Type of Accounts

Registered Retirement Savings Plans (RRSP)

Saving for retirement can be done in various ways but the RRSP is often the most effective way to do so. Investments in the RRSP are tax sheltered, meaning they grow tax free while in the registered account. Any withdrawals from the RRSP are treated as income in the year received. In addition to tax free growth, RRSP contributions reduce taxable income in the year of deposit and may result in a tax refund depending on the individualís situation. Contributions can be applied in the taxation year if done within the year or within the first 60 days of the next year.

Registered Education Savings Plans (RESP)

Grants offered by the government make RESPs a great option when saving for your childís post-secondary education. There are no annual limits on contributions made to RESPs but only $5,000 will receive a 20% grant from the government ($2,500 for the current year and $2,500 for a past year if applicable). Contributions can be made up until the year the student turns 17yrs. RESPs are offered through individual, family and group plans, with the latter being the most inflexible of the three.

There are many other rules and details that should be reviewed before setting up an RESP.

Registered Disability Savings Plans (RDSP)

In January of 2009, the Canadian Government introduced Registered Disability Savings Plans (RDSP) to help ensure long-term financial security for individuals and families of individuals with disabilities.

Similar to an RRSP, the RDSP is a savings vehicle that allows investment earnings to grow on a tax free basis. Beneficiaries of the RDSP are also eligible for government grants and a bond, depending on the disabled individualís income or family income. The maximum lifetime grant and bond benefit is $70,000 and $20,000 respectively.

The accountholder for a Registered Disability Savings Plan must be a parent or guardian if the disabled individual is under 18yrs or can be the beneficiary if 18yrs or older. Anyone can contribute to an open plan.

The beneficiary of an RDSP must be:

  • eligible to claim the Disability Tax Credit
  • a Canadian resident
  • under the age of 60
  • a valid Social Insurance Number holder

A disabled beneficiary with an RDSP is eligible for a Disability Savings Bond, which requires no personal contribution, as well as a Disability Savings Grant. The bond and grants are based on income.

Canadian Disability Savings Grant

Family Net Income Matching Grant on Annual RDSP Contributions
Less than or equal to $77,664 Contribute $500 and receive $1,500
Contribute an additional $1,000 and receive $2,000
Greater than $77,664 Contribute $1,000 and receive $1,000

Canadian Disability Savings Bond

Family Net Income CDSB
$21,816 or less $1,000
$21,817 to $37,832 Prorated on $1,000
Above $37,832 None

It is imperative to understand the various rules and intricacies before setting up an RDSP. Local bank branches currently offer RDSPs but with little support or counseling.

Working with a financial professional, like a Certified Financial Planner, is the best way to ensure the Registered Disability Savings Plan is set up and maintained properly.

In-Trust For (ITF)

Parents and grandparents often use in-trust accounts to save money for their childrenís future. Although saving for education is more effectively done through an RESP because of the government grant benefits, in-trust accounts provide more flexibility in the event the child does not pursue a post-secondary education.

In-trust accounts also provide the ability to income split between the parent (donor) and child (beneficiary) as capital gain income is taxed in the childís hands, presumably at a lower tax bracket. Any interest and/or dividend income within the in-trust account is taxed in the contributorís hands until the child turns 18. At that point the beneficiary would be taxed on all income, whether the funds remain in the trust or are removed.

Caution should be taken in opening in-trust accounts as the assets effectively become the property of the beneficiary. Care should also be taken to ensure that the account is setup properly so that the Canada Revenue Agency does not attribute capital gain income back to the donor.

Tax Free Savings Accounts

In January of 2009, the Federal government introduced Tax Free Savings Accounts (TFSAs), a tool allowing Canadians to earn investment income without having any tax applied. Every Canadian 18yrs and older is allowed to contribute $5,000/year to a TFSA. The contribution space is cumulative, meaning that you can carry forward any unused space in a given year. Investment growth within the account is not subject to tax, whether left within the TFSA or withdrawn at a later date.

Investors should keep in mind that contributions to a TFSA are not tax deductible. Additionally, interest on money borrowed to contribute to a TFSA is not tax deductible.

TFSAs are a great tool for long-term investing and may even be more effective than an RRSP, depending on the individualís situation.

Unregistered or Open Accounts

Open accounts can be used for any type of investing, including supplementing RRSP and RESP accounts. With no favourable tax treatment on income earned, it is important to be strategic with the type of investments used in an open account. If RRSP accounts are also utilized, the investor may benefit from holding interest bearing investments within the registered account while keeping investments that primarily earn capital gains in open accounts. Going a step beyond, there are types of investments that can be purchased that are more tax efficient. These investments are highly technical and should be thoroughly reviewed before purchase, as well as discussed with a skilled Certified Financial Planner Ė contact me for details.