FP2 Chapter 7

Child Care Benefit (CCB)

a monthly tax-free benefit for families with children under 18

What factors impact the amount of CCB?

• family’s income and number of children

Child Care Expense Deduction

a deduction for child care costs

What spouse claims the child car expense deduction?

lower-income spouse

Child Care Expense deduction amounts

$8000/year for children under 7 and $5000/year for children 7-16

Registered Education Savings Plan (RESP)

a tax-deferred education savings account in which the contributor invests funds for the beneficiary’s post-secondary education

Are RESP contributions tax-deductible?

yes

Educational Assistance Payments (EAP)

grants and investment income withdrawn as payments from an RESP

For an EAP withdrawal, who is taxed?

the beneificary

RESP Planning strategies

Maximize annual contributions to receive maximum CESG

Make RESPs joint with spouse

Spread AIP payments over two years

What is the lifetime CESG?

$7200

Can CESG be carried forward?

yes

In what scenario can AIP be transferred to a RRSP?

• Subscribers are Canadian residents (must)

• All beneficiaries are dead

• The transfer was made after the 35th year of the RESP

• The RESP is 10 years old and the beneficiary is over 21 and ineligible to receive an EAP

CESG for Low-Income Families

1. FIRST INCOME BRACKET → CESG = 40% on the first $500 contribution and 20% on the next $2000

   1. Maximum = (0.4*500 + 0.2*2000) = $600 per child

2. SECOND INCOME BRACKET → CESG = 30% on the first $500 contribution and 20% on the next $2000

   1. Maximum = (0.3*500 + 0.2*2000) = $550 per child

3. THIRD INCOME BRACKET + → CESG = 20% on the first $500 contribution and 20% on the next $2000

   1. Maximum = (0.2*500 + 0.2*2000) = $500 per child

Canada Learning Bond (CLB)

an extra grant of $500 provided to low-income families plus additional instalments of $100 are deposited annually up to the year the child turns 15 as long as the family is in the lowest income bracket

Maximum CLB

500 + 15*100 = $2000

Family-Plan RESPs

• All children are named as beneficiaries

  • If one does not pursue post-secondary education, the other children use the beneficiaries earnings

Individual RESPs

A resp with one beneficiary that does not need to be related to the subscriber

Accumulated Income Payments (AIP)

 taxable withdrawals from an RESP directed to a subscriber

After the first AIP withdrawal, when must the RESP be terminated?

before March 1st

Withholding tax on AIP withdrawal

20%

Informal (In-Trust) Account

 an account to invest funds on behalf of a minor childen

Are contributions to an informal trust account tax-deuctible?

no

What is the annual and lifetime contribution limits for informal trust accounts?

No limits

Can the funds in an informal trust account be used for any purpose?

yes

Appropriate Investments for In-Trust Accounts

investments that yield capital gains to avoid attribution rules

In-Trust Account Ownership

Contributor (Settlor)	The legal owner of the assets
Trustee	The manager of the assets
Beneficiary	The recipient of the assets

How are interest and dividends taxed in an informal trust account?

 taxed annually at the contributor’s MTR

How are capital gains taxed in an informal trust account?

 taxed in the beneficiary’s name

Crystallizing

the strategy of selling assets to realize the capital gain and then buying back the same assets

Objective of crystallizing

to raise the ACB to the FMV so taxes are paid annually rather than a lump-sum bill in later years

Can tuition tax credits be transferred to a student’s parents?

Yes, if they have not been used

Can tuition tax credits be carried foward?

yes

Registered Disability Savings Plan (RDSP)

a tax-deferred savings plan intended to help those with disabilities

Are RDSP contributions tax-deductible?

no

Who can make RDSP contributions?

Anyone, but must have written permission from the plan holder

When can RDSP contributions be made?

until the end of the year the beneficiary turns 59

When is CDSG and CDSB available?

until the end of the beneficiary’s 49th year or until they reach the maximum limit

How far can CDSB and CDSG be carried forwards?

10 years

If a disabled person dies, what happens to RDSP payments?

they are made to the estate

Canadian Disability Savings Grant (CDSG)

a grant deposited into a RDSP based on income and contribution amount

CDSG Amounts by Income

Under $97,069	$3.00 per every $1.00 for the first $500 (1500 total) $2.00 per every $1.00 for the next $1000 (2000 total)
Over $97,069	$1.00 per every $1.00 for the first $1000 (1000 total)

Canada Disability Savings Bond (CDSB)

a bond deposited into a RDSP based on income

CDSB Amounts by Income

Income	CDSB
Less than $37,711	$1000
$37,711-$48,535	Amount is adjusted
More than $48,535	No CDSB

RDSP Contribution Limits

	Contributions	CDSG	CDSB
Annual Limit	No annual limit	$3500	$1000
Lifetime Limit	$200,000	$70,000	$20,000

Are RDSP contributions taxed when paid out?

No

Who pays the tax upon CDSG, CDSB and the earnings on RDSP payments?

The beneficiary

RDSP Beneficiary Eligibility

Certified physical or mental impairment

Must be a Canadian resident when the plan starts and when contributions are made The plan can be held if the beneficiary ceases to be a Canadian resident

Valid SIN

How many RDSP holders can there be?

1+

Can the beneficiary be the RDSP holder?

Yes as long as they:

• Have reached the age of majority

• Competent

Do RDSP holders need to be Canadian residents?

no but they need a valid SIN

What happens to the RDSP when the beneficiary reaches the age of majority and is competent?

• The legal parent may continue as the plan holder

• The beneficiary can replace their parent(s) or be added as a joint holder

• Other holders must be removed

What happens to the RDSP when the beneficiary reaches the age of majority and is not competent?

