Top Financial Planning Questions To Ask Your Accountant
Top Financial Planning Questions To Ask Your Accountant
Too many people make the mistake of using their accountant simply to do their tax returns. There are financial planning strategies to consider involving tax planning that you can discuss with your accountant. And if you do your own tax return, these ideas may help you optimize your finances by saving taxes.
Registered Retirement Savings Plans (RRSP)/Registered Retirement Income Funds (RRIF)
Should I be making RRSP contributions?
This depends on a number of factors. Generally, the tax deduction from an RRSP contribution is advantageous if your income is higher now than your income is likely to be in retirement. This may be difficult to assess, but a general guideline may be that if your taxable income is below about $50,000, RRSP contributions may not be advantageous.
If you are young and saving towards a home down payment, you may not want to contribute more than $35,000, as this is the maximum withdrawal you can take from your RRSP using the Home Buyer’s Plan (HBP).
If you have a company matching contribution in a group retirement plan, whether an RRSP or a Defined Contribution (DC) registered pension plan, you should generally maximize the employer contributions, regardless of your income.
Should I be taking RRSP withdrawals?
You do not need to take RRSP withdrawals until the year you turn 72, but there are often benefits to taking withdrawals well ahead of time. Even in your 50s, if your income is relatively low, it can make sense to take RRSP withdrawals.
One reason to do so is to try to use up your low tax brackets every year. If you defer your RRSP withdrawals and live off non-registered or Tax-Free Savings Account (TFSA) withdrawals early in retirement, you could be into a much higher tax bracket when you take your RRSP/RRIF withdrawals in the future.
This spike in income could even result in a reduction of your government benefits, most notably, Old Age Security (OAS). OAS clawback starts at about $87,000 of income.
Taking these withdrawals earlier might also help you to fund TFSA contributions or preserve your TFSA and benefit from more tax-free growth. By comparison, RRSP growth is tax-deferred with tax payable on future withdrawals.
Should I convert my RRSP to an RRIF?
You do not need to convert your RRSP to an RRIF to take money out. You can take RRSP withdrawals at any time. The tax treatment of RRSP withdrawals and RRIF withdrawals is generally the same but with some nuances.
If you are age 65 or older, it can be beneficial to convert your RRSP to an RRIF. RRIF withdrawals qualify for the pension income amount whereby up to $2,000 of eligible income can be tax-free or taxed at a low tax rate.
Pension income splitting with your spouse can also save you tax. Up to 50% of your RRIF withdrawals when you are 65 or older are eligible to move to your spouse’s tax return, which can save tax if their income is lower. RRSP withdrawals do not qualify for pension income splitting; RRIF withdrawals, however, do qualify.
Household
Can I make any claims for family members on my tax return?
The most common tax deduction to claim for family members is a childcare expense deduction for children under age 16. It is common to overlook the tax deductibility of summer camps.
But there are many other tax credits that can be claimed for family members. One common one is the amount for an eligible dependent if you were single and providing financial support to a child (including adult children with a mental or physical impairment) or an aging parent or grandparent. Another is the Canada caregiver amount, which may result in a tax refund if you provide care for a spouse or common-law partner, an adult child, an aging parent, or other eligible family members.
You may also be able to claim medical expenses you paid for someone who depended on you for financial support, ranging from minor children to adult family members.
Can I split income with family members to save tax?
One of the easiest ways to split income with a family member is to pay them a salary if you are self-employed and they work for you. The salary must be reasonable based on the work completed.
Contributions to a spousal RRSP are deductible to the contributor, and the withdrawals are taxable to the account owner – the other spouse – subject to conditions. As long as no contributions were made in the three years prior to taking a withdrawal, they are taxable to the account holder, not the contributor spouse. One exception to this 3-year rule is if the RRSP is converted to an RRIF.
If someone has a lot of non-registered investments, they can loan money to a lower-income spouse at the Canada Revenue Agency prescribed rate. That rate is currently five per cent. A high rate like that may be a reason to hold off until rates decline again. The interest paid to the loaning spouse is taxable to them, and the interest paid by the borrower spouse is tax deductible to them. The result is income more than the interest rate is effectively moved from one spouse to the other and taxed on the lower-income spouse’s tax return.
A prescribed rate loan using a discretionary family trust can be used to split income with other family members, including minor children or grandchildren, for whom you wish to provide financial support.
Renovations
There are several tax credits available related to home renovations. One of the big ones recently introduced is the Multigenerational Home Renovation Tax Credit. It provides a tax refund of up to $7,500 on renovations of $50,000 or more for a secondary suite to house a family member.
There are federal and provincial tax credits for seniors to make their homes more accessible, including the cost of widening doorways, installing ramps or lifts, or making showers or washrooms safer.
Several tax credits are also available for substantial renovations or qualifying green energy equipment purchases.
Incorporated Business Owners
Should I take my compensation as salary or dividends?
Although it depends on your province or territory of residence and level of income, there is generally less tax payable on salary compared to dividends. On dividends, there is some tax payable first in your corporation and then some payable personally, so the tax, in this case, refers to the combined tax between the two.
Salary also results in RRSP room, Canada Pension Plan (CPP) contributions, and the ability to deduct certain expenses, like childcare expenses.
It can also be advantageous to have tax withholding done at source on salary, compared to dividends, that do not require tax withholding and otherwise result in a tax liability that may result in quarterly tax instalments.
Should I contribute to my RRSP?
Generally speaking, if you can contribute to an RRSP when you are in a higher tax bracket than you will be in retirement, there will be a long-term benefit.
Since salary is often better than dividends, and salary creates RRSP room, a combination of salary and RRSP contribution is often advisable from a tax, retirement planning, and investment perspective.
Should I contribute to my TFSA?
The tax payable on taking extra salary or dividends from your corporation to make TFSA contributions and grow your savings tax-free can be advantageous. This is particularly true for someone who is below the top tax bracket, is a conservative investor, has a lot of corporate savings, or expects to need a lump sum of money for personal spending in the medium term.
Summary
Your accountant may be able to provide you with some good tax and personal finance advice if only you take the initiative to ask them. There are plenty of good questions like the ones above to pose to your accountant to try to optimize your planning. If you do your own tax return, these are tax topics to investigate for yourself, so you can pay less tax and keep more of your income and savings.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.