The Key Differences Between a Defined Benefit and Defined Contribution Pension Plan
As an employer, you may be thinking about offering your employees a pension plan. If so, you have two main options: a defined benefit pension plan and a defined contribution pension plan. A defined benefit pension plan offers your employees a set amount of money when they retire, whereas a defined contribution pension plan does not.
There are four key areas you should be aware of for pension plans:
We will walk you through each of these to help give you a better understanding of the differences between the two types of pension plans.
In a defined benefit pension plan, both you, the employer, and the employee will contribute to the pension plan. The amount that you will have to contribute each year will depend on what kind of expenses the pension plan has, and the amount of funding it will require that year.
In a defined contribution pension plan, employees contribute a set amount each year into their pension. As an employer, you can choose to match or “top up” their contributions to a set amount that you define in advance.
For both types of plans, contributions are tax-deductible for the employee.
As an employer, you or your pension plan administrator will be responsible for managing the funds in a defined benefit pension plan. This applies whether the employee is actively contributing to the fund or has retired and is receiving funds from it.
With a defined contribution pension plan, you can let your employees choose how they want to invest their funds. This provides your employees with more flexibility and choice and takes the responsibility off you as the employer to manage pension funds. You will still need to arrange to have a selection of funds for your employees to select from.
In a defined benefit pension plan, an actuary will work with you (approximately every three years) to calculate how much money you will need to cover the pension expenses. The actuary must consider everything from cost of living adjustments to how many employees will be retiring.
In a defined contribution plan, the costs will be lower as less active management is required. Employees will receive whatever amount their investments are worth when they retire.
Both types of pension plans will help attract and retain employees. Since a defined benefit plan builds in value each year, it is more likely to attract employees interested in staying with your company for a long time. A defined contribution plan will still attract employees – but the pension will be less appealing than a defined benefit plan would be.
A defined benefit plan will cost you more to set up, maintain, and administer, but offers your employees more stability in their retirement. A defined contribution plan will give you and your employees more flexibility and cost you less to run.
Either type of plan will help you attract and retain employees.
https://lssmith.ca/wp-content/uploads/2021/07/Copy-of-Defined-Contribution-vs.-Benefit-Pension-Plan-for-Employees.gif296500L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-07-06 16:12:042021-07-06 16:15:09Defined Contribution vs. Benefit Pension Plan for Employees
Starting a new business venture can be both exciting and nerve-racking at the same time. The hopes and dreams of success, financial freedom and being your own boss are accompanied by many uncertainties and risks. To add to some of the anxiety, comes the facts: about half of all new businesses will not be around within the next 5, and only about one third will survive 10+ years. The situation often becomes more complex when there are multiple owners and the future success of a business is at risk if proper planning is not done. The unexpected ‘exit’ of a partner due to death, disability, illness, retirement or just simply that ‘it’s not working out’ can create a very difficult situation for the remaining business owner(s) and the business itself. Many businesses operate under a ‘handshake’ sort of agreement, but those rarely are upheld when the situation starts to get challenging. In order to protect against all of these pitfalls, it is always advised to have the right structure in place to address any potential challenges that may arise. This is done through incorporating a Buy-Sell Agreement between the owners.
What is a Buy‐Sell Agreement?
A buy-sell agreement is a legally binding contract designed to establish a set of rules or actions for the remaining business owner(s) to carry on the business, in the event one of them is no longer involved in the business – this can be due to death, illness, injury, retirement or a simple desire to ‘get out’. In other words, this document dictates how the remaining owner(s) will interact with each other and how the business will operate when certain situations occur. This agreement creates certainty and a ‘game plan’ in case one or more of the partners are no longer able or willing to commit to the business.
