Advisers and getting advice | Investing | Investment products: Stocks, bonds, mutual funds, ETFs and advanced investments | Pensions | Retirement planning | RRSPs, RRIFs, TFSAs and RESPs | Taxes | Wills and estate planning
Advisers and getting advice
When I meet with a new adviser, what should I ask about registration?Each provincial or territorial government has a securities administrator. They make the rules for the investment companies and advisers who serve you. Both companies and advisers must register with the securities administrator wherever they do business, before they can sell to the public or give them advice.Before you choose an adviser, be sure to ask if they and their firm are both registered. In Ontario, ask:
Learn more now about choosing an adviser.
top
Investing
What is an accredited investor?To be an accredited investor you must have:
Why? Accredited investors can buy investments that have no prospectus. These investments are called “exempt” products. They are intended for investors who can afford to get independent expert advice or to survive larger losses.Without a prospectus, you may have less information to work with when you buy exempt products. This may make the investments higher risk.
As a Canadian citizen, can I buy and sell Canadian investments if I live in another country?Your question is complex. Brokerage firms vary in their policies. Contact the institution where you’re planning to open an account. They might say you can hold stocks and bonds, but not mutual funds.
Note: Having a Canadian investment account is one of many factors that the Canada Revenue Agency considers in determining if you are a non-resident for tax purposes. This does not mean you cannot have an account, but keep it in mind. View the CRA's Determination of Residency Status form now.
Can an immigrant, landed or not, invest in Canada?Yes. If your Social Insurance Number (SIN) is valid, you can open a bank or investment account.
The federal government also has a special immigrant investor program. It helps those with business experience who can commit $400,000 for five years to job-creating investments.
Where can I get more information about incorporating environmental and social values into my investment decisions?Socially responsible investing (SRI) is a trend that is growing rapidly both here in Canada and in the U.S. While some funds apply very narrow screening mechanisms, others believe that their role is to represent the conscience of their investors in much more active ways. Learn more about what's happening in the world of SRI now.
How can I find financial information about private companies?For the most part, privately held companies are not required to disclose publicly any information about their business activities. Only publicly traded companies are reporting issuers and therefore subject to disclosure requirements. Public companies must file their disclosure documents on the System for Electronic Document Analysis and Retrieval (SEDAR).
For companies not filing on SEDAR, contacting the firm directly and simply asking for the information you are seeking, is often the quickest way to obtain it.
What does ‘diversification’ mean? What is a diversified portfolio?Diversification refers to spreading your money across different investments. It is a way to reduce risk when you invest. You can diversify your portfolio by:
It is never a good idea to put all your eggs in one basket. This is one of the key investment strategies that every investor should know and follow. Talk to your adviser about the asset mix that might be right for you.
Investment products: Stocks, bonds, mutual funds, ETFs and advanced investments
When a company issues bonds and debentures, how does it affect its net profits after tax?Debt issuance has an immediate effect, but not on the income statement. It would affect the balance sheet instead, because liabilities would increase.Over time, as the company pays interest on the new debt, it would incur an expense that reduces profits. This interest expense is tax deductible, but the tax break does not offset the entire cost.
In some cases, earnings could rise. Examples include:
What investments receive better tax treatment outside a registered plan like an RRSP: dividend paying stocks or dividend mutual funds?Investors get tax breaks on both dividends and capital gains in non-registered accounts. This applies both to stocks you buy from a company directly and mutual funds. When you by stocks, you can save money on fees if you are disciplined. You would also have control over the timing of capital gains and that might result in less trading and therefore fewer taxable events. When you own a mutual fund in a non-registered account, you may pay taxes yearly on any gains the fund makes after expenses.Just remember: taxes are not the only thing to consider when you choose investments. For example, do you have enough money to construct a well-diversified portfolio? If not, there are diversified exchange-traded funds (ETFs) that focus on dividend-paying stocks. They support a buy-and-hold strategy and very low fees.
Do all dividends from the preferred shares of Canadian companies qualify for the dividend tax credit? How about those with a specific redemption date?Yes. All dividends paid on preferred shares of Canadian companies qualify for the dividend tax credit. It does not matter whether there is a redemption date. What you likely recall is that some issues look like preferred shares but are really “preferred securities.” They pay interest income and do not qualify for the tax credit. To learn more, read this article now.
To check the tax status of a Canadian issue, consult your investment advisor. Or, look it up here.
What is the difference between asset allocation and balanced funds? Where do you buy them?Asset allocation funds and balanced funds are the same thing. A balanced fund holds both stocks and bonds, and perhaps other types of assets too. The portfolio is often made up of 60 per cent stocks and 40 per cent bonds or the reverse, depending on the manager’s market view. Some funds have more aggressive mandates that permit the manager to put as much as 100 per cent into one asset class.
