Canada Revenue Agency

Retirement savings: Are the kids alright?

February 4, 2016

By Sheryl Smolkin

A pair of surveys recently released by Tangerine Bank and TD Bank show that many millennials started saving for retirement in their early 20s, but they do not have a clear understanding of how much to save or how their RRSP savings can be used in future.

A new survey by Tangerine found that the younger generation of Canadians is getting the message to start saving early and build a nest egg for retirement. Despite being in the early stages of their career or still in school, the survey revealed that 62% of millennials (those 18-34) have started saving for retirement and almost half (46%) said they started before the age of 25.

These results are even more impressive when compared to data collected from the 81% of older working Canadians aged 35-65 who are currently saving for retirement. When asked when they began saving, only 18% reported to have started before the age of 25.

Of those 38% of millennials not yet saving for retirement, many (62%) say it’s because of their low salary or not having enough money, and another 23% said it’s because they are saving for a big ticket item like a house, a wedding, or travel.

Nevertheless across the different age groups, the survey’s findings were uniform when it comes to financial literacy. Fifty eight percent of both millennials and older working Canadians felt they did not learn enough about saving for retirement before they started.

This is consistent with the findings of a late 2015 Environics poll conducted for TD bank which found that many millennials are unaware that RRSP funds cannot be used for other items such as making a charitable donation (64%), paying childcare expenses (60%), financing a car (52%), making a personal loan (51%), renting an apartment or purchasing a second home (50%).

Half (50%) of all millennials surveyed by TD correctly identified that RRSP funds can be used for first time home purchase, although just 28% were aware they can be used to fund full-time education as a mature student.

“Saving enough money for a down payment on a home can be difficult for many younger Canadians, so the ability to withdraw up to $25,000 from an RRSP, or up to $50,000 for a couple, can help make it easier,” said Linda MacKay, Senior Vice President, Personal Savings and Investing at TD Canada Trust. “Building up an RRSP from the earliest possible moment not only helps you save on income tax now, but could also help get you into your first home more quickly and lower your monthly mortgage payments down the road.”

But Lee Bennett, Senior Vice President, TD Wealth Financial Planning says there are pros and cons and long-term implications of using RRSP funds to buy a home or pursue further education, including giving up the potential growth of RRSP savings until that money is repaid into the plan. As with any significant investment decision, she recommends investors consult with a financial planner who can help explain what’s best for each individual.

MacKay agrees, adding that it’s important to have a bit of know-how and understand clearly what an RRSP can – and cannot – be used for in order to avoid incurring tax penalties for improper withdrawals and to be able to maximize the amount of money that can be saved. She says this applies particularly to millennials who, as the TD survey shows, have many misconceptions about how an RRSP fund can be used.

You can find basic information on How RRSPs work and Making RRSP withdrawals before you retire on the Ontario Securities Commission’s web site GetSmarterAboutMoney.ca and a more comprehensive discussion from the Canada Revenue Agency at RRSPs and related plans.


May 4: Best from the blogosphere: Federal Budget Edition

May 4, 2015

By Sheryl Smolkin

FEDERAL BUDGET

Prime Minister Harper’s 2015 pre-election budget included several goodies for both people who are saving for retirement and seniors in the deccumulation phase. As you probably know by now, annual TFSA contributions have been increased from from $5,500 to $10,000/year and seniors will be permitted to withdraw money more slowly from their RRIFs so their savings will last longer.

If you are already a senior, you will be happy to know that Rob Carrick at the Globe and Mail characterized seniors as the runaway winners in the Budget. You got more elbow room to manage withdrawals from your RRIFs and a new tax credit to make your homes more accessible. Older Canadians are also major beneficiaries of the new $10,000 annual contribution limit for tax-free savings accounts and there is some financial help for people who look after gravely ill relatives

One of the sources of controversy after the budget was passed is whether it is safe to go ahead and top up your TFSA for 2016 before the budget is actually passed by Parliament. My take was that this is a majority government and there is no way the budget provisions will not become law. Jonathan Chevreau quoted me in Experts: go ahead and make that extra $4,500 TFSA contribution now: I just did.

And  since then Canada Revenue Agency has clarified the timeline of new TFSA limit. In a statement, they said:

“This proposed measure is subject to parliamentary approval. Consistent with its standard practice, the CRA is administering this measure on the basis of the budget announcement. Financial institutions may immediately allow existing and new account holders to contribute up to the proposed maximum.”