Types of Buy‐Sell Agreements
Buy-sell agreements are generally structured as a cross purchase agreement, promissory note agreement, or a share redemption agreement.With a cross-purchase agreement, each shareholder within the agreement agrees to purchase a specified percentage of the shares owned by the departing shareholder, and if it’s due to death, the deceased shareholder’s estate is obligated to sell the shares to the remaining shareholder(s). A shareholder will generally purchase insurance on the life of the other shareholder(s) and on death, will use the proceeds from the insurance to buy out the remaining shares from the deceased shareholder’s estate.With a promissory note agreement, corporate owned life insurance is placed on the life of each shareholder, with the corporation named as the payor and beneficiary. In the event that a shareholder dies, the surviving shareholder(s) purchases the deceased’s shares from their estate using a promissory note. Once the remaining shareholder(s) owns the deceased shareholder’s shares, the company collects the death benefit on the insurance policy with the excess amount above the adjusted cost basis of the policy in the capital dividend account. The company then provides the surviving shareholder(s) a capital dividend which provides the remaining shareholder(s) the necessary funds to pay off the promissory note.Under the share redemption arrangement corporate owned life insurance is placed on the life of each shareholder with the corporation named as the payor and beneficiary. In the event that a shareholder dies, the company collects the insurance proceeds and places the excess amount above the adjusted cost basis of the policy in the capital dividend account. The company uses the proceeds in the capital dividend account to redeem the shares held by the deceased shareholder’s estate. Once that is done, the remaining shareholder(s) takes over the ownership of those purchased shares.Each structure has their advantages and disadvantages and should be reviewed with a legal professional, tax professional as well as a knowledgeable Financial Advisor.
Why the business needs a buy‐sell agreement
A buy-sell agreement is a crucial component of a business that should be incorporated to protect the shareholders as well as the business itself. It is designed to ensure important things are taken care of if someone leaves the business for whatever reason, so that the business can continue to grow and run successfully. A buy-sell agreement offers several key benefits to your business:
It maintains the continuity of your business by ensuring members get to decide what happens to the business before any problems arise.
It protects company ownership by laying out a succession plan for departing members. This keeps remaining shareholders from being burdened by untested and unproven successors (like the widow or children of the departing co-owner).
It minimizes dispute between remaining co-owners and the family of the departing owner by having a strategy in place ahead of time to govern business operations.
It alleviates co-owner stress and uncertainty by specifically identifying which events would trigger a buyout.
It protects business assets and liquidity by providing a financial (and tax) plan for each of the different triggers addressed in the agreement.
It protects the interest of, not just the business entity itself, but also that of the business owners to ensure members (and their families, in the event of death or disability) are handled with respect, courtesy and the utmost fairness.
What to include in the buy‐sell agreement
Since a buy-sell agreement is a legally binding document, it generally should be drafted with a knowledgeable and experienced Legal Professional. Most agreements are started through a generic template, but then are customized for the needs of each business/partner and can be a fairly thorough and comprehensive document. There are several different components of a buy-sell agreement and several different aspects need to be addressed, such as the valuation of the company, ownership interests, buy-out clauses, and terms of payment. The agreement should generally be drafted at the very start of the business, so as to avoid any issues or misunderstandings later on. The agreement will also address certain ‘triggering events’, which are listed below.
Conflict between owners of a business in regards to the direction or management of the business can sometimes occur, and can even push the most successful business off-course. In a situation where no agreement or mediation can be reached, it may make sense to allow for one or more of the partners to be bought out. This would allow the business to continue moving forward and is often referred to as a ‘shot-gun clause’. Sometimes a situation where one owner offers to buy-out the other would also offer to be bought-out for the same value, thus ensuring fair treatment and value of the shares.
An owner who is in the midst of a divorce may be bought-out by other partners, to protect the company ownership. A divorce settlement will generally depend on the partner’s share of the business. It’s not uncommon for a family law judge to order a business owner to split his or her interest in a company with the former spouse. To protect the business from this event, a clause should require the shares held by the former spouse of a partner to be acquired by the company or one of the other owners.
