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An Introduction to Investments

What’s the best way to grow your money and start investing? Understand the difference between TFSAs, RRSPs, and other investments to reach your financial goals.

 

Between the two, there's no "wrong" option, but knowing the difference can help you optimize for what you're saving for.

Canadians are fortunate to have two options for saving: Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP).

Tax-Free Savings Account (TFSA)

A Tax-Free Saving Account is an account in which investment or interest income is earned tax-free. Since contributions are made from funds that have already been taxed, there is no tax payable when money is withdrawn from a TFSA. There are a few rules that are important to understand when contributing to a TFSA:

  • TFSA contribution room accumulates every year.
  • When you contribute less than the maximum annual contribution, the difference is referred to as the unused contribution room. Contribution room is cumulative—that is, any unused contribution room at the end of the year is carried over to the next year.
  • If you withdraw funds from your TFSA, you do not lose contribution room. The amount withdrawn is added back to your contribution room in the following year.

TFSA ELIGIBILITY

Any individual who meets the following three requirements is eligible to open a TFSA:

  • Resident of Canada, and
  • 18 years of age* or older, and
  • Holds a valid social insurance number. There is no maximum age limit to open or hold a TFSA and a person may hold more than one TFSA account.

*In British Columbia, New Brunswick, Nova Scotia, Newfoundland & Labrador, the Northwest Territories, Yukon and Nunavut, the holder must be 19 years of age or older.

TYPES OF TFSA INVESTMENTS

A TFSA may contain any number of eligible investment vehicles, including deposit-type savings accounts, mutual funds or self-directed plans. Your credit union investment specialist can help you choose the right one based on your goals and your tolerance for investment risk.

Registered Retirement Savings Plan (RRSP)

A Registered Retirement Savings Plan is a savings plan designed to both encourage and help Canadians save for retirement. Contributions to an RRSP are tax deductible, meaning that when you make a contribution to an RRSP, you are reducing your taxable income by the amount of money you contribute to the plan. If you withdraw funds from an RRSP, the amount withdrawn will be added to your income in the year of the withdrawal and taxed at your marginal tax rate. As a result, RRSPs are normally treated as long-term investments.

TYPES OF RRSP INVESTMENTS

Almost any type of investment can be held in an RRSP account. Two common investments are Variable Rate Deposit and Fixed Rate GICs.

  • Variable Rate Deposit: This type of deposit ensures your investment return keeps pace with current interest rate trends. Interest rates are reviewed and adjusted regularly by your credit union. This option is beneficial if you expect interest rates to rise.
  • Fixed Rate GICs: A Fixed Rate GIC locks in the interest rate you will receive. This provides the security of knowing your rate of return is guaranteed for a fixed period of time. You can choose the term that best fits your financial plan.

Mutual funds and other market investments are also options for RRSP accounts. Speak with your credit union investment advisor to discuss which investment vehicle is right for you.

CREDIT UNION RRSP LOANS

Sometimes it’s tough to come up with the cash before the RRSP contribution deadline. Your credit union can help with a convenient RRSP loan. We will also show you how the cost of borrowing can be offset by your tax savings.

Which One is Right for You? TFSA or RRSP?

The truth is, it’s not always either/or. TFSAs and RRSPs can be used together to build a savings plan that’s right for you. We recommend speaking with a credit union investment advisor, who can review your current and projected financial circumstances and help you build a personalized retirement savings plan. When building your retirement plan, you will want to consider:

Will you want, or need, to use a portion of the savings before retirement?

If so, investing funds in a TFSA account is a good option. Funds withdrawn from a TFSA will not be taxed and you do not lose your contribution room. You can re-contribute the amount withdrawn in a future year. If funds were held in an RRSP and withdrawn, they are taxable at your marginal tax rate for the year.

Do you want to build savings as quickly as possible?

The TFSA contribution limit ($5,500 in 2018) is not determined by income but rather is the same for all who qualify for a TFSA. The contribution maximum for an RRSP is based on income and therefore varies per person. For the 2018 taxation year, the maximum RRSP contribution is 18% of your 2017 earned income to a maximum of $26,230. This means, depending on your income, you may have greater contribution room in an RRSP than in a TFSA, allowing you to accumulate savings faster.