In a Maclean’s article, Stop pretending the TFSA expansion won’t be felt until 2080 Kevin Milligan notes that the most important feature of TFSAs is that room accumulates through time, starting at age 18. The annual limit started at $5,000 in 2009, moved to $5,500 in 2013, and the budget has now moved the limit to $10,000 from 2015 forward.

This means that 10 years from now in 2025, every Canadian who is age 34 or older will have full possible contribution room of $141,000. For a couple, that would be $282,000. The net result he believes is that very few people in the future will have any need to pay much tax on investment income as TFSAs will provide almost total coverage of assets.

Finally, Gordon Pape says in his Toronto Star column: RRIF withdrawal changes – it’s about time. His preference would have been for Ottawa to eliminate the minimum withdrawals entirely. After all, everything in an RRIF will eventually be taxed when the plan holder or the surviving spouse dies. The feds will get their share sooner or later — they always do. But he will take what he can get!

We will discuss the RRIF changes in more detail in a future blog on savewithspp.com.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

 


How to qualify for the Pension Tax Credit

April 9, 2015

By Sheryl Smolkin

One of the perks of growing older is that there are some additional tax credits you can take advantage of when you file your income tax return. For example, the pension income tax credit is available to you if you are under age 65, but the amounts that qualify for this tax credit are different, depending on whether you are pre or post age 65.

The federal non-refundable tax credit applies to up to $2,000 of eligible pension income. That means you will get back a maximum of 15% or $300. Provincial tax savings are in addition and can bump up your total savings by an additional $350 to $700 depending on your province of residence.

Since you can transfer up to 50% of pension income to your spouse for tax purposes, a couple can each access this tax credit even if only one of the pair is receiving an eligible pension.

If you are younger than age 65, the only pension income that is eligible for the pension tax credit is either from a superannuation/pension plan, annuity payments from the Saskatchewan Pension Plan or annuity income you are receiving because of the death of your spouse or common-law partner. The income you receive in these circumstances might be in the form of Registered Retirement Income Fund (RRIF), Registered Retirement Plan (RRSP) or Deferred Profit Sharing Plan (DPSP) income, but only if you have been receiving this income since your spouse passed away. 

If you are 65 or older eligible income can be:

  • Income from a superannuation or pension plan.
  • RPP lifetime benefits.
  • RRIF income.
  •  DPSP income.
  • RRSP annuity income.
  • EBP benefits.
  • Regular annuities.
  • Elected split pension income.
  • Variable pension benefits.
  • Foreign pension income unless the foreign pension income is tax-free in Canada because of a tax treaty or income from a United States Individual Retirement Account.

For a more detailed list of pension and annuity income eligible for the pension tax credit, check out CRA’s Eligible Pension and Annuity Income (less than 65 years of age) and Eligible Pension and Annuity Income (65 years of age or older) charts.

The following income does not qualify as pension income for the pension income tax credit:

  • Old Age Security or Canada Pension Plan benefits
  • Quebec Pension Plan benefits
  • Death benefits
  • Retiring allowances
  • RRSP withdrawals other than annuity payments
  • Payments from salary deferral arrangements, retirement compensation arrangements, employee benefit plans, or employee trusts.

A recent decision of the Tax Court of Canada in Taylor v. The Queen clarified the meaning of “annuity income from an RRSP.” Sarah Taylor began withdrawing money from an RRSP when her husband died. According to the terms of the RRSP she had total discretion with respect to the timing and the amounts of the withdrawals.

To minimize withdrawal fees, she decided to take funds out only once a year. In 2011 she withdrew funds a second time to make an unusual tax payment. The two payments to her were $12,500 and $6,250. Her accountant argued that once she turned 65 in 2011 these amounts and other similar annual withdrawals should be treated as annuity payments as required by the definition of “pension income” for the purposes of the pension tax credit.

Madame Justice Judith Woods ruled that withdrawals made by Taylor from her RRSP were not annuity payments and did not qualify for the pension tax credit because her financial institution had no obligation to make payments on a recurring basis.