The value of the business comprises a significant component for the retirement of many business owners. Allowing the remaining partners to reclaim the interest in the business keeps the business intact and provides the retiring partner with a market to liquidate their ownership, thus providing the retiring partner with a cash infusion to enjoy their retirement. There may also be some distinction in the agreement between early retirement and regular retirement and how the shares of the departing owner are to be valued.
Borrowing money to expand or grow the company, or to purchase equipment or goods, is common for many companies. However, lending institutions often require personal guarantees from the owners/shareholders of the business. Having one or more owners that are not able to provide this guarantee can lead to higher fees and impact the overall financial well-being and growth of the business. Therefore, a provision should be considered to allow the other shareholders the opportunity to acquire shares of the defaulting shareholder(s).
An owner who has become disabled and unable to perform their duties can impact the overall well-being of the business. The agreement should address several situations and questions, such as whether the partner will continue to receive a salary, and for how long, or whether they will continue in the day-to-day management of the company.The buy-sell agreement also needs to clearly define what is considered a disability and should include a timeline for which the disabled partner would be given the opportunity to return. Often the business will purchase disability buy-sell insurance and link the definitions to the plan. This has the added benefit of providing an independent third party to determine when the criteria for the buy-out are satisfied.
The death of a partner is an unfortunate and difficult situation for both the family and business partners alike. To deal with the stress of continuing the business, establishing the rules of business continuity upon death provides peace of mind to both the surviving partners and the family of the deceased. The surviving partners benefit from the assurance of not having to deal with an unwanted partner and the family is assured that they will be treated fairly.Generally, all partners/co-owners will be covered by a ‘key person’ life insurance policy, which can be paid by either the company or the other partners, where the death benefit would be used to buy out the deceased owner’s shares (as mentioned above).
Funding the buy‐sell agreement
Without sufficient resources to fund a potential buy-out, the agreement itself can fall apart. The partners need to decide where the money will come from to complete the buy-out – whether it will be the responsibility of individual owners or from the company itself. While not all events can be protected, two can: the death and disability of a shareholder. By using an insurance policy, funds can be made available at the time they are needed, thus minimizing potential liquidity issues, protecting the business and the impacted shareholders, as well as the family of the deceased shareholder. Using insurance provides the protection needed at a fraction of the cost to the alternatives and can provide immediate capital and significant tax benefits.
Working as a partnership between 2 or more individuals is never an easy task, and the situation only gets more complicated when one or more of them exits the business. Protecting not only the business, but your personal interests, as well as your family’s future are very important objectives for any business owner, and should not be overlooked. Although no business can be certain of success, there are strategies and structures that can help protect the business from failure in the future. Working with a knowledgeable and experienced Financial Advisor, Legal Professional and Tax Professional, you can be assured that you can have the proper Buy-Sell Agreement in place so that all parties involved benefit.
https://lssmith.ca/wp-content/uploads/2021/06/500x500-THE-IMPORTANCE-OF-A-BUY-SELL-coverImage.png500500L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-06-02 16:45:072021-06-02 16:48:21Importance of a Buy-Sell Agreement
Working at an organization that offers a pension plan is one of the greatest financial advantages a Canadian can enjoy. Pension plans are designed to provide retirement income and help employees reach their retirement goals and for business owners- help retain key employees.
Pension plans can offer:
Forced retirement savings for employee
There are 2 main types of pension plan:
Defined Benefit Plan
Defined Contribution Plan
Defined Benefit Plan
Retirement income is guaranteed, contributions are not.
The pension amount is based on a formula that includes the employee’s earnings and years of service with the employer
Usually, contributions are made by the employee and employer
The employer is responsible for investing the contributions to ensure there’s enough money to pay the future pensions for all plan members.
If there’s a shortfall, the employer pays the difference.
Defined Contribution Plan
Contributions are guaranteed, retirement income is not.
Usually, contributions are made by the employee and employer.
The employee is responsible for investing all contributions.
The amount available in retirement depends on how the investment performs including total contributions.
At retirement, the money in the account can be used to generate retirement income through purchasing an annuity or transferring the amount to a locked-in retirement income fund.
