cheepnis

a bit of financial advice please.

my situation is that i have a twp. I intend to eventually applying for pr but at this stage i dont know for how many years in the long term i'd remain in canada.

as savings rates here in canada are pants pretty much across the board i am looking to buy some stocks.

i maxed out my tfsa account already and was wondering whether to use the year's unused rrsp contribution and invest in a self-directed rrsp.

ISAs i had no problem getting my head around but i am not too clear on the tax pros/cons of investing in/out of an rrsp.

rather than post on redflagdeals i am curious to know what the expats' perspective is.

iaink

I dont think an RRSP is even an option on a work permit, you have to be a permanent resident unless I am mistaken.


You can always invest in mutual funds anyway if you are looking for a decent return on investment, but you wont have the tax shelter benefit of a registered plan.

Rob_999

If you're paying tax you're entitled to set up a RRSP. I did on a temp work permit before getting PR.

JonboyE

The big advantage of RRSPs is that, as long as you stay within your contribution room, you get a tax refund on your contribution at your highest marginal tax rate.

Within the RRSP all funds are sheltered from tax, and over a life time the compounding effect of the tax free growth/income can be considerable.

The downside is that, unlike TFSAs, when you withdraw funds they are taxable. If you use an RRSP to save for retirement as intended you effectively defer tax from the years you are earning and paying at high marginal rates to the years when you are retired and paying tax a much lower rate. If two spouses pay tax at different rates you can use an RRSP to split income.

You can also "manage" pre-retirement withdrawals from an RRSP, such as withdrawing in a year you otherwise have limited income, to ensure it is taxed at a lower rate.

The general advice is to use the TFSA to save up for stuff you will buy in your working years - like a cottage - and use an RRSP to save for retirement. If you can afford it max out both because they are the best tax savings deals available to ordinary mortals.

If you leave Canada the money can stay protected within the RRSP. However, if you withdraw funds while a non-resident you will be subject to withholding tax at 25% (or if you are in a tax treaty country, whatever the tax treaty specifies).

iaink

I stand corrected then...


I was told I couldnt do it when I was on a TWP, but that could well have been bank incompetence


What would happen to RRSP funds if a temporary worker (or even a PR) ended up returning to the UK? Would there be a tax penalty for moving them or is it OK as long as they are transferred to another tax sheltered account overseas?

cheepnis

thanks for that jonboy et al.

i will do my own research but while here i was wondering which online brokers have you been happiest with?

(i loved the clarity and service of hargreaves landsdown back in the uk...)

PMM

Hi

You may wish to think about stocks/mutual funds in an RRSP. As dividend income outside an RRSP gets favourable treatment, i.e. only 50% is taxable, while if it is in an RRSP, when you tax it out it is fully taxed.

triumphguy

However, you can use the dividends to reinvest in new units inside the RSP each time there's a distribution, and often dividend paying units/funds/stocks are often less volatile than growth stocks/funds.

RSP's give you a bit of a tax break up front, but the government gets it back in spades once you transfer your money from an RRSP to a RRIF (registered retirement income fund). The only real benefit of an RSP is the tax deferred growth - and the habit or discipline of regularly investing (but you can have that with any savings/investing plan).

gryphea

Iain

You can only put into an RRSP based on the previous years income in canada. So for the first tax year on a TWP you cannot put into an RRSP- but the second one you can.

Don't know about transfer- we just always assumed if we left canada we would leave it here until retirement.

gryphea

Is all dividend income rated 50%?

Is that also true of shares in the company you work for?

JonboyE

Obviously it depends upon province, but in most provinces the highest marginal tax rates for capital gains is around 22%-23%, dividends around 30%, and all other income around 44%-46%.

The rates for Alberta are a bit lower http://www.taxtips.ca/taxrates/ab.htm

It is the same if you own shares in your employer.

gryphea

Thanks JonboyE

Don't really understand the table

It says:
Marginal tax rate for dividends is a % of actual dividends received (not grossed-up amount). AND then it gives values of the income brackets-4%, 6%, 12%, 16%

So If I read it right then the most you ever pay is 16%, if you earn less than $40K they give you money on your dividends?

So I presume the dividends count towards your total income and then are taxed on the band accordingly?