The lesson to be taken from this court case is to be certain you understand the rules with respect to RRIF withdrawals and the pension tax credit.  Some people who do not have eligible pension income at age 65 opt for an interim approach. If you move $12,000 into a RRIF and then withdraw $2,000 a year for six years, these withdrawals will allow you to qualify for the full pension tax credit.


What is a prescribed RRIF?

March 12, 2015

By Sheryl Smolkin

If you are a member of the Saskatchewan Pension Plan you can elect to retire any time between the age of 55 and 71. You can purchase an annuity from the plan which will pay you an income for the rest of your life.

You can also transfer your SPP account into a locked-in retirement account (LIRA) or a prescribed registered retirement investment account (prescribed RRIF). Both options are subject to a transfer fee.

LIRA

The LIRA is a locked-in RRSP. It acts as a holding account so there is no immediate income paid from the account. You direct the investments and funds in this option and funds remain tax sheltered until converted to a life annuity or transferred to a prescribed RRIF. You choose where the funds are invested.

The LIRA is only available until the end of the year in which you turn 71. One advantage of a LIRA is that it allows you to defer purchase of an annuity with all or part of your account balance until rates are more favourable.

Prescribed RRIF

You must be eligible to commence your pension (55 for SPP) to transfer locked-in pension money to a prescribed RRIF. If you are transferring money directly from a pension plan, the earliest age at which your pension can commence is established by the rules of the plan.

You may transfer money from a LIRA at the earlier of age 55 (SPP) or the early retirement age established by the plan where the money originated. Funds in your SPP account or your LIRA at age 71 that have not been used to purchase an annuity must be transferred into a prescribed RRIF.

Unlike an annuity, a prescribed RRIF does not pay you a regular amount every month. However, the Canada Revenue Agency requires you to start withdrawing a minimum amount, beginning in the year after the plan is set up.

The Income Tax Act permits you to use your age or the age of your spouse in determining the minimum withdrawal. This is a one-time decision made with the prescribed RRIF is established. Using the age of the younger person will reduce the minimum required withdrawal.

To determine the minimum annual withdrawal required, multiply the value of your prescribed RRIF as at January 1 by the rate that corresponds to your age:

Table 1: Prescribed RRIF + RRIF minimum Withdrawals

Age at January 1 Rate (%) Age at January 1 Rate (%)
50 2.50 73 7.59
51 2.56 74 7.71
52 2.63 75 7.85
53 2.70 76 7.99
54 2.78 77 8.15
55 2.86 78 8.33
56 2.94 79 8.53
57 3.03 80 8.75
58 3.13 81 8.99
59 3.23 82 9.27
60 3.33 83 9.58
61 3.45 84 9.93
62 3.57 85 10.33
63 3.70 86 10.79
64 3.85 87 11.33
65 4.00 88 11.96
66 4.17 89 12.71
67 4.35 90 13.62
68 4.55 91 14.73
69 4.76 92 16.12
70 5.00 93 17.92
71 7.38 94 and beyond 20.00
72 7.48
For revised RRIF withdrawal schedule based on 2015 Federal Budget, see Minimum Withdrawal Factors for Registered Retirement Income Funds.

There is no maximum annual withdrawal and you can withdraw all the funds in one lump sum. This is in contrast to other pension benefits jurisdictions such as Ontario and British Columbia where locked-in funds not used to purchase an annuity must be transferred to a Life Income Fund at age 71 that has both minimum (federal) and maximum (provincial) withdrawal rules.

The same LIRA and prescribed RRIF transfer options apply to Saskatchewan residents who are members of any other registered pension plan (DC or defined benefit) where funds are locked in.

RRSP/RRIF transfers

If you have saved in a personal or group registered retirement savings plan (RRSP) your account balance can be transferred into a RRIF (as opposed to a prescribed RRIF) at any time and must be transferred into a RRIF no later than the end of the year you turn 71 if you do not take the balance in cash or purchase an annuity.

The minimum withdrawal rules are the same as those of a prescribed RRIF (see Table 1). However, even in provinces like Ontario and British Columbia where provincial pension standards legislation establishes a maximum amount that can be withdrawn from RRIF-like transfer vehicles for locked in pension funds (LIFs), there is no cap on the annual amount that can be taken out of a RRIF.