In summary, a defined benefits plan guarantees you a retirement income and a defined contribution plan guarantees contributions but not retirement income.
Talk to us, we can help.
https://lssmith.ca/wp-content/uploads/2021/05/groupRetirementBenefitsFI.jpg8101440L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-05-05 14:18:062021-05-05 14:21:21Group Retirement Benefits
On April 19, 2021, the Federal Government released their 2021 budget. We have broken down the highlights of the financial measures in this budget into three different sections:
Personal Tax Changes
Extending Covid -19 Emergency Business Supports
All of the following COVID-19 Emergency Business Supports will be extended from June 5, 2021, to September 25, 2021, with the subsidy rates gradually decreasing:
Canada Emergency Wage Subsidy (CEWS) – The maximum wage subsidy is currently 75%. It will decrease down to 60% for July, 40% for August, and 20% for September.
Canada Emergency Rent Subsidy (CERS) – The maximum rent subsidy is currently 65%. It will decrease down to 60% for July, 40% for August, and 20% for September.
Lockdown Support Program – The Lockdown Support Program rate of 25% will be extended from June 4, 2021, to September 25, 2021.
Only organizations with a decline in revenues of more than 10% will be eligible for these programs as of July 4, 2021. The budget also includes legislation to give the federal government authority to extend these programs to November 20, 2021, should either the economy or the public health situation make it necessary.
Canada Recovery Hiring Program
The federal budget introduced a new program called the Canada Recovery Hiring Program. The goal of this program is to help qualifying employers offset costs taken on as they reopen. An eligible employer can claim either the CEWS or the new subsidy, but not both.
The proposed subsidy will be available from June 6, 2021, to November 20, 2021, with a subsidy of 50% available from June to August. The Canada Recovery Hiring Program subsidy will decrease down to 40% for September, 30% for October, and 20% for November.
Interest Deductibility Limits
The federal budget for 2021 introduces new interest deductibility limits. This rule limits the amount of net interest expense that a corporation can deduct when determining its taxable income. The amount will be limited to a fixed ratio of its earnings before interest, taxes, depreciation, and amortization (sometimes referred to as EBITDA).
The fixed ratio will apply to both existing and new borrowings and will be phased in at 40% as of January 1, 2023, and 30% for January 1, 2024.
Support for small and medium-size business innovation
The federal budget also includes 4 billion dollars to help small and medium-sized businesses innovate by digitizing and taking advantage of e-commerce opportunities. Also, the budget provides additional funding for venture capital start-ups via the Venture Capital Catalyst Program and research that will support up to 2,500 innovative small and medium-sized firms.
Personal Tax Changes
Tax treatment and Repayment of Covid-19 Benefit Amounts
The federal budget includes information on both the tax treatment and repayment of the following COVID-19 benefits:
Canada Emergency Response Benefits or Employment Insurance Emergency Response Benefits
Individuals who must repay a COVID-19 benefit amount can claim a deduction for that repayment in the year they received the benefit (by requesting an adjustment to their tax return), not the year they repaid it. Anyone considered a non-resident for income tax purposes will have their COVID-19 benefits included in their taxable income.
Disability Tax Credit
Eligibility changes have been made to the Disability Tax Credit. The criteria have been modified to increase the list of mental functions considered necessary for everyday life, expand the list of what can be considered when calculating time spent on therapy, and reduce the requirement that therapy is administered at least three times each week to two times a week (with the 14 hours per week requirement remaining the same).
Old Age Security
The budget enhances Old Age Security (OAS) benefits for recipients who will be 75 or older as of June 2022. A one-time, lump-sum payment of $500 will be sent out to qualifying pensioners in August 2021, with a 10% increase to ongoing OAS payments starting on July 1, 2022.
Waiving Canada Student Loan Interest
The budget also notes that the government plans to introduce legislation that will extend waiving of any interest accrued on either Canada Student Loans or Canada Apprentice Loans until March 31, 2023.
