall financial plan, please contact me to set up a personal consultation. I would be happy to outline your options and recommend a solution which will help you reach your goals.

TFSA’s Offer Two Main Benefits

1. Tax-free Growth: Regardless of the type of investment you put your TFSA contributions into they will all grow tax free. This of course, will help you to build your savings faster and achieve those financial goals.
2. Tax-free Withdrawals:  Anytime you need to take money out of your TFSA you can without paying any tax. This flexibility makes TFSA a good vehicle to save for short and long term goals.

Quick Facts

• As of 2009, any Canadian 18 years of age or older with a social insurance number can open and contribute $5000 annually to a year to a TFSA.
• Your unused contribution room can be carried forward indefinitely.
• If you make any withdraws to your Tax-Free Savings Account, you can put the money back into the TFSA but only in the following calendar years.
• Your withdrawals can be made tax-free
• Your withdrawals have no affect on your ability to receive government benefits
• Unlike an RRSP, your contributions are not tax deductible
• And any capital losses cannot be claimed
• Excess contributions to your TFSA are subject to taxes, interest and penalties.
• You can name your spouse or common-law partner the beneficiary of your Tax-Free Savings Account without any impact on their existing contribution room.
• You can have one or many TFSAs. Regardless of how many you have, you cannot exceed the contribution limit.
• You can transfer your TFSA between financial institutions.

Need a Bit More Information?

How much can I contribute to my TFSA?

• Your annual limit is $5,000
• Plus your unused TFSA contribution room from prior years
• Plus any withdrawals from TFSAs made in the prior years

Unused TFSA Contribution Room

If the full $5,000 is not deposited into a TFSA each calendar year, the unused contribution room is carried forward. A person who is opening a TFSA for the first time in 2012 can contribute up to $20,000 into the plan ($5,000 for each year from 2009-2012). The TFSA accountholder is entitled to contribute another $5,000 to the plan as of January 1, 2013.

A plan holder who withdraws money from the TFSA can redeposit it into the plan in future years. Here’s an example of how it works: Jennifer has $10,000 in a TFSA. She withdraws $5,000 from her plan in 2012. In 2013, she would have the standard $5,000 contribution limit and an additional $5,000, which she can contribute to her plan at any time. You cannot however, contribute back into your TFSA in the same calendar year as the withdraw was made. So if you withdrew $20,000 of TFSA contributions in April of 2012 you could not contribute the monies back in to the plan until 2013.

Investing Options for TFSAs

An advantage to opening up a ‘self-directed’ Tax-Free Savings Account is that plan holders have a number of investment options to choose from – all of which can grow on a tax-free basis:

• Mutual funds
• Individual stocks
• Guaranteed Investment Certificates (GICs)
• Bonds

How to Open a TFSA

Someone who wants to open a TFSA can get started by contacting their financial advisor. Or feel free to send me an email at rhonda_sherwood@scotiamcleod.com or call 604-661-1532. I would be happy to answer your questions and help you get started with your TFSA.

The Bottom Line

A TFSA is a great way for anyone to save for their financial goals without worrying about taxes eating away at their  monies.

Choosing a Beneficiary for your RRSP or RRIF

When planning for what happens to your RRSP or RRIF when you pass away, the first thing you will need to do is to choose a beneficiary who will receive the money from the plan and unless you name a ‘qualified’ beneficiary the full value of your registered funds will be subject to tax.  In other words, the full value of the registered funds will pass on to the named beneficiary while the estate will be liable for the taxes owed.  Since the estate owes the taxes, other beneficiaries of the estate might receive a reduced and unequal amount. So plan carefully.
So who is considered a ‘qualified’ beneficiary? That would be your spouse or common law spouse, a financially dependent child or grandchild who are under the age of 18 or a financially dependent child or grandchild with a physical or mental infirmity.
In most cases, it makes sense to name your spouse or common-law spouse as the beneficiary. This way, your RRSP or RRIF can transfer to their registered plan on a tax-deferred basis. Your spouse will only then pay tax when he or she makes withdrawals from the plan.
This holds true, if you name your financially dependent child of any age who has a physical or mental infirmity. They too will receive the monies on a tax-deferred basis and again, will only be subject to tax and at their personal tax rate when withdrawals are made.