Also read: RRIF Rules Need Updating: C.D. Howe


CPP post-retirement benefits a good deal

June 5, 2014

By Sheryl Smolkin

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If you decide to start collecting CPP at age 60 but have to continue paying into the plan because you go back to work, your additional post-retirement contributions can significantly increase the amount of monthly pension you receive even while you are still working.

Since 2012, CPP recipients over age 60 who earn employment income must still contribute to the plan until age 65 and may voluntarily make contributions between ages 65-70 if they are earning an income.

Between age 60 and 70 your contributions will generate additional CPP benefits called post-retirement benefits. You don’t need to apply for these additional benefits. They will automatically be added to your monthly cheque following each year after age 60 you contribute.

A sample calculation prepared by Government Benefits Consultant Doug Runchey who worked for 32 years with Human Resources and Skills Development Canada illustrates how post-retirement contributions can add up.

His example is based on a person who in 2014 at age 60 starts collecting a maximum CPP pension of $702 ($1,038 minus the early retirement reduction of 32.4 per cent).

However in January 2015, this individual decides to go back to work. He subsequently earns the maximum pensionable amount of $52,500 (2014 figures) for the next five years before he stops working completely. Using the 2014 maximum CPP contribution level, between ages 60 and 65 he will be required to contribute $2,425.50 each year to the plan (a total of $12,127.50).

Beginning in 2015 at age 61, his pension will be increased each year by an annual, cumulative post-retirement benefit that adds up to $1,350 by age 65.

As a result, his pension of $702 per month at age 60 will increase in yearly increments to $814 monthly at age 65. Therefore, he will receive approximately $2,490 in CPP post-retirement benefits between age 60 and 65. If he lives for another 20 years until age 85, the post-retirement benefit will put an additional $27,000 in his pocket.

“By accruing additional CPP post-retirement benefits of $1,350 per year between age 60 and 65, the person in this example will earn an 11.13 per cent return on the $12,127 in contributions he made for the period,” Runchey says.

He also says that the notional return on post-retirement CPP contributions by a taxpayer earning the CPP maximum pensionable amount each year who chooses to work and contribute to CPP until age 70 will be even higher.

However, Runchey notes that if this taxpayer was self-employed and required to pay both the annual employer and employee contributions ($4,850) from age 60 to 65, the total return on his five years of post-retirement contributions will be cut in half, to 5.56 per cent.

Post-retirement benefits earned in one year are added to benefits beginning in January of the following year, but eligible contributors may not receive the payment until April or May with a retroactive payment to the beginning of the year.

The amount of CPP post-retirement benefits that you can earn between ages 60 and 70 depends on your earnings and the number of years you continue to work and contribute. A Service Canada PRB Calculator will help you calculate how contributing after you begin receiving CPP benefits but before you stop working will increase your CPP benefits at retirement.

If you are over 65 and want to stop contributing to the CPP, you must complete the CPT30 form and give a copy to your employer. If you are self-employed, you must complete the appropriate section of the CRA CPP contributions on Self-Employment and Other Earnings and file it with your income tax return.

You can change your mind and begin contributing to the CPP again but you are allowed only one change per calendar year.

Also read:
Working and aged 60 or older
Canada Pension Plan Post-Retirement Benefit – Born in 1950
CPP Post Retirement Benefits – DR Pensions Consulting


Dave Dineen’s retirement journey

May 22, 2014

By Sheryl Smolkin

 

 

Dave Dineen in Barcelona
Dave Dineen in Barcelona
podcast picture
Click here to listen

Hi,

Today in savewithspp.com we continue our series of interviews with personal finance bloggers. Dave Dineen’s blog “Dave’s retirement journey” appears on Sun Life’s brighterlife.ca

Dave retired in December 2010 in his mid-50s. Before retiring, he spent 30+ years in marketing for several financial services companies, most recently, for Sun Life.

He writes about what it actually feels like to be retired – the pitfalls, as well as the joys. He shares many real-life experiences and what they’ve taught him about how to retire successfully.

Thanks for joining me today Dave.

My pleasure Sheryl. Great to talk to you.

Q: More and more people are now saying they are aiming for Freedom 70 or older. You’ve achieved Freedom 55. Why did you decide to retire so early?
A: Well, a few reasons really. My parents were dairy farmers and my dad died at age 62 before he could retire. And before that, my parents’ vacations actually fit between milking the cows in the morning and milking them again at night, 365 days a year. So I decided to retire while I was young enough, healthy enough and vital enough to do the things I wanted to do.