Support for Workforce Transition
Support to help Canadians transition to growing industries was also included in the budget. The support is as follows:
$250 million over three years to Innovation, Science and Economic Development Canada to help workers upskill and redeploy to growing industries.
$298 million over three years for the Skills for Success Program to provide training in skills for the knowledge economy.
$960 million over three years for the Sectoral Workforce Solutions Program to help design and deliver training relevant to the needs of small and medium businesses.
Federal Minimum Wage
The federal budget also introduces a proposed federal minimum wage of $15 per hour that would rise with inflation.
New Housing Rebate
The GST New Housing Rebate conditions will be changed. Previously, if two or more individuals were buying a house together, all of them must be acquiring the home as their primary residence (or that of a relation) to qualify for the GST New Housing Rebate. Now, the GST New Housing Rebate will be available as long as one of the purchasers (or a relation of theirs) acquires the home as their primary place of residence. This will apply to all agreements of purchase and sale entered into after April 19, 2021.
Unproductive use of Canadian Housing by Foreign Non-Resident Owners
A new tax was introduced in the budget on unproductive use of Canadian housing by non-resident foreign owners. This tax will be a 1% tax on the value of non-resident, non-Canadian owned residential real estate considered vacant or underused. This tax will be levied annually starting in 2022.
All residential property owners in Canada (other than Canadian citizens or permanent residents of Canada) must also file an annual declaration for the prior calendar year with the CRA for each Canadian residential property they own, starting in 2023. Filing the annual declaration may qualify owners to claim an exemption from the tax on their property if they can prove the property is leased to qualified tenants for a minimum period in a calendar year.
Excise Duty on Vaping and Tobacco
The budget also includes a new proposal on excise duties on vaping products and tobacco. The proposed framework would consist of:
A single flat rate duty on every 10 millilitres of vaping liquid as of 2022
An increase in tobacco excise duties by $4 per carton of 200 cigarettes and increases to the excise duty rates for other tobacco products such as tobacco sticks and cigars as of April 20, 2021.
Luxury Goods Tax
Finally, the federal budget proposed introducing a tax on certain luxury goods for personal use as of January 1, 2022.
For luxury cars and personal aircraft, the new tax is equal to the lesser of 10% of the vehicle’s total value or the aircraft, or 20% of the value above $100,000.
For boats over $250,000, the new tax is equal to the lesser of 10% of the full value of the boat or 20% of the value above $250,000.
If you have any questions or concerns about how the new federal budget may impact you, call us – we’d be happy to help you!
https://lssmith.ca/wp-content/uploads/2021/04/FEDERAL-BUDGET-2021.jpg281500L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-04-22 11:42:072021-04-22 11:45:22Federal Budget 2021 Highlights
Tax season is upon us once again. But since 2020 was a year like no other, the 2021 tax-filing season will also be different. Both how we worked and where we worked changed for a lot of us in 2020.
Some Canadians got to work from home for the first time but saw no other disruption to their jobs. There was a much bigger disruption for other Canadians – they faced temporary or permanent job losses and had to supplement their incomes wide side gigs and emergency government programs.
The Canadian government has introduced some new tax credits and deductions in response to these changes. We’ve covered some of the highlights below.
Claiming home office expenses
With a sudden shutdown happening across the country in March 2020, many Canadians stopped commuting to the office and started working from home. As a response to this, the Canada Revenue Agency (CRA) has offered a new way to claim home office expenses. If you:
Worked from home due to COVID-19 – for a minimum of 50 percent of the time for at least four consecutive weeks AND
Your employer did not reimburse you for your home office expenses.
You can claim $2 for each day – to a maximum of $400 for the year.
If you have more complicated or higher home office expenses, then your employer must provide you with a T2200 form, with a list of deductions included.
New Canada Training Credit
Suppose you are between the ages of 25 and 65 and taking courses to upgrade your skills from a college, university, or other qualifying institution. In that case, you can claim this new, refundable tax credit.