However, if you are naming as beneficiary your financially dependent child or grandchild (under the age of 18), the assets will still pass on to them on a tax deferred basis but the funds will have to be used to buy an income producing annuity. The child or grandchild will receive annuity payments but will not be able to access the full amount of the funds until he or she is 18. And again, a tax liability will only occur when payments under the annuity are made and will be taxed at the child or grandchild’s personal tax rate.

Unfortunately, there is no tax deferral benefit for naming adult children who do not have a disability (physical or intellectual).  Even if they are still living at home and are financially dependent upon you.

Naming any beneficiary of your registered funds will still avoid probate fees. Unless of course, the beneficiary is your estate in which case the probate fees will be applied.
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Now if you don’t name a beneficiary, the funds in your RRSP will automatically become part of your estate and will be subject to income tax and probate fees (in British Columbia).

There are a number of factors to look at when considering what happens to your registered funds when you die. The decision you make can have a significant impact on your beneficiaries’ financial situation, as well as the amount of tax which will need to be paid out of your estate. Please feel free to contact me to help you find the right solution for your personal situation.

RRSP Carry-forwards for Unused Contribution Room

For each year that you earned income, you have a set maximum which you can contribute to your RRSP. Not everyone contributes the full amount that they are entitled to into their retirement savings plan each year. This is not a situation where if you don’t use it you’ll lose it, though; any unused contribution room is simply carried forward to future tax years indefinitely.

If you have a year where your income is higher than in previous years or your expenses have gone down, you have the option of taking the extra money and putting into your RRSP. One way you can contribute to your RRSP and take advantage of your unused contribution room is to take your income tax refund and contribute it to your plan. That way, you don’t have to try to find a way to make more money to use for retirement savings, and you get a tax deduction for the amount that you deposit into your RRSP.

The amount of your unused RRSP contribution room is listed on the Notice of Assessment you receive from the Canada Revenue Agency each year. You can also find out the amount of your unused RRSP contribution limit by signing up for My Account on the Canada Revenue Agency website. Once your account has been activated, you will be able to view this information online.

RRSP Carry-forward for Undeducted Contributions

The other type of RRSP carry-forward that you can take advantage of is for undeducted contributions. What this means is that if you didn’t take the deduction for your RRSP deduction on your income tax return, you can use it later on.

Why would you choose not to take a tax deduction that you are entitled to right away? If your income will be higher in later years, you can use the deduction to reduce the amount of income tax you are required to pay. Contributing to your RRSP now means that you can get the power of compound interest working for you sooner and end up with more money available to you when it’s time to retire.

Tax matters can be complicated and it can be challenging to figure out how much you should be be contributing to your RRSP each year and when you will get the maximum benefit from the deduction on your contribution. If you have questions about the right strategy for your tax situation, make an appointment with a qualified financial planner for assistance.

Myth #1: I can only contribute to an RRSP in the year I earned the income.

The amount that someone can contribute to an RRSP is based on his or her previous year’s income, so your earned income in 2010 is what your 2011 RRSP contribution is based on. However, you also have up until February 29, 2012 to make your 2011 RRSP contribution. This idea can be a bit confusing.

Dianne earned income in 2010 and has an RRSP contribution limit of $20,000 for 2011. If she contributed $10,000 to her plan in 2011 and another $10,000 between January 1-February 29, 2012, she has the option of claiming the entire $20,000 on her 2011 tax return or using the latter $10,000 on her 2012 income tax return.

Myth #2: RRSP contributions can’t be carried forward.

Many taxpayers do not make their maximum allowable RRSP contribution each year. It can be difficult to find the funds to save for retirement when paying day-to-day bills and expenses must be the priority. The federal government has changed the contribution rules so that taxpayers don’t lose their unused RRSP contribution limit. It can be carried forward and used later on, when the taxpayer has more money to put toward retirement.