A “strategic” asset allocation fund has a fixed asset mix that rarely changes, if ever. The manager must rebalance when the portfolio strays from that plan by more than a certain amount. “Tactical” asset allocation funds give managers more leeway to alter the mix based on their market views.You can buy these funds from banks, discount brokers, full — service brokers and other financial advisers. Some mutual fund companies also sell directly to the public.
When investing, what is the difference between a unit and a share?You buy “units” of investments like income trusts and mutual funds. You buy “shares” of stocks. Units give you the right to part of a fund's capital, as well as any investment earnings and/or income. Shares give you part ownership in the company that sells you its stock. You also have the right to part of the company's assets and its earnings.
What are real-return bonds and should I hold them in my RRSP?Unlike regular bonds, real return bonds (RRBs) can offer inflation protection. Like a conventional bond, a RRB offers a fixed rate of return, paid semi-annually. However, unlike a conventional bond, an RRB's coupon and principal are adjusted by any change in the inflation rate (consumer price index) from the date of issue.At tax time each year, the bondholder must declare, as income, the amount by which the compensation for inflation on the principal has increased even though nothing is paid out until maturity. This is why RRB investors usually choose to hold them in a tax-deferred account like an RRSP.Investors who are living on a fixed income and don’t want their buying power to be eroded by inflation, are often attracted to RRBs. They often buy RRBs that don’t mature for a number of years and hold onto them. These bonds are seldom traded before they mature.
Learn more now.
How can I find out if old stock certificates still have any value today?An old stock certificate may still be valuable even if the stock no longer trades under the name printed on the certificate. The company may have merged with another company or simply changed its name. If you currently deal with an investment adviser, he or she may be able to find out if the security is still traded. The Ontario Securities Commission offers further information on this topic online.
What does the term "x-dividend" mean?The term "x-dividend" refers to a stock that is trading without its dividend. All the buy and sell orders for that stock are reduced by the amount of the dividend, unless the buyer or seller has specified otherwise (using a "Do Not Reduce" order). The reason the price is reduced is because the value of the company has just been directly reduced by the amount of the dividend that will be paid out.The x-dividend date is usually three days before the record date — the day a person has to actually own shares in a company to receive the declared dividend - to give all the orders time to settle. If a trade was executed before the stock went x-dividend, dealers pass the dividend along to the new owner.top
Pensions
Are there taxes or other costs if I cash out my pension when I change jobs?In most cases, you will pay income tax on your pension's commuted value. This is the amount you will receive from your pension if you leave the plan. If you move your pension savings to a Locked-In Retirement Account (LIRA), you would shelter most or all of the money from tax. LIRAs are much like Registered Retired Savings Plans (RRSPs). Learn more now about your options when you leave a pension plan.
Should a Canadian invest in a U.S. employee savings plan? My U.S. employer offers a 401(k) plan.401(k) plans are similar to our defined contribution pension plans here in Canada. Your employer puts part of your earnings into the plan to save for retirement. To find out if a 401(k) is right for you, see a tax or financial adviser with cross-border expertise.
Questions to ask them include:
Make sure you’re satisfied with the answers to these and any other questions before you decide.
What does ‘vesting’ mean for my company pension and when am I eligible? Vesting means having the ‘right’ to keep your pension benefits even if you leave the plan. In most cases, you have to meet certain conditions. It depends on the type of plan, when the money went into your pension and how long you’ve been a plan member.
If you leave early and you are vested, you may be able to take cash for your pension. Or, you may receive income from your pension when you retire.
How do you know if you are vested? In Ontario, you will likely be vested once you have been a member for two years. In Quebec, you are vested as soon as you join. In New Brunswick, it’s five years. You should get a yearly member statement that shows you:
Retirement planning If I have a lot of retirement savings, will I still get my Canada Pension and Old Age Security?Yes, you will qualify for benefits from the Canada Pension Plan. The amount you receive will be based on your contributions. Learn more about CPP nowYou may not qualify for Old Age Security at 65. It depends on your income when you retire. OAS is designed to provide benefits to low-income seniors. Learn more about CPP and OAS now.top
RRSPs, RRIFs, TFSAs and RESPs
Can I transfer money in a spousal RRSP into my spouse’s self-directed plan?Yes. There are no penalties if the money has been in the spousal account for more than three years. This is the normal holding period for spousal RRSPs. The only challenge is that the computer systems at many institutions cannot remove a spousal flag. Talk to your institution — and if a transfer is a problem, consider merging the regular RRSP into the spousal plan.
Do I pay income tax when transferring money from my RRSP to a RRIF (Registered Retirement Investment Fund)?No. The money is still sheltered from tax in the RRIF. Taxes are due only on withdrawals.