You can automatically accumulate $250 annually – and the new Canada Training Credit has a lifetime maximum of $5,000. You can claim this credit when you file your taxes.
Pandemic emergency funds
The emergency support programs helped a lot of Canadians avoid financial disaster. If you were one of the Canadians who received pandemic emergency funds, you must be aware of the tax implications.
If you received the Canada Emergency Response Benefit (CERB) or the Canada Emergency Student Benefit (CESB), no taxes were withheld at source, so you will be taxed on the full amount. If you received the Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB), or Canada Recovery Caregiver Benefit (CRCB), the CRA withheld a 10% tax at source, so you may not owe additional taxes on this income.
New digital news subscription tax credit
This is a new, non-refundable tax credit that is calculated at 15 percent – and is eligible for up to a maximum of $500 in qualifying subscription expenses. To qualify for this credit, you must subscribe to one or more qualified Canadian journalism organizations – and you could save up to $75 a year thanks to this credit.
I’m here to help you understand where you owe taxes and how you can lower your tax bill. Give me a call today!
https://lssmith.ca/wp-content/uploads/2021/04/Whats-new-for-the-2021-tax-filing-season_.jpg281500L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-04-01 07:00:062021-04-02 06:00:07What’s new for the 2021 tax-filing season?
Before buying insurance from your bank to cover your mortgage, understand the difference between self owned mortgage life insurance and bank owned life insurance. The key differences are ownership, premium, coverage, beneficiaries and portability.
Self: You own and control the policy.
Bank: The bank owns and controls the policy.
Self: Your premiums are guaranteed at policy issue and discounts are available based on your health.
Bank: Premiums are not guaranteed and there are no discounts available based on your health.
Self: The coverage that you apply for remains the same.
Bank: The coverage is tied to your mortgage balance therefore it decreases as you pay down your mortgage but the premium stays the same.
Self: You choose who your beneficiary is and they can choose how they want to use the insurance benefit.
Bank: The bank is beneficiary and only pays off your mortgage.
Self: Your policy stays with you regardless of your lender.
Bank: Your policy is tied to your lender and if you change, you may need to reapply for insurance.
We’ve created an infographic about the difference between personally owned life insurance vs. bank owned life insurance.
https://lssmith.ca/wp-content/uploads/2021/03/mortgageLifeInsurance.jpg405720L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-03-03 05:30:002021-03-03 05:36:13Self Owned vs. Bank Owned Mortgage Insurance
On Friday, February 19, 2021, Prime Minister Justin Trudeau announced an extension to several of the COVD-19 federal emergency benefits. The goal of this extension is to support Canadians who are still being financially impacted by the COVID-19 pandemic.
The following benefits are impacted:
Canada Recovery Benefit
Canada Recovery Caregiving Benefit
Canada Recovery Sickness Benefit
Canada Recovery Benefit
The Canada Recovery Benefit (CRB) provides income support to anyone who is:
Employed or self-employed, but not entitled to Employment Insurance (EI) benefits.
Has had their income reduced by at least 50 percent due to COVID-19.
You can receive up to $1,000 ($900 after taxes withheld) a week every two weeks for the CRB. The recent changes now allow you to apply for this benefit for a total of 38 weeks – previously the maximum was 26 weeks.
Canada Recovery Caregiving Benefit
The Canada Recovery Caregiving Benefit (CRCB) helps support people who cannot work because they must supervise a child under 12 or other family members due to COVID-19. For example, a school is closed due to COVID-19 or your child must self-isolate because they have COVID-19.
You can receive $500 ($450 after taxes withheld) for each 1-week period you claim the CRCB. The recent extension made now allows you to apply for this benefit for a total of 38 weeks instead of the previous 26 weeks.
Canada Recovery Sickness Benefit
The $500 a week ($450 after taxes) Canada Recovery Sickness Benefit (CRSB) is also getting a boost. If you cannot work because you are sick or need to self-isolate due to COVID-19, you can now apply for this benefit for a total of four weeks. Previously, this benefit would only cover up to two missed weeks of work.
