What type of investment account is best for you?
There are multiple ways to minimize the taxation on investments, including Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs) and Registered Education Saving Plans (RESPs).
TFSAs enable investors to grow their savings tax-sheltered regardless of what their savings goal is. Next year’s vacation. A new car. House renovations. Or just a rainy day. Your contributions are not tax-deductible (which means you’re putting in “after-tax dollars”) – it also means that any growth in the plan is tax-sheltered and any withdrawals are tax-free. In other words, the growth and withdrawals are not subject to any tax.
For the illustrated period, an investor holding a mutual fund within a tax sheltered plan could have earned 168% more than had they held it in a taxable account and been subject to taxation along the way.
† Performance returns presented are hypothetical and for illustrative purposes only. It does not represent actual performance. Assumptions were made in the calculation of these returns including an income tax rate of 30% equally applied on the full annual distribution with no distinction made by composition type, and an annual growth rate of 8% over the 20-year period. The 168% spread is the difference between the cumulative return earned by both portfolios over the life of the investment. Trading costs and other fees associated with the portfolios are not included and trading prices and frequency implicit in the hypothetical performance may differ from what may have actually been realized at the time given prevailing market conditions. This performance simulation is for illustrative purposes only and does not reflect actual past performance nor does it guarantee future performance.
An RESP also allows for invested money to grow tax-free but, like a TFSA, contributions are not tax-deductible. Anyone can contribute to an RESP in the name of a child (the “beneficiary”), while a child could have multiple RESPs; however, there is a lifetime contribution limit per beneficiary, which is tracked by the federal government. Contributions can be supplemented by government grant programmes, including the federal government’s Canadian Education Savings Grant (CESG) as well as any applicable provincial programmes.
Withdrawals from the plan can be made* once the beneficiary is attending a designated post-secondary institution:
If the beneficiary decides not to pursue a post-secondary education, the subscriber has several options, including naming a new beneficiary, transferring the earned income to an RRSP (subject to any available RRSP contribution limit) or withdrawing the money.
*Please note: If the beneficiary is not attending a designated post-secondary institution a proportionate amount of grant will be repaid to the government. Grant and earned income can only be withdrawn if the beneficiary is attending a designated post-secondary institution (except for an AIP when the grant is repaid and the subscriber takes the income when the beneficiary is not currently pursuing post-secondary education and over 21).
In the case of RRSPs, you get the immediate benefit of a tax deduction for the year you contribute. As a result, any amount withdrawn from the RRSP is taxed as income in the year that you make the withdrawal. The idea is that, in retirement, your annual income will likely be less, which means the tax payable would be less. Anyone who is a Canadian resident and with earned income can contribute to an RRSP.
Fast facts for the 2016 tax year:
*Pension Adjustment (PA) represents the value of any pension benefits accruing from participation in a registered pension plan or deferred profit-sharing plan. A Past Service Pension Adjustment (PSPA) arises in rare instances when a pension plan has benefits for a post-1989 year of service upgraded retroactively.
A Registered Retirement Income Fund (RRIF) is a registered account designed to give you a potential income flow in retirement.
Think of a RRIF as a Registered Retirement Savings Plan (RRSP) in reverse – RRSPs allow you to accumulate tax-sheltered savings for retirement, while your RRIF generates a taxable retirement income stream from these savings – which still continue to grow tax-sheltered.
In other words, you make tax-deductible contributions to a RRSP and make taxable income withdrawals from a RRIF.
'AGF Elements', 'Elements', 'What are you doing after work?' and the AGF logo are trademarks of AGF Management Limited and used under licence. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The payment of distributions and/or dividends should not be confused with a fund's performance, rate of return or yield. If distributions and/or dividends paid by the fund are greater than the performance of the fund, your original investment will shrink. Dividends paid as a result of capital gains realized by a fund, and income and dividends earned by a fund are taxable in your hands in the year they are paid. Monthly distributions on Series T and Series V shares may generally be a return of capital so long as there is sufficient capital attributable to the relevant series. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base falls below zero, you will have to pay capital gains tax on the amount below zero.
Please refer to the prospectus for each product for complete information regarding targeted annual distributions, minimum investments and other important information.
^Under AGF's distribution policy, Series T and V unit-holders will receive 12 monthly distributions. In addition, if an annual distribution of net realized capital gains and/or net income/capital gains is required, unit-holders will receive an additional 13th distribution in December. This may result in two December distributions - one that is the regular monthly distribution and one annual distribution, if required. This annual distribution must be reinvested in additional units of the fund.
The All World Tax Advantage Group is a mutual fund corporation that currently offers approximately 20 different classes of securities. In addition to fund diversification by investment style, geography, and market capitalization, a key benefit of investing in any of the classes within the group is the possibility of sharing incurred expenses (and losses) of the combined structure potentially offsetting income earnings to minimize chance of a dividend declaration. While the articles of AGF All World Tax Advantage Group Limited provide authority to make distributions out of capital and AGF All World Tax Advantage Group Limited intend both to calculate capital in the manner contemplated by the corporate statute for corporations that are not mutual fund corporations and only to declare distributions out of capital if there is sufficient capital attributable to a series, no definitive case law exists to confirm that a mutual fund corporation may make distributions of capital and how it is to be calculated. Further, no advance income tax ruling has been requested or obtained from Canada Revenue Agency, nor is AGF aware of any published advance income tax ruling or the possibility of obtaining such a ruling, regarding the characterization of such distributions or the calculation of capital for such purposes.
Investors should consult their investment professionals and tax advisors prior to implementing any changes to their investment strategies.
The information contained in this document is designed to provide you with general information and is not intended to be tax advice applicable to the circumstances of the investor.
Publication date - April 27, 2016