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Registered and Non-Registered Investments

What is the difference between registered and non-registered savings plans?

Registered savings plans (RRSPs) are defined in the federal Income Tax Act and registered with Canada Revenue Agency (CRA). They allow you to save for your retirement without paying taxes on the principle or interest until you withdraw the funds from the plan.

However, there are restrictions on the type of investments, the duration, and the amount you can contribute to a registered plan. Non-registered savings plans have no restrictions. You can save any amount and the plan can hold any kind of investment. However, you must pay tax on the plan's investment income as you earn it.

Types of Registered Plans

RRSP stands for Registered Retirement Savings Plan. It is one of several registered savings plans set up under the Income Tax Act (ITA 146-(1)) and registered with the Canada Customs and Revenue Agency.

An RRSP is a formal contract between an individual, known as the annuitant and the issuer of the plan. The annuitant or his or her spouse or common-law partner contributes funds to the plan and uses the funds to provide a retirement income when the plan matures.

In addition to providing retirement income, RRSP`s also provide three key benefits:

  • You receive an immediate reduction of taxable income -- you can deduct contributions to an RRSP from your total income subject to certain limits.
  • You receive tax-sheltered growth -- you do not pay taxes on contributions and earnings for as long as funds remain within the RRSP. This means you have more to invest and your investments grow faster.
  • Withdrawals from an RRSP are taxed as income, both the original investment and the growth on the original investment. Since payments do not usually commence until after an individual has retired, the taxpayer`s marginal tax rate is typically lower than during his or her peak earning years.

RRIF stands for Registered Retirement Income Fund. A RRIF is essentially a mirror of an RRSP, it can hold the same types of investments and provide the same tax-sheltered growth. Similar to an RRSP, you control the investment decisions.

However, RRIFs are designed to distribute assets in the form of retirement income. You change your RRSP to a RRIF when you want to receive retirement income.

While there is no minimum age for starting a RRIF, you can postpone establishing one until you are 71. All RRSP`s must be converted to a RRIF by the time you reach age 71. Once you transfer your RRSP to a RRIF, you must withdraw a minimum amount each year, specified by a formula based on your age. In the initial year of a RRIF, you are not required to withdraw a payment. You may delay the withdrawal until the following year.

Since there is no maximum withdrawal limit, you are free to withdraw any amount you wish. However, you must include all RRIF payments as income for tax purposes.

LIF stands for Life Income Fund. A LIF is essentially a RRIF that receives funds from a locked-in retirement account, and provides for a life income by restricting both the minimum and maximum withdrawals from the account. In some provinces the balance remaining in the LIF must be used to purchase a life annuity by the end of the year in which the annuitant reaches age 80.

The Income Tax Act treats a LIF the same as a RRIF. However, in accordance with the requirements of pension legislation, a LIF includes a maximum withdrawal limit, designed so that the maximum amount withdrawn will not impair the annuitant`s ability to purchase a life annuity by age 80. If the minimum withdrawal required under the Income Tax Act exceeds the maximum withdrawal under the pension legislation, the taxpayer must still withdraw the minimum amount.

RESP stands for Registered Education Savings Plan. RESP`s are attractive investment vehicles for parents, grandparents, and others interested in financing a child`s post-secondary education.

As the subscriber of the plan, you contribute to an RESP for the benefit of your designated beneficiary(ies). The lifetime maximum contribution per beneficiary is $ 50,000. Contributions to an RESP are not tax deductible; however, any income earned in an RESP is tax-sheltered for as long as the funds remain in the plan.

On the first $500 you save in your child’s RESP, the Canada Education Savings Grant will give you:

  • up to $200, if your net family income is $37,885 or less;
  • up to $150, if your net family income is between $37,885 and $75,769, or;
  • up to $100, if your net family income is more than $75,769.

The family net income amounts are updated each year based on the rate of inflation. Income amounts shown are for 2008.

When you save more than $500 annually, the Canada Education Savings Grant could add up to $400 on the next $2,000. The most CESG your child can receive is $7,200. This lifetime limit also applies to each individual child when the CESG money is shared with other beneficiaries as in a family RESP.
You can view a Government document on Education Savings to get more information.

Guaranteed Investments Certificates (GIC`s and GIC-RRSP`s)

Guaranteed investment certificates provide security of your principle and guaranteed returns on your investments. These guaranteed investments can be purchased in the form of short term (30 to 364 days) or long term (typically 1 to 5 years). The rate quoted on the day you invest in a GIC is the guaranteed rate for the duration of the term selected. TODAY`S RATES!

The minimum amount required to invest in a GIC is typically $ 500 or $ 1000.

We offer rates from over 40 financial institutions. These institutions are either CDIC (Canada Deposit Insurance Corporation) insured or DICO (Deposit Insurance Corporation Of Ontario). This means that your deposits are insured up to $ 100,000.

Please see the following websites or contact our office for additional information.

Daily Savings Accounts

Interested in earning higher interest on your savings or chequing account? We can assist you with setting up an account with Manulife Bank. Manulife typically offers significantly higher rates than their competitors and convenient online transactions. Call us today!

Tax-Free Savings Accounts (TFSA)

What is a TFSA?
The TFSA allows individuals to invest after-tax dollars into an account that grows tax free. There are no tax deductions for contributions to a TFSA and withdrawals are also tax free.

While the TFSA is similar to an RRSP, the contributions are not tax deductible, but the income earned in the account and any reported losses or gains, are not considered taxable income. In addition, you may make withdrawals at any time without being subjected to paying withholding tax.

Are there any contribution limits?

There is a maximum contribution limit per year for a TFSA. Although you may have TFSA`s at various financial or insurance institutions, the maximum amount applies to all of the accounts.

As of January 1, 2009, the annual contribution limit is $5,000. Unlike an RRSP the contribution limit is not based on your earned income. Any unused contribution room can be carried forward indefinitely. For example, if you contribute $ 3000 in 2009, then your contribution limit for 2010 would be ($ 5,000 - $ 3,000) $2,000 plus $ 5000 (2010 limit) for a total of $ 7000.

Withdrawals will not result in lost contribution room. The amount withdrawn will be added to the contribution room for the following year.

For example:
If you contribute $ 5,000 in 2009 and $ 4,000 in 2010 and then make a withdrawal later in 2010 of $ 2,000, your total contribution room for 2011 would be $ 8000.

Each year the CRA will advise you of your contribution limits on your Notice Of Assessment, the same as they do for RRSP contribution limits. The TFSA and RRSP are completely separate from each other and therefore have no impact on the limits for each plan.
There is more information available on the Government's website.

Segregated Funds -- Insurance-backed investments

Segregated funds are investment products that are similar to mutual funds but offer numerous benefits over mutual funds. The term, "segregated", refers to the fact that, unlike the accumulating funds for some insurance policies, these funds are kept separate or segregated from the assets of the insurance company.

There are important differences that distinguish segregated funds from mutual funds:

  • Segregated funds have maturity and death benefit guarantees that limit potential losses
  • Segregated funds are held under an insurance contract and consequently, they are generally not subject to the claims of creditors. This is an important consideration for some investors and for self-employed individuals.
  • Segregated funds allow you to name a beneficiary and therefore are exempt from probate fees
  • There is no public record at death of any funds held within an insurance company
  • Deposit protection provided by Assuris
  • Ability to lock-in gains and therefore capture the growth
  • Tax benefits -- capital gains versus interest income