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By Gigi Suhanic
National Post
FP Weekend Section
Saturday, February 26, 2005
RRSP clinic: Expert advice on your contribution queries, including what to do with investments while you're living in France
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "My advice is for you to seek professional counsel on your specific situation before moving to France. You should become familiar with the non-resident provisions of the Income Tax Act and their implications.”
With the March 1 deadline to contribute to your RRSP mere days away, FP Weekend has pulled together this mega-clinic to answer your last-minute queries. For more questions and answers go to the National Post's online clinic at www.nationalpost.com/rrspclinic/
Question: If I move to France, is it wise to cash in my RRSP or is it better to keep it until I retire? I will probably live in France for 10 years. And if I keep my RRSP, should I keep it in the form of mutual funds or term deposits?
Answer: This is a complicated question to answer in this forum. My advice is for you to seek professional counsel on your specific situation before moving to France. You should become familiar with the non-resident provisions of the Income Tax Act and their implications, along with how to determine your residence status and its consequences. You should also explore the taxation aspects for residing in France; Canada has a tax treaty with France.
Generally, a resident of Canada is liable for the tax on world income, while a non-resident is taxed on the income that originates in Canada. By going non-resident, you are deemed to have disposed of your assets. Hence, you may have income tax payable at the time of departure from Canada if you elect to become a non-resident. On the other hand, if you keep some ties with Canada while you are living in France, that gives rise to other income tax implications.
Canada Revenue Agency publishes some informative guides on non-residents and deemed residents of Canada. You can also obtain from the CRA the corresponding tax return for filing while abroad.
If you keep the RRSP, its composition should be dictated by the asset mix appropriate for your situation. If you don't have one, either you or your investment advisor ought to design an investment plan for all your holdings.
By: Adrian Mastracci, KCM Wealth Management Inc.
Question: I have a great life insurance policy whereby I receive share dividends periodically. I've decided to place those dividend cheques into RRSPs, not only for tax purposes but also for retirement. Unfortunately, the law requires that my life insurance policy provider issue dividend cheques instead of depositing the money directly into my RRSP account.
Does this mean that I must report the life insurance dividends as income, even though I deposit the money in my RRSP?
Answer: I will assume that you have a personally owned life insurance policy, one which is not part of the RRSP. That being the case, you will likely have to pay tax on some or all of the receipts regardless of where the money is eventually deposited. Your insurance agent or tax professional should be able to help you figure out what amounts are taxable in your hands, at your marginal tax rate.
By: Adrian Mastracci, KCM Wealth Management Inc.
Question: My husband and I have a stock certificate for shares his mother gave us several years ago. Can we take the certificate to the bank that holds our self-directed spousal RRSP and have the stocks put into the RRSP as our contribution for 2004?
Answer: Stock certificates can be deposited to a self-directed spousal RRSP, assuming the investment dealer is licensed to handle individual securities. This is called an "in-kind" contribution, and your bank should be able to process this on your behalf. When the stock is deposited to the RRSP, the size of the contribution will equal the market value of the shares on the day you deposit them.
Investors who make in-kind contributions of stock shares do need to be aware that if the shares are worth more on the day you deposit them to your RRSP than they were worth upon being transferred to you from your mother-in-law, then you will have to report the difference as a capital gain on your income tax return.
At the same time, you cannot report the capital loss if the shares are worth less than the market value on the day you received them.
To avoid this pitfall, if the shares are worth less than what you paid for them, sell them outside the RRSP and then contribute the cash to the RRSP. If you wish to continue holding that stock, you should simply repurchase the shares inside the RRSP. This way, you will still be able to use the capital loss to offset the tax consequences of capital gains you report on your 2004, or subsequent, income tax returns.
David Phipps
Question: Can I hold cash in my self-directed RRSP account now, and purchase mutual funds with that money later?
Answer: Once you have made a contribution to your self-directed RRSP, you can choose to keep your funds in cash until you decide how you would like to invest them. There is no time limit on how long you can stay in cash. Once you have done your research, you can purchase stocks or mutual funds, for example, when you are ready. So take the time to make an informed decision before you buy the investments in your RRSP.
Marcy Ages
Question: I've overcontributed for the 2004 tax year by $300. All contributions were made in 2004. But I used all of my $2,000 overcontribution limit in a previous taxation year. What do I need to do? Does Canada Revenue Agency actually keep a record of my $2,000 overcontribution limit?