My career choices along the way, also really led to my retirement. My first career was as a journalist. My second career was in marketing with big financial companies like TD Canada Trust and Sun Life where I created retirement websites and wrote retirement newsletters, blogs and brochures. So I know quite a bit about retirement.

And my third and kind of final career – if there is such a thing as a final career in life – was in market research. In that position I created Sun Life’s Canadian Unretirement Index, which has really contributed to how we understand the idea of retirement and the reality of how retirement is changing in this country.

Q: How are you funding such a long retirement?
A: I’m going to be 58 this year, so I can’t apply for CPP any earlier than two years from now. I can’t apply for OAS for over seven years. And I don’t want to start my workplace pensions too early and get really small payments.

So for now, my wife and I are living off two sources of income. Our basic day-to-day living costs are paid from a stream of dividends on her non-registered investments. The income I get from freelance writing and marketing is what we’re using for the “nice to haves” like travel or even to up our TFSAs.

Q: How many hours a week do you devote to freelance writing and marketing consulting?
A: It really varies. Actually when I retired, I had no intention of freelancing, but I kept getting offers from people who needed some help and knew what I could do. I’ve done work for people even while I’ve been away traveling in England, Scotland, Wales, Italy and Spain. All it takes these days is a laptop, a phone and Skype.

Q: Can you estimate what percentage of your pension income you are earning from your freelance work? 20%? 40%?
A: Oh, it’s more than either of those numbers. It’s made a tremendous difference. So much so, that after more than three years, we actually have yet to touch a penny in our RRSPs or our TFSAs or our pensions. We are preserving our retirement savings and enjoying a better retirement lifestyle than we really expected.

Q: So, let’s get to your blog. What have some of your most popular blogs been about?
A: Well, my blog “Dave’s Retirement Journey,” really is my personal story. And people are interested in living a good life without going through their money too quickly. In our case, we travel a lot. We were on the road almost 12 of our first 36 months of retirement.

So, one of my most popular blog posts was around spending money slowly while you’re taking a long trip. By the way, we just got back a couple of weeks ago from three months in Europe where we ate like royalty, lived centrally in wonderful cities and we did fun things. Yet we still arrived home with a zero credit card balance.

Q: How important do you think it is to retire without debt?
A: Oh boy, it is absolutely necessary. In my mind, if you are in debt, you are not ready to retire. Obviously, if poor health or a job loss forces you out, you kind of have to muddle through somehow. But otherwise, I believe even thinking about retiring with debt is just crazy.

Q: One of the things that you blogged about is how downsizing in retirement doesn’t always work. Can you tell us a little bit about your home and cottage buying and selling and where you’ve finally landed in terms of your housing choices?
A: Yes, it really was complicated. A couple of years before retirement we sold our big four bedroom house and downsized to a one bedroom city condo, plus a cottage. But we realized the upkeep on the cottage was keeping us from travelling, so we sold it. Then we found that the one bedroom condo on its own was too small and my wife really missed her garden. So we ended up selling the condo as well right about the time we retired. In the end, we bought a new condo in Stratford, Ontario, which is in the MoneySense list of the best places to retire in Canada.

Q: With the benefit of over three years as a retiree, what are several unexpected things you’ve learned?
A: Boy, I love that question. I’d say that the first thing is that if you’re the kind of person who’s disciplined enough to have saved well for retirement, then you’re probably going to find it pretty easy to adjust to the financial discipline of living within your means in retirement.

Another unexpected thing for me has been the power of social media. A couple of years after retiring, I remembered that I had a profile on  LinkedIn. I figured I’d better go in and update my profile to show that I was retired. Within a day, someone that I hadn’t worked with in 17 years reached out to me as a result of that LinkedIn update, and asked if I was interested in doing some freelance work for them in the marketing department at Investors Group. Another of my freelance clients actually has paid Google so that if somebody searches for my name, that client’s website comes up.

And I suppose a third unexpected thing I’ve learned along the way is that I actually like doing some freelance work. That’s a big surprise to me, because I really thought that I’d closed the door to work.

