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SAVINGS PLANS
 
RRSP Savings
 

R.R.S.P.'s

  • Monthly deposits or single lump sums.
  • Loans for RRSP including catch up loans.

Segregated Funds Offers:

  • A place to invest in G.I.C.s, bonds, equities, income.
  • All account types (RRSP, Cash, TFSA, RESP, Non-registered).
  • All or 75% principle protection.
  • Probate free.
  • Over 300 funds to diversify portfolios.
  • Contractual guarantees.
  • Strategic asset allocation.
    • Diversified globally.
    • Diversified by industry.
    • Diversified by fund managers.
    • Diversified by asset class.
  • Transfers, severance packages locked in RRSPs managed as above.
  • Investment advice and regular checkups.
 
 

Derivatives Reviewed: How International Investments can be 100% RSP-eligible

Imagine a huge rock lifted up in the air and balanced on the end of a playground teeter-totter. Any reduction in the weight on the bottom end and the rock may come crashing down. It may be dangerous, but it's not the rock's fault. It's because the rock is leveraged.

Recent press attention has focussed on isolated cases of large investment losses through the mismanagement of leveraged derivatives. This has created a common perception of derivatives as scary and dangerous, a perception which contains more fiction than fact. It's not the fault of derivatives, it's because they were leveraged.

Generally, any investment that derives its value from underlying stocks, bonds, or market indices is called a derivative. The use of derivatives by Canadian mutual funds is strictly regulated, both by type of derivative and by the manner in which derivatives are used. Mutual funds may trade in derivatives only with a counterparty that has an approved credit rating. As well, mutual funds cannot use leverage or borrow money to buy derivatives.

The careful use of derivatives gives CI investors access to outstanding investments across the globe while still retaining 100% RSP eligibility.

Several of C.I.'s funds use derivatives to:

  • Obtain or modify exposure to equity and fixed income securities. For the S&P 500, for example, it is more reasonable to buy a derivative based on the whole index than buying all 500 stocks.
  • Decrease risk. A fund may use derivatives to lock in an exchange rate and reduce the risk of currency fluctuations. This is called hedging, locking in a future buying or selling price in times of volatility, and is an important component of sound portfolio management.
  • Increase portfolio liquidity and enhance returns. Derivatives may have lower custodial and transaction costs which enhance returns.

One type of derivative used by C.I.'s international RSP funds is a futures contract. This is simply an obligation to buy or sell a specific instrument at a specific price on a specific date. Futures are not considered foreign content, and so they are 100% RSP eligible. Also, because every CI fund must set aside enough cash in Canadian dollars to equal the contract exposure of the future, they are never leveraged.

 
 
Retirement Savings Opportunities
 

Share with your Spouse - and save on taxes

 
 

With our progressive tax system, the more money your earn, the more you pay in taxes. This is true for all sources of income, whether earned now or as retirement income from your tax-sheltered RRSP savings. But if you split your RRSP contributions with your spouse now, you can reduce the combined income tax bill later.

To illustrate the benefits of income splitting, consider the following example:

Income Taxes Chart

Couple A has a total household income of $100,000; all income is earned by one individual. Couple B also has a household income of $100,000; however, in this case, both partners are earning $50,000 each. At the end of the year, Couple A could pay as much as $40,500 in income taxes, while Couple B will pay less than $33,000: a saving of almost 20%!

Although the Income Tax Act contains a number of measures to limit complete income splitting, RRSPs provide an excellent opportunity for couples to split their sources of retirement income. A spousal RRSP is simply an RRSP that is set up by a taxpayer in the name of his/her spouse. The contributor receives a tax deduction for any contributions made, while the spouse controls the plan and receives the benefits at retirement.

 
 
 
  Spousal plans are especially effective for single income households and for couples earning different levels of income. They are also effective for a taxpayer who is 69 or over with earned income and a spouse younger than age 69. This is because contributions can be made until the spouse reaches 69 -- stretching the contribution time for the older income earner. So, however you choose to divide your contributions, the name of the game is to ensure that when it comes time to draw income, you come as close as possible to having equal income from the two spouses. This can benefit in the short-term as well, if it means that the higher income earner gets the deductions on his/her income right away -- in effect, lowering the household tax bill now, and in the future.  

Some restrictions to Spousal RRSPs:

  • A spousal plan does not increase contribution room -- it simply provides an avenue to split future retirement income.
  • Contributions to a spousal plan plus the contributor's own plan cannot exceed an individual's total RRSP contribution limit.
  • Common-law spouses are eligible as long as the two individuals are of the opposite sex and have lived together for at least 12 months, or together are the parents of a child.
  • A withdrawal within three calendar years of contributing to any spousal plan will be taxed at the contributor's tax rate (This does not apply to minimum withdrawals from a RRIF or annuity, or after divorce from, or death of, the contributor). After this period, it is taxed according to the spouse's tax rate.
 
RESP
 

What is a Registered Education Savings Plan (RESP)?

A RESP is an Education Investment Plan that allows you, as the subscriber, to accumulate money in an investment portfolio for your beneficiary's (usually child's), post-secondary education. The withdrawals can be used towards you beneficiary's tuition, books and living expenses.

Two significant tax benefits come about because of the tax treatment of a RESP. They are:

  1. A RESP allows contributions to grow by compounding in a tax-sheltered environment until withdrawn.
  2. Since the withdrawals are made in the name of your beneficiary, and spread out over a number of years, your lower income beneficiary pays little, if any, income tax.