Answer: Yes, the Canada Revenue Agency (CRA) does keep a record of your over-contribution limit. If you look at the 2003 Notice of Assessment that you received after filing your 2003 tax return you will see that your $2,000 overcontribution is tracked by CRA and shows up as an undeducted RRSP contribution.
When you over-contributed to your RRSP past your $2,000 of over-contribution room, penalties started to accrue at a rate of 1% per month on the amount over the $2,000. In your situation, you were $300 past the $2,000 over-contribution limit, so you would have a penalty of three dollars per month. The penalty started accruing in the month in which you over-contributed.
The ideal way to have dealt with your $300 over-contribution would have been to file a T3012A form during 2004 as soon as you became aware of the over-contribution. This form instructs the company you bought your RRSP from to give you whatever dollar amount you've calculated that you need back to avoid the 1% penalty. Once you have completed this form and the money has been pulled out of your RRSP, you then complete a T1OVP form to calculate the number of months that you were in a penalty situation and the dollar amount of the penalty. You have to send in the T1OVP form to CRA with a cheque for the penalty by 90 days following the year in which the over-contribution occurred.
In your situation, you didn't complete a T3012A form. Do you need to file one now? The answer is probably no. Jan. 1, 2005, marked the start of a new tax year and you have new RRSP room (assuming you had some earned income in 2004). As of Jan. 1, 2005, you were no longer in a $300 over-contribution situation.
Now what you need to do is complete a T1OVP form to calculate the penalty amount owing on your over-contribution amount from 2004, and submit the form along with payment to CRA by March 31st (90 days following the end of 2004).
David Phipps
Question: I co-signed a mortgage with my dad. Does that count as my first home? I want to know if I can use the first-time home buyer feature from my RRSP to purchase my first home down the road.
Answer: "If someone co-signs a mortgage [they] can still use the Home Buyers' Plan," says Dawna Labonte, a spokeswoman for Canada Revenue Agency.
The Home Buyers' Plan (HBP) lets Canadians borrow up to $20,000 tax-free from their RRSPs to put toward the purchase of a home, with the requirement that you repay your plan within a 15-year period.
There are a number of conditions one must meet to qualify for the HBP. But perhaps most importantly in this case, you will not qualify as a first-time buyer if at any time during the past four full calendar years, you, your spouse or common-law partner owned a home that you occupied as your principal residence.
Gigi Suhanic
Question: In addition to my regular RRSP, I have two "locked-in" RRSPs, one under federal regulation ($126,000) and one under Ontario provincial regulation ($66,000). These were funded by returns from pension plans upon job changes. I now live in B.C. and I am 64 years old.
What options are open to me (and at what age)? Must I take annuities or can these be converted into RRIFs? At what age? Is there any speculation as to legislative change in the rules governing "locked-in" pensions?
Answer: The fact that you currently live in British Columbia is irrelevant since the rules that govern your locked-in RRSPs are based on the pension legislation where your pension originated.
You have two choices with respect to your federal locked-in RRSP: Convert it to a life income fund (LIF) or a life annuity at any time. If you do not require income from the locked-in plan, you can delay the conversion until the end of the year in which you turn 69.
A LIF is similar to a RRIF in that you are required to take minimum withdrawals each year, however there is a maximum amount that is permitted to be withdrawn from a LIF -- a RRIF has no maximum withdrawal limit. Prior to this week's budget, a federal LIF had to be converted to a life annuity by age 80; however, the 2005 federal budget released this on Wednesday has proposed to remove this requirement.
As for the Ontario locked-in RRSP, you actually have one additional option beyond the LIF or life annuity -- the locked-in retirement income fund or LRIF. An LRIF has the same annual minimum withdrawal requirement as a LIF, but an LRIF's maximum annual withdrawal limit is tied to the investment performance of its underlying assets whereas a LIF's maximum withdrawal limit is fixed based on a schedule.