Will your marginal tax rate in the future be higher or lower than it is today?

If you expect your marginal tax rate to be lower in the future, then an RRSP may be a better savings option. If you expect your tax rate to be higher when you are in your retirement years, then investing in a TFSA may be the better choice. In some situations, moving funds from your TFSA to your RRSP makes sense. For example, if you are young and starting out in your career, you may want to save inside a TFSA while your marginal tax rate is low. Once your tax rate is higher you can transfer the funds to an RRSP, and thereby generate a larger tax refund.

MONTHLY DEPOSITS - CONVENIENCE THAT MAXIMIZES YOUR RETURNS

Maximize your money by making monthly deposits to your RRSP and TFSA. This approach makes it easier to budget for contributions, and has the added benefit of earning more tax-sheltered interest or investment income each and every month. In the long run, this can make a real difference in the growth of your investments. Speak with your credit union about setting up an automatic funds transfer today.

Building a Savings Plan

Your credit union can help you build a financial plan based on your stage of life, your financial needs and your savings goals.

Did you know there is a way to earn investment income tax-free? A TFSA is a great way to let your savings grow, tax-free. Use them to save up for anything your heart desires, or just for the sake of saving.

TFSA Eligibility

Any individual (not trusts or corporations) who meets all of the following criteria is eligible to open a TFSA:

  • Resident of Canada, and
  • 18 years of age* or older, and
  • Holds a valid social insurance number (SIN).

There is no maximum age limit to open or hold a TFSA and a person may hold more than one TFSA. * In British Columbia, New Brunswick, Nova Scotia, Newfoundland & Labrador, the Northwest Territories, Yukon and Nunavut, the holder must be 19 years of age or older.

TFSA Contribution Limit

Contributions to your TFSA are not tax deductible, and may only be made by you, the holder. The amount you may contribute each year is set by the government. In 2018, the maximum contribution limit is $5,500. The total TFSA contribution room as of 2018 is $57,500

MAXIMUM CONTRIBUTION ROOM CALCULATION

The maximum contribution limit is calculated as follows:

Unused contribution room at the end of the previous year + Contribution limit for current year + Withdrawals made in the previous year = Maximum contribution limit

You are responsible for knowing your TFSA contribution limit.

You can contact the CRA for up to date information on your TFSA transactions, your contribution limit, as well as your contribution history:

  • Access My Account on the CRA website
  • Call 1-800-267-6999 to reach the Tax Information Phone Service (TIPS)

Unused TFSA Contribution Room

When you contribute less than the maximum contribution limit, the difference is referred to as ‘unused contribution room’. Unused contribution room accumulates each year and is carried forward indefinitely, allowing you to ‘catch up’ in future years.

Excess TFSA Contributions

It is important to keep track of your contribution room. If you contribute more than allowed to your TFSA, you will be penalized by the Canada Revenue Agency (CRA). An excess contribution will result in a 1% per month penalty tax on the highest excess amount in each month. The tax applies until the entire excess amount is withdrawn or absorbed by new contribution room in subsequent years. The CRA will advise you when an excess contribution occurs.

Qualified Investments

The types of investments eligible for TFSAs are restricted under the Income Tax Act. Options available through credit unions vary and may include:

  • Term deposits and GICs.
  • Variable interest savings accounts.
  • Credit union shares
  • Index-linked term deposits.
  • Mutual funds.
  • Publicly traded securities.
  • Bonds.

There are restrictions on holdings in a self-directed TFSA. Entrepreneurs and small business owners should check these rules carefully, particularly regarding investments in companies or ventures where you hold a significant financial investment (generally more than 10%) or where there is a nonarm’s length relationship. There are punitive tax measures that discourage holding non-qualified/prohibited investments and asset transfer transactions (swap transactions).

TYPES OF TFSA INVESTMENTS

A TFSA may contain any of a number of eligible investment vehicles, including deposit-type savings accounts, mutual funds or self-directed plans. Your credit union investment specialist can help you choose the right one based on your goals and your tolerance for investment risk.

