By Fin MacDonald, Fin Tax Service

This month I’m going to update the Principal Residence Exemption (PRE) sale or change of use reporting, and look at Registered Retirement Savings Plan (RRSP) strategies.

Important Dates

February 28, 2017 – date by which all T4, T4(A), T5 and similar slips must be issued. T3 slips are due by March 31.

March 1, 2017 – last date to make an RRSP contribution to be claimed on the 2016 tax return.

Friday March 3, 2017 – I will be speaking about taxes, at the Friday Forum from 10 to 1130 AM, at James Bay New Horizons, 234 Menzies St. I will also be taking questions, and meeting individually with members and attendees. All are welcome.

PRE Sale or Change of Use Reporting

Schedule 3 Capital Gains (or Losses) in 2016 is the form to use to report a sale or change in use of your principal residence. The second page of S3 has three lines: 179, 181 and 182. On line 179 you have three choices: 1/ Designate one property to have been principal residence (PR) for ALL years owned, 2/ Designate one property to have been PR for some years, and 3/ Designate more than one property as PR for various years. If your option is other than 1/, form T2091(IND) Designation of a property as a principal residence by an individual  must be completed.

Line 181 is where you record the year(s) of acquisition. Line 182 is where the proceeds of disposition are recorded.

There is no requirement to report the Adjusted Cost Base (ACB), (the purchase cost plus outlays such as the Property Transfer Tax) unless you are claiming multiple PRs on line 181. The Canada Revenue Agency (CRA) will be building a database to track the sales of Canadian residential property. There are potential penalties for not reporting, on the tax return for the year of the sale or change in use. “The penalty is the lesser of the following amounts: 1. $8,000; or 2/ $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.” (CRA website “Reporting the sale of your principal residence for individuals (other than trusts)”) It goes on to state that for the 2016 tax year a “communication period” will be the focus and penalties will “only be assessed in the most excessive cases.”

RRSP Strategies

1/RRSP Basics

Contribution room for RRSPs is earned, at a rate of 18% from employment, self-employment, CPP Disability payments, rental income and taxable support payments. Those who have an employee sponsored pension plan will receive a Pension Adjustment (PA), usually on the T4 slip; this amount reduces the contribution room available. Money contributed to an RRSP lowers the contributor’s taxable income, often providing a refund. The higher your tax bracket, the higher the savings from a contribution.  

RRSPs do not need to be used for retirement; they can be used for the Home Buyer’s Plan (HBP) or for Life Long Learning Plan (LLP). Upto $25,000 per person may be used for the HBP; upto $20,000 for the LLP. If the money withdrawn is not repaid as required, an amount is added each year to the contributor’s income until the amount withdrawn has been accounted for – and is not available come retirement.

Contributions to an RRSP can earn income inside the plan tax free until they are withdrawn. The year a person turns 71 they have three options for the money: take it into income (may make sense if it is a small amount); put into an annuity making yearly payments (with interest rates so low, not done very often) and; transfer the money to a Registered Retirement Income Fund (RRIF). If the RRIF is chosen, a fixed percent each year, determined by age, must be withdrawn. At 72 the minimum is 5.4% of the balance at the beginning of the year; @80 – 6.82%, @95 or older – 20%. The balance continues to earn tax free income that is only taxed when it is withdrawn. RRIF withdrawls are eligible for Pension Splitting and the Pension Income Credit.

2/ Spousal RRSP

If neither spouse is likely to have an employment-based pension, a Spousal RRSP can still make sense. With the advent of Pension Income Splitting, the value of the Spousal RRSP has declined. Any contributions to a Spousal RRSP that are withdrawn within three years, are attributed back to the contributor, and the not plan holder.

3/ RRSP vs Tax Free Savings Account (TFSA)

TFSA contribution room is earned each year the contributor is 18 years of age or older. If you have never contributed to a TFSA, and were at least 18 in 2009, you now have $51,000 in contribution room. TFSA contributions are not tax-deductible, like those to an RRSP; they are not income when they are withdrawn. If you withdraw money from a TFSA, unless you had the contribution room to repay it, you must wait until the following year to repay it.

The person’s income determines the refund for RRSP contributions.  In BC if your income is $38,000, a $1,000 RRSP contribution yields a tax savings (on the 2016 tax return) of $200.60; income of $75,000 = $282; income of $100,000 = $382.90.

What will your income be in retirement? If it is going to be $50,000 or more, any of the income tested benefits or fees (such as MSP Premiums) are not applicable. In this case, maximizing your RRSP contribution before looking at a TFSA makes sense.

If your taxable income in retirement is going to be less than $18,600, maximizing your TFSA each year makes the most tax sense. At that income level MSP premiums are nil; Pharmacare deductibles are lower; Shelter Aid for Elderly Residents is available if you rent; and Guaranteed Income Supplement from the federal government is likely. If you add to your low income with RRSP or RRIF income, some of the above benefits may be lost.

So, RRSP or TFSA? The higher your income, the higher your benefit from an RRSP. Max out the RRSP and then do the same with the TFSA if you can.

In the March issue of James Bay Beacon I will look at the changes to the 2016 tax return. As always, using my lens of Helping You to Keep More of YOUR Money, thanks for reading and I look forward to answering your questions at the New Horizons Friday Forum on March 3.