What taxes will I pay if I withdraw money early from my RRSP — before I retire at age 65?Your bank or RRSP administrator withholds some of the tax from the amount you withdraw. The rates are:
When you file your tax return for the year, you will add the amount you withdrew to your income . You will pay the difference if the tax withheld was too low or claim a refund if it was too high.
Let’s say you withdraw $8,000 from the RRSP. You can expect the bank to withhold 20% tax. That’s $1,600. To lower the tax withheld, you could ask your institution if they would use the 10% rate on two $4,000 withdrawals done at different times. Tax rules require that serial withdrawals be treated as one. Your institution may or may not treat two withdrawals as serial.
How do I set up a self-directed RRIF and transfer investments to it from other plans? The new investment dealer does the work. All you and your wife do is complete and sign the forms. Ask if the new dealer will cover the cost of any transfer-out fees charged by your current one. They usually do — up to a limit. Just remember: transfers during the January-February RRSP season often run into long delays.
Can I borrow against my RRSP?You can borrow against an RRSP, but you may pay a lot of tax. See section 4 of the Canada Revenue Agency’s IT-320. Here’s how the process works:
In most cases, you will add the amount you use to secure the loan to your income for the year. It is taxed just like a withdrawal. You will later be able to claim a tax deduction when you replay the loan and are no longer using the RRSP money as collateral.
Can I borrow against a Locked-in RRSP?You cannot borrow against a Locked-in RRSP. Most people receive these plans when they leave an employer. They are intended to hold any pension income you earned until you retire. That’s why they are called “locked-in.”
You can convert your plan to a Life Income Fund at any age. You can then create a steady stream of income. Consult the financial institution that administers your account.
What happens to my RRSP savings if I move to the United States?Moving your RRSP money from Canada means giving up its tax shelter. You cannot roll the cash to a U.S. retirement plan. But if you’re young, lower fees at U.S. brokers and mutual fund companies might offset the taxes you may pay.
Most expatriates have four options:
File a Section 217 election with the Canada Revenue Agency. This might let you recoup some or all of the non-resident tax.
What are some ways my wife and I can reduce taxes through our RRSPs? I am earning job income and she is not at this time.The RRSP rules allow you to put all or part of your contribution into an RRSP for your wife. This is called a “spousal contribution.” You get the tax deduction for the contribution. The timing of withdrawals will determine who owes any tax due later.
The money will be taxed in your wife’s hands if she withdraws it more than two years after the end of the year you make the contribution. If the money is withdrawn earlier, it will be taxed in your hands. In other words, if you made a spousal contribution in September 2009, it would be taxable for you – not her – if withdrawn before Jan. 1, 2011.
Spousal RRSPs help couples balance their retirement incomes to save tax. Whether this makes sense for you and your wife depends on her job and savings prospects.
After I retire, can I still make RRSP contributions?Let’s say you retired at the end of 2009 at age 65. Based on your 2009 income, you would be able to make a final tax-deductible contribution to your RRSP in 2010. You can keep your RRSP open until the end of the year you reach age 71.
Some people make a $2,000 penalty-free over-contribution many years before retirement. They let the money grow in their RRSP. When the time comes to make their final RRSP contribution, they apply the overpayment. This creates a tax deduction with no cash outlay in the year after they retire.
What happens if you retired at age 71 in 2009, instead of age 65? You will have to close your RRSP by the end of that same year. Yet you have earned enough job income year to create tax-deductible RRSP contribution room of $5,000 for 2008. There are two ways to take advantage of the new room:
The penalty ends on January 1 when the new year begins. That’s when the money you earned in 2009 entitles you to $5,000 of new RRSP room. On your 2010 tax return, you could then convert the over-contribution to a regular RRSP contribution. This will create a $5,000 deduction.Note: There is no way to get tax-deductible RRSP room for the same year in which the income was earned. But there are no penalties on lifetime over-contributions up to $2,000.
Can I buy and hold different mutual funds in different RESP accounts? Or am I supposed to have just one RESP?You can have more than one RESP account as long as
But you may want to merge the plans together. Why? You have created unnecessary bureaucratic overhead for yourself and the plan trustees. Instead, consider merging them into one self-directed plan.
Do my RRSP savings have to stay in the account until age 69?No. RRSP money can be withdrawn as taxable income at any age and many people use it to finance early retirement. You can also borrow money from your RRSP to pay for education or buy your first homeBy age 71, your RRSP must be converted to an income vehicle. You must make your first withdrawal by the end of the year in which you turn 72.
If an RRSP is set up as a trust, does the trustee and its agent - say a brokerage firm - have a fiduciary duty to the beneficiary of the trust?Yes. On opening your RRSP, you entered into an agreement. This agreement included a “declaration of trust.” This document details the trustee’s fiduciary duties. If you no longer have the document, your brokerage will send one on request.
If I cash out GICs from my RRSP early, what taxes will I pay?Any money you take from an RRSP will be taxed as ordinary income. There’s no difference between principal and interest. That’s because you did not pay tax on any of the money while it was in your RRSP.