Q: So what was the best investment you ever made?
A: This will sound odd, but I believe my best investment was actually to buy a good-quality treadmill about five years ago. It helps keep my wife and I healthy, and to us that’s more valuable than a big tall stack of money.

Q: If you had one piece of advice for Canadians thinking about retirement, what would it be?
A: That’s a tough question. I think Canadians need all kinds of advice when it comes to retirement. But I think for me it all starts with thinking about what kind of retirement you want to have. I like to use a simple analogy.

In your working career, chances are, somebody else wrote your job description. And at the end of your life, somebody else is going to write your epitaph. But it’s that in-between part that you get to write.

So what kind of retirement do you really want to have? Figure that out and of course seek all the help you need to deal with the financial stuff.

Thank you, Dave. I really appreciate talking to you today.

My pleasure, Sheryl.

This is an edited transcript of the podcast you can listen to by clicking on the graphic under the picture above. If you don’t already follow Dave’s retirement journey on Sun Life’s brighterlife.ca, you can find them here. Subscribe to receive blog posts by email as soon as they’re available.


More people planning to work beyond age 65

January 9, 2014

By Sheryl Smolkin

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Later retirement and working longer is the new norm. That’s the message in Sun Life’s 2013 Canadian Unretirement Index report.

Over 3000 adults aged 30 to 65 years of age polled online by Ipsos Reid in late 2012 present a startlingly different picture than five years ago.

The number of Canadians who are planning to exit the workforce by age 66 has declined by nearly half since 2008. Just 27% of survey respondents expect to be retired by that age versus 51% five years ago.

As a result, there is a corresponding increase in the number of Canadians who assume they will be working retirees. And according to the study, we’re not talking about part-time work.

Twenty-six percent now expecting to be working full-time at age 66. This figure represents a 10-percentage point increase since 2008 in the number of Canadians who expect to be punching the clock for a full 40 hours or more a week.

Furthermore, most people say they will be working longer not because they want to, but because they need the money. This is apparent when we examine the order in which Canadians ranked their reasons for working at age 66 in 2008 as compared to 2012.

Reasons for working at age 65

2008

2012

15%: I enjoy my job or career 25%: To earn enough money to pay basic living expenses
14%: To stay mentally active 21%: To earn enough money to live well
13%: To earn enough money to live well 16%: I don’t believe government pension benefits will be enough to live on
13%: I don’t believe government pensionbenefits will  be enough to live on 13%: To stay mentally active
11%: To earn enough money to pay basicliving expenses 10%: I enjoy my job or career

SOURCE: 2013 Sun Life Unretirement Index Report

It is apparent that there is a serious disconnect between retirement dreams and retirement reality for many Canadians. According to the Sun Life study, on average Canadians anticipate needing $46,000 in annual retirement income and they expect to live in retirement for 20 years.

But the average amount they anticipate saving by the time they retire is $385,000 (not including the equity in their house). That’s well below the amount required to meet these average expectations.

In fact 58% of Canadians aim to have less than $250,000 saved for retirement. Thirty-eight percent say they will have less than $100,000 tucked away.

There is no doubt that we all have competing priorities that make it difficult to save for retirement. Paying down debt and raising our children are pretty high on the list. But small steps can make a huge difference.

A good way to start is to pay yourself first. That means arranging for automatic monthly deposits in a registered retirement savings account like the Saskatchewan Pension Plan.

And if you complete and file the Canada Revenue Agency’s T1213 form you can request permission from your employer to deduct a lower amount of taxes at source.

By reducing your withholdings at source, you are paying yourself and not the Canada Revenue Agency first, and increasing your net take home pay. You are effectively giving yourself a raise all year long, not just once at tax time.

In 2013 you can contribute up to $2,500/year to the Saskatchewan Pension Plan and contribution options include directly contributing from your bank account on a pre-authorized contribution schedule. Additional amounts up to your RRSP contribution limit can be contributed to your individual or workplace retirement savings plans.

Developing the “Pay yourself first” habit can help you build up a substantial retirement nest egg. For example, if you deposit $2,500/year in the SPP and earn five percent over a 40 year career (age 25 to 65) you will have a lump sum of about $317,000 in your account.

The value of planning and saving is that you can decide how and when you want to fully retire. Saving with SPP will help you accumulate the funds you need to enjoy your golden years on your own terms.