If Sue has a $20,000 RRSP limit in a certain year and only contributes $5,000 into her plan, the other $15,000 is carried forward and added to her contribution room the next year. Sue would be able to contribute up to $35,000 into her RRSP the following year ($15,000 carried forward and $20,000 in new contribution room).

There may be times when taking the RRSP deduction may not make sense, even if you made a contribution in a particular year. If you know your income is going to be higher in the future, you can hang on to your RRSP deduction and use it then.

Myth #3: Contributing to a spousal RRSP means I can deduct twice as much each year.  

Spousal RRSPs can be a bit tricky to understand, and it would seem to make sense that contributing to someone else’s plan means that you can use their annual contribution limit as well as your own. Unfortunately, this is not the case and no matter whether your put money into your plan or your spouse’s RRSP, you can only use your contribution room to do so.

If Kate has a RRSP contribution limit of $20,000 for the year, she can put this amount into her own plan or make a contribution to her husband Bill’s RRSP account. Either way, Kate gets an income tax deduction for the amount of her contribution. If Bill earned money in the previous year, he could also make an RRSP contribution to his plan.

Now that you see how these 3 common RRSP myths and misconceptions have been debunked, make a point of getting tax your advice from a qualified financial advisor who can provide advice about your personal situation.

When Spousal RRSPs Makes Sense

A spousal RRSP makes sense in situations where one person earns significantly more than the other. It can be considered in a situation where one spouse is earning and the other one is at home caring for children. Spousal RRSPs can also be used in situations where both spouses are working but there is a significant difference in their respective incomes.

In a situation where both spouses approximately the same amount, a spousal plan is not the best option. Instead, each spouse should be making contributions to a personal plan in accordance with his or her RRSP limit. The amount that each person can contribute to a RRSP is listed on the Notice of Assessment issued by the Canada Revenue Agency (CRA) each year.

Opening a Spousal RRSP Account

When a couple decides to open a spousal RRSP, the account is opened in the lower-earning spouse’s name. The spouse with the higher income would make contributions to the plan, up to his or allowable RRSP limit each year. The contributing spouse would also receive the tax deduction for the amount deposited into the plan.

If the lower-income spouse has an existing RRSP account, it can be used for this purpose. However, once the higher-income spouse makes a contribution to the lower earner’s plan, the entire amount held in the investment account is considered to be a spousal RRSP.

The spouse whose name appears on the plan is its legal owner. He or she will be responsible for the taxes payable on funds withdrawn from the plan, subject to the attribution rules.

Income Tax Act Attribution Rules

The Income Tax Act includes attribution rules to ensure that taxes payable on assets transferred from one person to another are collected appropriately. In the case of a spousal RRSP, the rules require that withdrawals made from a plan in the same year the contribution was made or the previous two calendar years is treated as income for the contributing spouse.

The funds deposited into a spousal RRSP should be treated as a long-term (minimum of three years) investment. If any or all the funds are withdrawn before that time, the higher-earning spouse will lose the tax advantage of contributing to the plan.

There may be situations where having more than one RRSP account makes sense. If an investor wants to have the flexibility to withdraw funds from an RRSP before retirement if necessary, a second plan would offer the choice of taking the money from the one which would be taxed at the lower rate.

Contributing to a spousal RRSP can be an effective way to split retirement income and pay less in taxes. To find out whether this is makes good financial sense for your personal situation, consult a financial advisor.

RRSP Decision Time

Since you will be blowing out 71 candles on your birthday cake, your financial advisor will let you know that you need to make some decisions about your RRSP (Registered Retirement Savings Plan). One of the choices, which likely doesn’t make a lot of sense for most people, is to withdraw the full amount in cash and pay tax on it as a lump sum. You also have the option of transferring the funds from your RRSP directly into an annuity or a Registered Retirement Income Fund (RRIF). Another choice is to divide your RRSP funds into two or more of these options.