Suppose you contributed $5,000 to your RRSP in 2008. You claimed the standard RRSP tax deduction. That claim reduced your taxable income for 2008 by $5,000. Now, you have to pay the tax when you take the $5,000 out of the RRSP.
Who gets the tax break from a spousal RRSP?A spousal RRSP works like a regular RRSP except that one spouse puts money in for the other. The spousal RRSP savings belong to the plan-owner. But the tax deduction goes to the person who contributes the money to the plan.Learn more now about spousal RRSPs
I’m 23 and make $25,000. Should I invest inside an RRSP?There are two schools of thought concerning young people with lower incomes and Registered Retirement Savings Plans (RRSPs).
The first belief is that you should be contributing as much as you can as early as you can. Why? You can take advantage of the magic of compound interest. The earlier your money is compounding inside your RRSP, the more it will grow. Check out Amy and Amanda’s story learn more.
Later, when you withdraw the money, you will be taxed. But the theory is that when you retire, your income level will be lower than it was during your working years - therefore you will pay less tax on your withdrawals.
Another view is that if you have a low income, you will not benefit much from the tax benefits of contributing to an RRSP right now. If you make more money in the future, you’ll see more of a benefit when you deduct RRSP contributions from your income – meaning you won’t have to pay as much income tax.
Keep in mind that with this strategy, you lose out on the benefits of long-term compounding within an RRSP. To avoid this lost opportunity, you could invest in a Tax Free Savings Account (TFSA) instead. You will see tax advantages while you grow your savings. But you may be more tempted to spend your savings before you retire. With TFSAs, you can take the money out any time for any purpose. Whatever you decide to do, taking the initiative to start thinking about wise ways to manage your money is always a good choice!
If I have more than one RRSP account, what happens when I retire?You must “mature” each RRSP by the end of the year in which you turn 69. Most people convert their RRSPs to a Registered Retirement Income Fund (RRIF). You must then make a taxable RRIF withdrawal each year starting with the year in which you turn 72.
This rule applies to each plan. Six plans mean six withdrawals. That’s why financial advisers suggest consolidating your RRSPs into one self-directed RRIF. You then face just one annual RRIF withdrawal based on the plan’s total value. Most banks, credit unions, investment dealers and mutual fund
If I contribute to RRSPs, how will that affect my child tax credit? RRSP contributions help you qualify for the tax-free Canada Child Tax Benefit. That’s because they reduce your “net income” used to calculate your benefit. Here’s how it works.
If your family has a net income at or below $38,832: you will get the full benefit.
If your family has a net income above $38,832: your benefit will be reduced by 2 or 4 per cent of the amount of your net income above $38,832. The percentage depends on the number of children.
There is no net income test for the new Universal Child Care Benefit of $100 per month for each child under six-years-old. That’s because this money is taxable for the lower-income spouse. RRSP contributions can help here – but only if the tax deduction bumps that person into a lower tax bracket.
Learn more about the CCTB now.
Should I borrow to invest in my RRSP? Every January and February, many investors are encouraged to take out a loan or use their line of credit to contribute to their Registered Retirement Savings Plan. For some people, this may be a wise strategy. For others, it is not.
What do the experts say? Many say you should borrow to contribute to your RRSP if:
Taxes
If I have a windfall this year and would like to give some of it to my children, does the income from such investments revert back to me or my children for tax purposes?According to tax rules, if you transfer property to a person who is a non-arms length minor (this would be your child) or a niece or nephew, you would be taxed on the income earned. This would happen even if you set up a trust for your child to hold the property. When you child reaches 18 the income from the property is taxed in his or her hands. It's best to get some expert tax and financial advice if you come into a windfall.
If I move a non-registered mutual fund into my RRSP, will I have to pay any tax?Yes. You will have to pay income tax on one-half of your gain, less any commissions and expenses. If you do the transfer in 2010, you will have to add that amount to your 2010 tax return.Remember: even if you kept the fund outside your RRSP during 2010, you would have to pay tax on any distributions you receive at year — end. These would be taxed at capital gains or even higher tax rates. It depends on the type of distribution. You could ask the mutual fund company in mid-December whether it expects the fund to make a distribution by the 31st.
To learn more, contact the Canada Revenue Agency. Or, read this guide to capital gains.top
Wills and estate planning
What happens to money or units in my investment fund when I die? Does my beneficiary have to sell them?If you hold a mutual fund, your executor(s) can:
If you hold a segregated fund – the life insurance industry’s version of a mutual fund – the insurer will redeem the units after your death. They will pay your named beneficiary whichever is greater: their cash value or the guaranteed capital return.
Note: you can name a beneficiary for your RRSP, RRIF and segregated funds. A mutual fund held outside those accounts would become the property of your estate.