Why declaring all of your income can save you money

April 25, 2013

By Sheryl Smolkin

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Have you ever handed your home renovation contractor cash to avoid paying provincial sales tax and GST? Do you accept cash for your in-home daycare services and conveniently “forget” to remit source deductions or claim the income for tax purposes?

If either of these scenarios strikes a chord, chances are you are a participant in the underground economy (UE). A September 2012 Statistics Canada study on the UE in Canada pegs the level of underground activity at $35 billion in 2009.

The UE is any legal business activity that is unreported or under-reported for tax purposes. This can include failing to file returns or omitting an entire business activity, also referred to as “moonlighting” or working “off the books.”

Under-reporting income received, such as “skimming” a portion of business income, bartering, or failing to report a portion of employment income such as tips and gratuities is also included in the UE. The three most significant industry sectors accounting for almost two-thirds of UE activity are construction, retail trade and accommodation/food services.

Why should you care? After all nobody wants any more taxes than they have to.

Well for one thing, paying your taxes is the law. Evading taxes is illegal and can result in criminal convictions leading to fines and jail time in addition to any taxes, interest, and penalties owing.

For example, in December 2012 a Saskatoon man was fined $15,734 for tax evasion for the years 2008 and 2009. He purchased and sold two separate properties for profit and deliberately did not report the income earned from these sources to evade taxes.

In addition, he knowingly failed to report rental income earned from a property, and management fees received from two other renovation projects. The total amount of income found unreported during the years under investigation was $79,195. This resulted in the evasion of federal income tax in the amount of $19,687.

The fine of $15,734 represents 80% of the tax evaded. In addition to the court fines, all outstanding taxes plus penalties and interest must also be paid.

The investigation of tax affairs arose from inconsistencies uncovered during a routine income tax audit which led the CRA to obtain a search warrant and to seize income tax records from the tax evader’s personal residence.

Tax cheating also places an unfair burden on law-abiding businesses and individual taxpayers because overall tax rates must be higher for governments to raise the necessary funds to pay for services.

Businesses that offer lower prices because of their failure to comply with Canada’s tax laws gain an unfair advantage. Tax-cheating employers also gain an unreasonable competitive edge by paying wages under the table in cash, in order to avoid paying the employer portion of employment insurance premiums and Canada Pension Plan contributions. The “knock on effect” is that their employees are eventually deprived of benefits from these important social programs.

Finally, those who avoid paying taxes are taking money that is needed for important investments in schools, hospitals, and other vital government services.  In addition, cash transactions with no written contract or receipt offer no consumer protection and make it difficult for consumers to seek recourse.

Just because you haven’t been caught yet doesn’t mean you won’t be caught in future.

The Canada Revenue Agency has a variety of tools to detect those who do not report all of their income, including on-site visits by officers, information obtained from third-party reporting, leads from other audit files, informants, and indications that taxpayers are living beyond the level of income they report.

If you haven’t declared all of your sales and income in the past, you may be able to correct your information using the CRA’s Voluntary Disclosures Program. If you make a full disclosure before any audit or criminal investigation is started, you may only have to pay the taxes owing plus interest, but not the penalties.

While it may be tempting at times to try and avoid paying some or all of the taxes you, in the long run doing the right thing will actually save you money.

Have you filed your tax return yet? Send us an email to so*********@sa*********.com and your name will be entered in a quarterly draw for a gift card. And remember to put a dollar in the retirement savings jar every time you use one of our money-saving ideas.

If you would like to send us other money saving ideas, here are the themes for the next three weeks:

2-May Gardening Cheapest ways to plant a maintenance-free garden
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10 tax deductions to remember

April 11, 2013

By Sheryl Smolkin

SOURCE: SHUTTERSTOCK
SOURCE: SHUTTERSTOCK

It seems like filing income tax returns gets more complicated every year. Most of us will be e-filing this year because the Canada Revenue Agency is no longer sending paper forms to every household. But even if you carefully fill in the blanks on an electronic form, it’s easy to miss important deductions or tax credits that will help you to hold on to more of your hard-earned money.

Here is a list of 10 tax deductions and tax credits to remember when you are filing your tax return.