Besides the LRIF option, there are other differences between your federal and Ontario locked-in RRSPs. With a federal locked-in plan, withdrawals can begin at any age whereas with an Ontario locked-in plan, you can only start drawing income beginning at age 55, unless under the originating pension plan you were entitled to receive a pension at an earlier age. The second difference is that the Ontario LIF still requires you to convert it to a life annuity by the time your reach age 80. No word yet on whether Ontario will follow the fed's lead
Jamie Golombek
Question: My husband died in February, 2005. He was 57, retired and receiving a pension. I am retired also and have not received income for years. His RRSP names me as his beneficiary. We had no spousal RRSP. The 2003 tax assessment says the RRSP has approximately $30,000 contribution space open. Am I able to contribute to his RRSP (now mine) and if so, what are the important dates I have to know?
Answer: It isn't possible to make contributions to a deceased person's RRSP after the date of death. "Your RRSP ceases to exist once you die, so there are no more contributions that can be made to it," says Dawna Labonte, a spokeswoman for Canada Revenue Agency. But it is still possible to make a spousal contribution to take advantage of your husband's unused room.
According to the Canada Revenue Agency, your husband's legal representative can make a contribution to the surviving spouse's RRSP in the year of death, or during the first 60 days of the following year. Those contributions can be claimed as a deduction on your husband's final tax return.
Gigi Suhanic
Question: If I manage my own RRSP portfolio and I have equity mutual funds, how will the fund proceeds be taxed if I need to cash in the equity funds? What happens to the capital gains portion of any equity fund if, at some point in time, I close the fund and then transfer the value of the equity fund to a balanced fund?
Answer: The only amount that will be taxed is the withdrawal from your self-directed RRSP account. Neither the proceeds nor the capital gains from your mutual fund sale are taxable inside your RRSP.
There is no impact on your taxable income if you sell or close a fund in your RRSP account, provided you do not withdraw the money from the account. If you use the money to purchase another fund in the same RRSP account, regardless of the type of fund purchased, the transaction is not taxable.
Sylvia Lim
Question: Approximately five years ago I over-contributed to my RRSP by about $2,000 and have been carrying that forward ever since. I am 67 and there is no likelihood of my earning enough income to be able to balance out that overcontribution. What happens to it when I turn 69?
Answer: By Dec. 31 in the year you turn 69 your RRSPs will mature. You can do one or any combination of the following: transfer your RRSPs into a registered retirement income fund (RRIF), convert them to an annuity, or collapse your RRSPs and take a lump sum. When you go the RRIF or annuity route, no taxes are withheld. If you collapse the RRSP, there are withholding taxes plus you must declare the sum you receive as income.
Just don't let the deadline pass without doing anything. Otherwise, the government will automatically include the funds in your RRSP as income and there is no recourse.
As for the overcontribution of $2,000, if the RRIF option is chosen the overcontribution will simply roll over to the RRIF and continue to grow tax-deferred. If the annuity option is selected, the $2,000 will be used to purchase the annuity. The problem with this scenario, however, is that if the $2,000 is never deducted because you don't foresee any RRSP contribution room opening up, then you will be essentially paying tax on something you never got a tax deduction for -- a form of double taxation. That being said, you have had the benefits of tax-free compounding inside the RRSP (and by extension RRIF or annuity).
However, it is highly unlikely that the tax benefits of having the overcontribution tax-sheltered can outweigh the double taxation of this amount.
But do not give up deducting the overcontribution.
You could find you have some earned income in later years, perhaps from consulting income or rental income, which can create contribution room. While you can't contribute to an RRSP past age 69, you can still take the unclaimed $2,000 deduction at any age.
Jamie Golombek
Question: I had an RRSP before I got married -- but now that I am married, can I transfer my RRSP to my spouse or do I need to open a spousal RRSP?
Answer: You can't transfer personal RRSPs to another person -- including your spouse. The only way your funds could move to your spouse is through death or divorce.
But you can open a spousal RRSP with your spouse as the annuitant. You could continue to contribute to your personal RRSP and to a spousal one as long as you don't exceed your allowable RRSP limits for that tax year. The goal of spousal RRSPs is for both partners to achieve relatively equal income between spouses in retirement.
The thing about a spousal RRSP is that although your spouse is the annuitant, you still get the tax deduction. But if your spouse withdraws funds from the spousal RRSP, the money is taxed at his or her marginal rate. Beware the three-year clawback rule. It states that in any year your wife withdraws from the spousal plan, the amount of contributions you made for the current or preceding two years would be the first dollars considered by CRA as withdrawn -- and these amounts would be taxed in your hands, not hers.
Gigi Suhanic
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