Withdrawals

One of the great advantages of TFSA accounts is that you can withdraw funds at any time (may be subject to investment terms). Withdrawals are not subject to income tax, and do not impact eligibility for federal income tested benefits and credits (e.g. OAS, GIS, Age Credit, GST, EI, Canada Child Benefit, working income tax benefit). Withdrawals from TFSA accounts will increase your contribution room in the following year, but not for the year of withdrawal.

TRANSFERS

  • TFSA funds are transferable to another TFSA owned by:
  • You, under a direct transfer.
  • Your spouse/common-law partner (CLP), on your death.
  • A former spouse/CLP, on relationship breakdown.

NOTE: Where a transfer from one TFSA to another TFSA for the same holder is not direct, the transactions may result in an excess contribution situation. A transfer due to death will not affect the TFSA contribution room of the surviving spouse/CLP (see Death of a TFSA Holder for restrictions). A transfer due to relationship breakdown will not affect the TFSA contribution room of the holder or former spouse/CLP.

Death of a TFSA Holder

You may appoint your spouse/CLP as successor holder and beneficiary of your TFSA. Upon your death, your spouse/CLP will become the holder of the TFSA.

Where your spouse/CLP is the designated beneficiary and is not specifically appointed successor holder, any income/gain earned after your death will not be tax sheltered. Your spouse/CLP may contribute an amount, not exceeding the fair market value (FMV) at date of death, without impacting his/her unused TFSA contribution room. The contribution must be made before December 31 of the year following the year of death. In addition, within 30 days of making that contribution or at a later time as permitted by the CRA, your spouse/CLP must provide the CRA with a completed RC240 Designation of an Exempt Contribution Tax-Free Savings Account (TFSA).

You may designate someone other than your spouse/CLP as beneficiary of the TFSA, or you may choose not to name any beneficiary at all. In either circumstance, the fair market value of the TFSA at date of death are tax-free; however, any increase in value of the TFSA after date of death becomes taxable income either of the beneficiary or of your estate, depending on the circumstances and the date of payments.

NOTE: Where, at the time of your death, you reside in Quebec, your spouse/CLP cannot become the successor holder of your TFSA. A designation of beneficiary is also not recognized in Quebec.

Non-resident Holder

In the event you are no longer a resident of Canada, the following rules apply:

  • The TFSA may remain open.
  • Contribution room will not accumulate.
  • If you make a contribution while you are a non-resident, you will be subject to a 1% per month penalty tax for each month until the contribution is withdrawn or you become a resident of Canada.
  • Withdrawals will increase contribution room; however, you cannot take advantage of the increased contribution room until you become a resident of Canada.

If you subsequently become a resident of Canada, contribution room will commence accruing and you may make future contributions.

Surname, SIN, Birthdate Must Match CRA Records

The CRA will register your TFSA when your surname, SIN and birthdate match the CRA records. If one of these items does not match the CRA records, your TFSA cannot be registered, meaning interest earned on contributions is not tax sheltered.

Having a beneficiary matters because it helps your loved ones navigate tax implications of your estate, and gives you peace of mind that you're leaving all your assets as you intended to.

What to name a beneficiary for:

It's a good idea to name a beneficiary for your TFSA, RRSP, and/or RRIFs.

Key considerations

  • You can have more than one beneficiary
  • It's a good idea to consult a tax expert
  • There can be complexities with naming beneficiaries who aren't adults
  • If your beneficiary predeceases you, their children don't automatically take their place
  • Keep provincial and federal regulations in mind when you're planning your estate

Learn more about beneficiaries (PDF)

Worrying about making more money is one thing, but you should never worry about the money you already have.

That's why The Financial Services Regulatory Authority of Ontario (FSRA) protects insurable deposits held with Ontario credit unions. Deposits held in non-registered accounts in Canadian currency payable in Canada are insurable up to a maximum of $250,000. So you can relax. Your money is safe here.

So, what happens if a credit union goes out of business?

  • Payments for insurable deposits are made as soon as possible;
  • The payment includes principal and interest up to $250,000 for insurable deposits held in non-registered accounts aggregated together and unlimited for insurable deposits held in registered accounts;
  • Borrowers are responsible for repayment of outstanding debt until paid in full and will be notified by letter from DICO with specifics.
Questions? Learn more about deposit insurance (PDF)
 

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