  1. Line 208 – Saskatchewan Pension Plan contributions
    You must have available RRSP room to make an SPP contribution. SPP contributions should be reported on Schedule 7 of your income tax form and claimed on line 208. Both your application and your contribution must be received by SPP before a tax receipt will be issued.SPP contributions will be taken into account in determining RRSP over-contributions. Spousal contributions are permitted and if the contributor has available RRSP room, he or she may contribute and receive a tax deduction for both their personal and their spouse’s account. Spousal attribution rules apply to SPP.
  2. Line 214 – Childcare expenses
    The annual childcare expenses you can deduct depend on the age of your child. For example:

    • For a child born in 2006 and later: $7,000
    • For a child born in 2012 or earlier: $10,000
    • For a child born 1996-2005:            $4,000

    What qualifies as a childcare expense and who can make the claim are discussed in detail on the Information Sheet and Form T778.

  3. Line 215 – Disability supports deduction
    If you have an impairment in physical or mental functions, you can claim a disability supports deduction if you paid expenses that no one has claimed as medical expenses, and you paid them so you could:

    • Be employed or carry on a business (either alone or as an active partner).
    • Do research or similar work for which you received a grant; or
    • Attend a designated educational institution or a secondary school where you were enrolled in an educational program.

    You cannot claim amounts that were reimbursed by a non-taxable payment such as insurance. Expenses must be claimed in the same year they are paid.

  4. Line 301 – Age amount
    You can claim this amount if you were 65 years of age or older on December 31, 2012, and your net income is less than $78,684. If your net income was:

    • $33,884 or less, you can claim $6,720.
    • More than $33,884, but less than $78,684, complete the chart for line 301 on the Federal Worksheet to calculate your claim.

    Don’t forget to also claim the corresponding provincial tax credit.

  5. Line 319 –  Interest paid on your student loan
    You may be eligible to claim an amount for the interest paid on your student loan in 2012 or the preceding five years for post-secondary education if you received it under:

    • The Canada Student Loans Act.
    • The Canada Student Financial Assistance Act; or
    • A similar provincial or territorial government law.
  6. Line 324 – Tuition, education, and textbook amounts transferred from a child
    The maximum tuition, education, and textbook amount transferred from a child (or from each child), is $5,000 minus the amounts that he or she uses, even if there is still an unclaimed part. Tuition, education, and textbook amounts that the student carried forward from a previous year cannot be transferred. Only one person can claim this transfer from the student. However, it does not have to be the same parent or grandparent that claims the student as a dependant.
  7. Line 330 – Medical expenses
    You can claim on line 330 the total eligible medical expenses you or your spouse or common-law partner paid for:

    • Yourself.
    • Your spouse or common-law partner; and
    • Your child or your spouse’s or common-law partner’s child born in 1995 or later.

    The amount you can claim is the lesser of:

    • 3% of your net income; or
    • $2,109.

    To maximize this claim, it should be deducted by the spouse with the lower income.

  8. Line 331 – Allowable amount of medical expenses for other dependants
    Claim on line 331 the part of eligible medical expenses you or your spouse or common-law partner paid for the following persons who depended on you for support:

    • Your child or your spouse’s or common-law partner’s child who was born in 1994 or earlier, or grandchild; or
    • Your or your spouse’s or common-law partner’s parent, grandparent, brother, sister, aunt, uncle, niece, or nephew who was a resident of Canada at any time in the year.
  9. Line 365 – Children’s fitness amount
    You can claim to a maximum of $500 per child, the fees paid in 2012 relating to the cost of registration or membership for your child or your spouse’s or common-law partner’s child in a prescribed program of physical activity.
  10. Line 370 – Children’s arts amount
    You can claim to a maximum of $500 per child the fees paid in 2012 relating to the cost of registration or membership of your child or your spouse’s or common-law partner’s child in a prescribed program of artistic, cultural, recreational, or developmental activity.

Have you filed your taxes already? Send us an email to so*********@sa*********.com and tell us about other valuable tax deductions we may have missed. If your story is posted, your name will be entered in a quarterly draw for a gift card. And remember to put a dollar in the retirement savings jar every time you use one of our money-saving ideas.

If you would like to send us other money saving ideas, here are the themes for the next three weeks:

18-Apr Wedding How to beat the high cost of weddings
25-Apr Taxes Why you should file your tax return on time
2-May Gardening Cheapest ways to plant a maintenance-free garden