Sounds like good deal to me?

OH has been asked to be a shareholder of a canadian company from MAy next year. You get no dividend for a year and then you get (what has been in the past) a very healthy dividend. Just trying to work out how it affects us tax wise. I have also heard if you get a line of credit to buy the shares- that the interest is tax free?

Think from next year we need to be getting ourselves an accountant!

Yoong

The interest from the line of credit you purchase to buy shares is tax deductible (not tax free).Can be interests or dividends from Canadian
companies however shares for capital gains do not qualify for the tax
deduction.

Around Jan-March,the company sends T5-Statement of Investment
Income to you , on the statement there are boxes with numbers .
I have been investing on dividend stocks for years using borrowed
money and inspite of the bear markets ,the dividends are paid on time.
The energy companies cut their dividends but they were very generous
during the boom time.The banks dividends remain the same.
Sorry I don't know the marginal tax rate for dividends.The tax software did the
calculations for me.

http://www.cra-arc.gc.ca/tx/ndvdls/t.../menu-eng.html
Good luck.
Yoong

cheepnis

The responses here gave me a lot to think about, thanks.

After some research i found some pertinent links and ideas such as this which says:

"For this first year that it’s available, I actually do plan to open a high interest savings account in my TFSA to set up an emergency fund, but this is not the most efficient use of a TFSA as a tax strategy.

Since you do not pay taxes on your withdrawal, it is better to have high yielding investments in your TFSA since the expected larger sum will be tax free. With this logic, placing lower yielding investments like bonds and GICs into RRSPs make more sense. You’ll still get the same tax refund for the dollars you put in and when you have to pay tax at retirement it won’t be as high as with stocks or REITs."

though the often quoted taxtips site seems to say the opposite about what should stay in or out.

this article i found on cbc says:

"Consider over-contributing to your RRSP by the permitted $2,000 penalty-free amount," suggests the accounting firm Ernst & Young. "You won't get a tax deduction for the extra amount, but your earnings on it will grow tax-free."

like i said in my first post, i am kind of unsure at this stage about my long term future here in Canada. I found an article on cbc about "Dipping into RRSPs before retirement", as i was wondering if they are the 2nd best place to park cash for a few years having maxed out this years tfsa allowance.

does this sound reckless?

and regarding brokers, i was keen to steer clear of the big banks and questrade doesnt seem all that fab judging by feedback on rfd. So i arrived at optionsxpress. thinkorswim has gotten huge praise south of the border (bought out by TD earlier this year) though its canadian operations have only just started and are very limited right now.

Lord Vader

Keep in mind that in 3 weeks you will be able to throw another 5k into your TFSA in addition to any room you may have left over from 2009 and keep in mind that you are allowed to make a contribution to your RRSP for the 2009 tax year up to the first 60 days into 2010.

If you are unsure how long you are staying in Canada, I would make sure you max your TFSA first and be less concerned with the RRSP as this is primarily designed for retirement while the TFSA could be used for any purpose. You can always move money/investments from the TFSA over to an RRSP and receive an income deduction for tax purposes as long as you have the contribution room in your RRSP available. If you take money out of your TFSA you will regain the contribution room in the TFSA for the money that is withdrawn the following year after the withdrawal in addition to the new 5k in TFSA contribution room you are allowed each calender year.

If you are staying for the long term and you are able to contribute to an RRSP and it would result in a tax refund for you, then contribute to the RRSP, take the tax refund and place it in your TFSA if you have the room available, if not use the tax refund to pay down your mortgage or other debts or place it into your RRSP to use as a contribution for the 2010 tax year.

As far as which investments to hold in your TFSA or RRSP, it ultimately depends on your personal risk tolerance and the intended use of the money. Money that you plan on using in the shorter term should not be viewed with the same risk level as money to be used in the longer term regardless of if it is in a TFSA or an RRSP or neither. Generally speaking and assuming that someone has a longer term investment horizon and has an investment portfolio of mixed financial assets, then holding the higher risk investments with the higher potential return in the TFSA would make sense while holding interest bearing investments in the RRSP would make sense. You should talk with someone to go over your own individual circumstances because as with anything else, no size fits all. You should have a solution tailored to your personal circumstances.