A qualifying family member, guardian or public entity will continue to hold the plan

Who can replace a RDSP plan holder?

Beneficiary	Beneficiary’s estate	Joint holder
Another qualified plan holder	Legal Parent

When the disability ends, what happens to the RDSP?

It closes

• All assets are paid out at the end of the second year the beneficiary no longer qualifies

• Grands and bonds are repaid; remaining funds are paid and taxes to the beneficiary

—> RDSP may remain open for four additional years under certain conditions

What happens to the RDSP upon death of the beneficiary?

It closes

• All assets are paid out at the end of the second year the beneficiary no longer qualifies

• Grands and bonds are repaid; remaining funds are paid and taxed to the beneficiary’s estate

Conditions to Repay RDSP Grants & Bonds

RDSP is closed	RDSP is deregistered
Beneficiary does not qualify for the DTC	Beneficiary dies

10-year period rule (RDSP)

All grants and bonds paid into the plan during the last 10 years are repaid

Assistance Holdback Amount

the amount of funds due in the event of a payment

According to the assistant holdback amount, how large can the withdrawals be without having to repay anything for a beneficiary with a life expectance of less than 5 years?

$10,000

According to the assistance holdback amount, how much of any grant/bond is repaid in the last 10 years?

$3 per every dollar

Types of RDSP Payments

Disability Assistance Payments (DAPs)	Payments to the beneficiary’s estate
Transfer to a new RDSP	Repayment of CDSG and CDSB

Types of Disability Assistance Payments (DAPs)

1. Lifetime Disability Payments (LDAPs)

2. Other

Lifetime Disability Payments (LDAPs)

Payments that can start at anytime but no later than the end of the year where the beneficiary turns 60 (paid annually on a regular schedule

What is the annual maximum LDAP payment?

= A/(B+3-C) + D

A = FMV of the RDSP at the beginning of the year

B = The greater of 80 or the beneficiary’s age at the start of the year

C = The age of the beneficiary’s age at the start of the year

D = The sum of all payments in the current yea

If FMV of the RDSP is less than the assistance holdback amount, will a payment be made?

No

What is the maximum DAP if the beneficiary is not expected to live beyond five years?

No maximum

RDSP Transfer Conditions

Same beneficiary	All holders agree
All funds are transferred	Old RDSP is closed
The transfer is completed within 120 days

Can a deceased individual’s pension or retirement plans be moved to an RDSP?

Yes as long as the beneficiary is a child/grandchild

Can investment income from a RESP be transferred to a RDSP?

Yes as long as the beneficiaries are the same

Do transfers into a RDSP reduce contribution room?

Yes

Are RDSP contributions tax-deductible?

No

What is taxed upon RDSP withdrawals?

No contribution; only grants, bonds and earnings

RDSP Advantage

a benefit or loan that depends on the existence of a RDSP.

RDSP Advantage Tax considerations

• The FMV of the benefit

• The amount of the loan

RDSP Non-Qualified Investments

investments similar to those non-qualified for RRSPs and RESPs

Tax for holding non-qualified investments in a RDSP

50% of the FMV at the time is was acquired

50% of the FMV at the time it became non-qualified

Tax-Free Savings Accounts (TFSA)

an account that accrues tax-free earnings

Are TFSA contributions tax-deductuble?

No

TFSA Opening Conditions

Over 18 years old

Canadian resident

TFSA Benefits

No attribution rules	No tax at death
Withdrawals do not result in government clawbacks	No tax on withdrawals nor growth
No restrictions on what the funds can be used for

How far can TFSA unused contribution room be carried forward?

Indefinitely

TFSA Room formula

Annual Limit + Previous year’s withdrawals + unused contribution room 

TFSA Prohibited investments

Debt of the TFSA holder

An investment in a corporation, partnership or trust in which the holder has interest in

An investment in a corporation or partnership that does not deal at arm’s length with the holder

Property (once you have accumulated enough TFSA funds, you can hold your mortgage loan as an investment)

Penalty for excess TFSA contributions

1% tax per month of the highest excess amount

Exempt Contribution

occurs when a surviving spouse receives a payment from a deceased spouse’s TFSA

Does the exempt contribution affect contribution room?

No

Penalties on Prohibited TFSA Investments

1. Holding Prohibited Investments → 50% of the FMV of the investment when it was acquired or became a prohibited investment

2. Income and Capital Gains on Prohibited Investments → a tax on the income earned when the investment is disposed of

TFSA Penalty Refund Conditions

The client was unaware the investment was prohibited at the time of purchase

The client disposes of the investment before the end of the year after the year the tax is imposed

Reasonable error and if the client disposes the investment ASAP

TFSA In-Kind Contributions

in-kind contributions from a non-registered account are a sale and contribution

• Capital gain if FMV is greater than ACB

• No capital loss is FMV is less than ACB

Are there penalties for plan-to-plan transfers?

No

Qualifying Transfer

a transfer from the TFSA of one spouse to the TFSA of another in the event of marriage breakdown

Do qualifying transfers affect contribution room?

no

Death of a TFSA Holder

Assets can be transferred to a surviving spouse’s TFSA	Assets can be paid to a beneficiary (income earned after the death is taxable to the beneficiaries)
Assets can be transferred to a charity within three years

Cease of a TFSA

TFSA Holder dies	The arrangement no longer meets the requirements for  a TFSA
The arrangement is not administered in accordance with the conditions for qualifying arrangements

TFSA Form

Arrangement in Trust	The trust is deemed to have disposed of the investment and to have re-acquired the investment at the same time
Annuity Contract	The contract is disposed at FMV
Deposit	The deposit is disposed at FMV