Finance 101 for all of life’s journey: How to manage your finances efficiently throughout all stages of your life

Getting back to financial basics is ultimately about strengthening the financial foundation of your wealth, finding ways to reduce taxes, and protecting your assets. This newsletter aims to educate and reinforce key lessons about utilizing tax-efficient savings tools and strategies, to maximize your net worth and plan for the future.

This newsletter focuses on two key points: How to maximize your savings with a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), and Registered Education Savings Plan (RESP), alongside some key income-splitting strategies to keep more of your money and give less to the CRA!

#1: Revisiting RESPs, TFSAs & RRSPs to maximize the benefits

Financial noise can sometimes be overwhelming, which is why I believe it’s worth returning to the basics from time to time. Savings accounts like a Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are vital tools in financial planning, regardless of whether you’re saving for your children’s/grandchildren’s education, your retirement, or for any other goal. If used effectively, they can ultimately strengthen the foundation of your wealth.

Here is a summary of the three main savings account options:

My goal here is to reiterate the importance of saving over the long term and doing so in the most tax-efficient way, given your personal time horizon, goals, and level of flexibility. Here are some quick pointers for each account type:

RESP confusion: Recently, I read in a study that more than 80% of Canadian parents don't properly understand the benefits of an RESP. That is unfortunate, as they could be leaving an additional 20% of government grant money on the table! An additional 20% on top of your contributions can go a long way, especially if compounded from when a child is born until they are ready for university.

TFSA fact check: If you have been 18 or older and living in Canada since 2009, your maximum TFSA contribution limit is now $81,500 – that’s a lot of money to grow and compound tax-free over time!

Think you are too young for an RRSP account? At a young age, you may be far from retirement and probably not even thinking about it, but you are never too young to start thinking strategically about your financial goals and best interests, and to maximize the compounding effect.

As the next generation of wealth, your young adult has a lifetime filled with plans, dreams and potential. We can help you ensure that they earn, save and live their life to the fullest.

Additionally, if you missed my article in last month’s newsletter comparing the benefits of an RRSP to a TFSA, I encourage you to read it here!

Where should my savings go: an RRSP or a TFSA?

#2: Income splitting strategies to meet your needs

Several income splitting strategies can be used at different stages of life, whether you have a young family, are getting ready for retirement or own a corporation. Here are a few of my favourite tips that may meet the needs of you and your family to maximize your tax return:

Tips for young families

Use RESPs to save for children’s education

Investment income earned within an RESP is tax-deferred, and since future withdrawals for education are taxable to the child, this means a lower tax bill for the family overall.

Help your spouse maximize their TFSA

Ordinarily, gifts between spouses for investment purposes are subject to complex tax attribution rules; however, spouses can gift funds to each other that are then contributed to their TFSA.

Spousal RRSP contributions

A higher-income individual can make tax-deductible RRSP contributions for the benefit of their lower-income spouse, so that future withdrawals can be taxable at the spouse’s lower rate.

Tips for individuals aged 65 and older

Split eligible income with your spouse

You can split eligible income on your tax return with your spouse. Common examples include: pensions, prescribed annuities, registered retirement income funds (RRIFs), and life income funds (LIFs).

Share your CPP pension with your spouse

If you and your spouse are eligible for, or already receiving income from CPP, you can apply to share this income by submitting an application available at Service Canada.

Income split your RRSP by converting it to a RRIF

RRSP withdrawals cannot be split with a spouse at any age, but if you are 65 or older, you can convert a portion, or all your RRSP, to a RRIF, making those withdrawals eligible for income splitting.

Tips for shareholders of private corporations

Pay reasonable salaries to family members

Where you can show that your spouse and/or children have worked in the business, you may be able to pay them a reasonable salary. It is important to track their actual working hours, describe their work tasks, and define the terms of their employment. Wages must be reasonable based on the work performed and the age of the individual (i.e., school aged children).

Pay dividends to shareholders of private corporations over age 65

Despite the expanded “Tax on Split Income” (TOSI) rules for Canadian private corporations as of 2018, private corporations can continue to pay dividends to shareholders in specific situations. For example, to ensure consistency with other pension income splitting rules, where the business owner is age 65 or older and their spouse is a shareholder of the corporation, dividends can be paid to the spouse without attracting punitive TOSI tax consequences. If this exception did not exist, the dividend payments may be subject to the TOSI rules, which would tax the payment at the top marginal tax rate, regardless of the spouse’s tax bracket.

For more information on income-splitting strategies or the registered account types available, please feel free to reach out to me anytime!

Thanks for reading!

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