At this point in your life, you may be receiving income from government pensions, a company pension plan, personal investments, your RRSP, as well as from your employment. As a result of these multiple sources of income, you may be pushed into a higher tax bracket, resulting in either a partial or complete claw-back of your Old Age Security (OAS) benefit.

Is there something you can do to remedy this situation? Can you contribute to your RRSP if you are still working?

RRSP Contribution Strategy

One thing that works in your favor is that you have to the end of the year in which you turned 71 to convert your RRSP into cash or another financial product. Based on the amount you earned, you may have RRSP contribution room for 2013. Consider making that contribution in December of 2012 so that it can be credited to your RRSP while the plan is still open.

You will be charged a penalty of one percent per month on any RRSP contributions which are over the allowable limit of $2,000. The good news is that your tax savings should be much higher than the penalty you would have to pay.

Example of RRSP Contribution at Age 71

Here’s an example of how you can take advantage of the RRSP deduction in your 71st year:

Sue is a psychotherapist who was still working in the year she turned 71. Her RRSP limit for 2013 is $20,000 but since she is supposed to close her plan at the end of 2012 and convert it into another vehicle, how can she make the most of her contribution limit?

She can contribute $20,000 to her RRSP in December of 2012, even though this means she will have overcontributed to her plan. Under existing CCRA rules, Sue would have to pay a one percent penalty for each month her contribution was over the limit of $2,000. In this instance, the one percent penalty on the over-contribution of $18,000 ($20,000-$2,000) would only be calculated for December and would work out to $180.00. The penalty would drop off as of January 2013, since Sue would have a contribution limit of $20,000 based on her prior year’s earnings.

Assuming Sue gets 40 percent of her RRSP contribution back as a tax rebate, she would have to “spend” $180 to get a refund of $8,000. This definitely works out to her benefit.

Another way that Sue can continue to make RRSP contributions after she turns 71 is if her spouse is younger than she is. In that instance, she can make a contribution to a spousal RRSP and deduct it on her income tax return. She can also take advantage of the same over-contribution strategy in December of the year her spouse turns 71.

Before you plan to use this strategy to contribute to your RRSP after you turn 71, speak to a financial advisor. He or she may be able to suggest other moneysaving options, such as splitting the income received from eligible pensions, annuities or RRIFs with your spouse.

Your mortgage is expensive- plain and simple. It is a long term debt paid with your after-tax dollars. The rule of thumb is to pay down those expensive debts first. So if you had a 25 year $250,000 mortgage with a 5 year term rate of 3.29% at the end of the 25 years you would of paid $116,187.11 in interest payments. If you made an extra $5,000 payment each year you will have saved $44,206 off your mortgage and 9 years off your amortization. That is a huge savings!! Another way to look at it, is a 3.29% return on your investment each year.

Hopefully, you will have enough time when the mortgage is paid to start aggressively saving towards your retirement. Remember, your house is a great investment but if your not generating enough income in retirement you will have to consider downsizing and using the equity to help with retirement costs. Or continue working.

So now let’s look at your retirement savings, what will you have coming in in retirement and what how much will you need to cover your essential and lifestyle costs? Do you have a company pension you’re contributing to? Do you feel comfortable replying on government pension income to supplement your shortfall? Do you have RRSPs or other savings? Finally, how far off are you from your desired retirement date? These are important factors in deciding whether or not to contribute to your RRSP versus your mortgage. Also what is the estimated rate of return you might get on your RRSP investment? If you’re an aggressive investor and potentially could return say 6 or 7% on your investment and you’re paying 3.29% (after tax dollars) the RRSP might be the obvious choice. And visa versa, if you have low risk tolerance and want to invest into a 1% GIC then paying down the mortgage may be the better choice.

The bottom line, you should meet with your financial advisor before making any choices. It is so important to have a financial plan in place that addresses all your goals. In the end, the best option may be to invest the most you can in your RRSP and then use the tax rebate to make an extra payment each year on your mortgage. By the time retirement rolls around you will be mortgage free and will have money in the bank. You CAN achieve both financial goals.