Finally, the government will also be increasing the amount of time you can claim Employment Insurance (EI) benefits. You will now be able to claim EI for a maximum of 50 weeks – this is an increase of 24 weeks from the previous eligibility maximum.
https://lssmith.ca/wp-content/uploads/2021/02/COVID-19-Benefits-extended.png281500L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-02-22 14:09:462021-02-22 16:06:21Extended COVID-19 Federal Emergency Benefits
Great news for some ineligible self-employed Canadians who received the Canada Emergency Response Benefit (CERB). As per canada.ca:
“Today, the Government of Canada announced that self-employed individuals who applied for the Canada Emergency Response Benefit (CERB) and would have qualified based on their gross income will not be required to repay the benefit, provided they also met all other eligibility requirements. The same approach will apply whether the individual applied through the Canada Revenue Agency or Service Canada.
This means that, self-employed individuals whose net self-employment income was less than $5,000 and who applied for the CERB will not be required to repay the CERB, as long as their gross self-employment income was at least $5,000 and they met all other eligibility criteria.
Some self-employed individuals whose net self-employment income was less than $5,000 may have already voluntarily repaid the CERB. The CRA and Service Canada will return any repaid amounts to these individuals. Additional details will be available in the coming weeks.”
https://lssmith.ca/wp-content/uploads/2021/02/Self-employed.png281500L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-02-12 16:28:222021-02-12 18:03:31Self-employed: Government of Canada addresses CERB repayments for some ineligible self-employed recipients
If you are seeking ways to save in the most tax-efficient manner available, TFSAs and RRSPs can provide significant tax savings. To help you understand the differences, we compare:
TFSA versus RRSP – Differences in deposits
TFSA versus RRSP – Differences in withdrawals
1) TFSA versus RRSP – Difference in deposits
There are several areas to focus on when comparing differences in deposits for 2021:
● Contribution Room
● Carry Forward
● Contribution and Tax Deductibility
● Tax Treatment of Growth
How much contribution room do I have?
If you have never contributed to a TFSA before, you can contribute up to $75,500 today. This table outlines the contribution amount you are allowed each year since TFSAs were created, including this year:
For RRSPs, the deduction limit is always 18% of your previous year’s pre-tax earnings to a maximum of $27,830. For example, if you earned $60,000 in 2020 then your deduction limit for 2021 would be $10,800 (18% x $60,000). If you earned $200,000, your deduction limit would be capped at the maximum of $27,830.
How much contribution room can I carry forward?
If you choose not to contribute to your TFSA at all one year or do not contribute the maximum amount in a year, you can indefinitely carry forward your unused contribution room. The only restrictions on this are that you must be a Canadian resident, older than 18, and have a valid social insurance number. If you make a withdrawal, then the amount you withdrew is added on top of your annual contribution room for the next calendar year.
For an RRSP, you can carry forward your unused contribution room until the age of 71. When you turn 71, you must convert your RRSP into an RRIF. If you make a withdrawal from your RRSP, you do not open up any additional contribution room.
Contributions and Tax Deductibility
Your TFSA contributions are not tax-deductible and are made with after-tax dollars.
Your RRSP contributions are tax-deductible and made with pre-tax dollars.
Tax Treatment of Growth
One of the reasons it’s essential to make both RRSP and TFSA contributions is that any growth in them is treated differently.
A TFSA is more suitable for short-term objectives like saving for a house down payment or a vacation – because all of the growth in it is tax-free. When you make a withdrawal from your TFSA, you won’t have to pay income tax on the amount withdrawn.
The growth in an RRSP is tax-deferred. This means you won’t pay any taxes on your RRSP gains until age 71, at which time, you convert RRSP into a RRIF and begin withdrawing money. RRSPs are better suited for long-term objectives, like retirement. Since you will have a lower income in retirement than when you are working, you will be in a lower tax bracket and, thus, not pay as much tax on your RRIF income.