When the student begins to use the RESP for education purposes, the investment income from that vehicle becomes taxable in their hands.

However, because the student typically has little other income, or is taxed at a very low tax rate, he or she effectively pays little or no tax on the RESP income.

Why an RESP?

Higher education is quickly becoming a high price necessity for a child's future success. According to the Canadian Federation of Students, the current cost for one year of an undergraduate program, including living expenses, is about $10,000. By the time a child, born this year, reaches the age of 18, that one year of study will rise significantly in cost. Estimates in Head Start, a new book by Gordon Pape and Frank Jones, shows that in 15 to 20 years students may well need $100,000 to $150,000 just to complete a basic four year undergraduate degree. Parents and grandparents want what is best for their children's/ grandchildren's futures. They, however, may not be fully prepared for the future cost of post-secondary education for that child.

Just as an individual would save for retirement, contributing to a child's RESP is an excellent way to save for that post-secondary education.

RESP Contributions

The maximum amount that can be contributed for any beneficiary is $4,000 per year, up to a lifetime limit of $42,000 per beneficiary. This maximum applies to each beneficiary and not to each subscriber who contributes to the plan. So, for example, if a parent and a grandparent each wanted to set up a RESP for their child/grandchild, the combined contribution of both subscribers, in any given year, cannot exceed $4,000 and the lifetime limit cannot exceed $42,000.

The Canada Education Savings Grant (CESG)

Effective January 1, 1998, the government will provide a Canada Education Savings Grant that gives parents and others even greater incentive to save through the use of a RESP. The grant provided by the government will be equal to 20% of contributions made to a RESP plan, on the first $2,000 in annual contribution for each child up to the age of 18. The maximum annual grant will be $400 per child. A family that has been unable to make contributions for one or more years may catch up in later years. In this case, the CESG will be paid on contributions up to $4,000 per year. The maximum lifetime grant per beneficiary is $7,200 (20% x $2,000 x 18 years).

The Canada Education Savings Grant will be given directly to the RESP promoter chosen by the subscriber, to be invested in the beneficiary's plan. The grant itself is not included in calculating the annual and lifetime RESP contribution limits.

The introduction of the Canada Education Savings Grant means that investments in a RESP will automatically receive a 20% rate of return on all contributions up to the first $2,000 per year. This automatic 20% rate of return, provided in the form of a grant by the government, makes RESPs a very attractive savings vehicle for your child's education.

The CESG and the investment income it generates will be paid to the student while he or she is enrolled in eligible full-time, post-secondary education or training programs. If the child does not pursue education or training, the grant must be returned to the government. The investment income can be transferred to the subscriber's RRSP under certain conditions.

 
     
Top Marks for RESPs
 

As investors, you already know the importance of saving. Of all the things that are worth saving for, a child's education is certainly near the top of the list.

But in this era of government cutbacks, the cost of post-secondary education is skyrocketing. The Canadian Federation of Students estimates that a 4-year degree could cost over $67,000 by the time today's 3-year-olds reach university. To make saving easier, the federal government created the Registered Education Saving Plan (RESP).

RESPs let you contribute up to $4,000 per year towards the education of a beneficiary. The maximum contribution you can make during the plan's 25-year maximum life span is $42,000 for each child. Contributions are not tax-deductible, but the money grows tax-free until it is withdrawn. At that time, tax is charged to the student, typically at a very low tax rate.

Alberta provides an RESP savings grant to residents (proof of residency required). This grant provides a single contribution of $500 to your RESP.

Your application will require the child to have a SIN #. We have application packages that can simplify this process through IAPLife.

The Canada Education Savings Grant (CESG) makes RESPs an even more attractive way to save. Each year until the beneficiary turns 18, the federal government will add 20% to the amount you contribute for each child, to a maximum grant of $400 per child per year. It is actually possible to collect a total of $7200 in tax-free grants.

If the beneficiary elects not to go to college, you can name another beneficiary, use u to $50,000 of the RESP to fill unused RRSP contribution room, or you can withdraw the funds in cash, taxed at your marginal rate and less a 20% penalty tax.

RESPs have no foreign content restrictions, so contributors are free to invest in virtually any segregated fund they choose. To find out what RESPs can do for you and for your children contact your financial advisor and visit us at Industrial Alliance Pacific.

 
 

 

 
Good Things to Know (opens in new window)
 
Open Accounts
 

Investing in Open Accounts which are "not" registered.

Tax-efficient Investing at Its Best

The challenge for Kim and her Financial Advisor is to find an investment tool that allows her to stay involved in her portfolio without losing compounding power to taxes.

Wouldn't it be nice if Kim's non-registered portfolio could act like an RSP allowing both re-balancing and diversification while deferring her capital gains taxes? It can.

C.I. Sector Fund is a tax-deferral investment vehicle that acts like a second RSP with no contribution limit. The structure of C.I. Sector Fund enables investors to switch among the 25 Sector Fund classes without triggering capital gains. With some of C.I.'s most innovative funds represented, investors can lock in gains while diversifying among world regions and economic sectors.

Most importantly, C.I. Sector Fund unleashes the compounding power of capital appreciation; investors can finally make pure investment decisions that are not driven by tax considerations.

 
Work Sheet for Savings
 
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