TFSA versus RRSP – Differences in withdrawals
There are several areas to focus on when comparing differences in withdrawal for 2021:
For a TFSA, there are never any conversion requirements as there is no maximum age for a TFSA.
For an RRSP, you must convert it to a Registered Retirement Income Fund (RRIF) if you turn 71 by December 31st of 2021.
Tax Treatment of withdrawals
One of the most attractive things about a TFSA is that all your withdrawals are tax-free! This is why they are recommended for short-term goals; you don’t have to worry about taxes when you take money out to pay for a house or a dream vacation.
With an RRSP, if you make a withdrawal, it will be taxed as income except in two cases:
The Home Buyers Plan lets you withdraw up to $35,000 tax-free, but you must pay it back within fifteen years.
The Lifelong Learning Plan lets you withdraw up to $20,000 ($10,000 maximum per year) tax-free, but you must pay it back within ten years.
How will my government benefits be impacted?
If you are making a withdrawal from your TFSA or RRSP, it’s essential to know how that will affect any benefits you receive from the government.
Since TFSA withdrawals are not considered taxable income, they will not impact your eligibility for income-tested government benefits.
RRSP withdrawals are considered taxable income and can affect the following:
Income-tested tax credits such as Canada Child Tax Benefit, the Working Income Tax Benefit, the Goods and Services Tax Credit, and the Age Credit.
Government benefits including Old Age Security, Guaranteed Income Supplement and Employment Insurance.
How will a withdrawal impact my contribution room?
If you make a withdrawal from your TFSA, then the amount you withdrew will be added on top of your annual contribution room for the next calendar year. If you make a withdrawal from your RRSP, you do not open up any additional contribution room.
RRSPs and TFSAs can both be great savings vehicles. However, there are significant differences between them which can affect your finances. If you need help navigating these differences, please do not hesitate to contact us. We’re here to help.
https://lssmith.ca/wp-content/uploads/2021/01/TFSA_vs_RRSP_2021_Featured_Image.png281500L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-01-21 14:01:102021-01-21 15:36:17TFSA vs RRSP – What you need to know to make the most of them in 2021
We’ve put together a financial calendar for 2021. It contains all the dates you need to know to make the most of your government benefits and investment options. Whether you want to bookmark this or print it out and post it somewhere prominent, you’ll have everything you need to know in one place!
We’ve provided information on:
The dates when the government distributes payments for the Canada Child Benefit, the Canada Pension Plan (CPP) and Old Age Security (OAS).
When GST/HST credit payments are issued – usually on the fifth day of January, April, July and October.
All the dates the Bank of Canada makes an interest rate announcement. A change in this interest rate (up or down) can impact a bank’s prime interest rates. This can then affect anything from the interest rate charged on your mortgage and line of credit to how much the Canadian dollar is worth against other currencies.
When you can start contributing to your Tax Free Savings Account (TFSA) for 2021, the contribution limit for 2021 is $6,000.
March 1st is the last day for your 2020 Registered Retirement Savings Plan (RRSP).
December 31st , 2021 is the last day for 2021 charitable contributions.
December 31st is the deadlines for various investment savings vehicle contributions, including your Registered Disability Savings Plan (RDSP) and Registered Education Savings Plan (RESP), as well as your RRSP if you turned 71 in 2021.
Tax filing deadlines for personal income tax, terminal tax returns for someone who died in 2020, self-employed individuals
Knowing all of this information here can help you keep on top of your finances if you’re expecting any government benefits. It can also make sure you don’t miss any critical tax or investment deadlines!
Tax packages will be available starting February 2021 – reach out to your accountant to get started on your taxes!
If you have any questions on how we can help with your 2021 finances, please contact us.
https://lssmith.ca/wp-content/uploads/2021/01/2021-FInancial-calendar-1.png5631000L.S. Smith and Associateshttps://lssmith.ca/wp-content/uploads/2018/05/lsSmithLogo.jpgL.S. Smith and Associates2021-01-04 06:00:002021-01-04 06:39:362021 Financial Calendar