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[H&R Block Insight - February 2009]
[Are all 'Registered' plans the same?]

Registered Disability Savings Plan (RDSP), Registered Education Savings Plan (RESP) and Registered Retirement Savings Plan (RRSP) - they all have similar sounding names but are quite different.

There are some similarities. All of the plans are registered with the Canada Revenue Agency (CRA) and require designated beneficiaries that will benefit from the income generated by the plan. There are annual or lifetime contribution limits and they all have a tax free earning component.

The Registered Disability Savings Plan (RDSP) is the newest plan of the group and is intended to help parents and others save for the long-term financial security of a person with a severe disability. Any Canadian resident under the age of 60 and eligible for the Disability Tax Credit can open an RDSP.

Contributions to the RDSP are not tax deductible but any investment income earned within the plan is tax-free until withdrawn. When the beneficiary receives a pay out from the RDSP, the interest portion of the payment is included as income on their tax return. The maximum lifetime contribution is $200,000 and there is no annual contribution limit.

RDSP contributions may qualify for the Canada Disability Savings Grant (CDSG). CDSG I is payable until the year in which the plan beneficiary turns 49. The CDSG can add a maximum $3,500 annually to an RDSP account with a lifetime savings grant maximum of $70,000. Also, lower-income families may qualify for a Canada Disability Savings Bond, which could deposit up to $20,000 into an RDSP over the life of the account without making any contributions.

The Registered Education Savings Plan (RESP) is intended to help parents and grandparents to save for a child's post-secondary education. To open an RESP your child needs to have a Social Insurance Number (SIN).

Like an RDSP, RESP contributions are not tax deductible and any investment income earned within the plan is tax-free until withdrawn. The interest portion is taxed when the money is withdrawn but in the hands of the student. Since students tend not to have a sizable income while attending school, the personal tax rate is low. The maximum lifetime contribution limit is $50,000; there is no annual contribution limit.

Contributions to a child's RESP qualify for the Canada Education Savings Grant (CESG) from the federal government. The grant can add up to a lifetime maximum of $7,200 in contributions to the plan. Lower-income families may qualify for the Canada Learning Bond (CLB) for each child born after 2003. If a child is entitled to the National Child Benefit Supplement they may receive up to $2,000 over the lifetime of the RESP without contributing to the plan.

The Registered Retirement Savings Plan (RRSP) is the most well-known registered plan and is meant to help individuals save for their retirement. However, it is often confused with the other registered plans. The contribution limit is generally calculated as 18 per cent of your previous year's income to an annual maximum. For 2008, the maximum is $20,000 and $21,000 for 2009. If you are unable to contribute the maximum in any given year, you can carry forward the amount and add it to your maximum contribution amount the following year.

RRSP contributions are tax deductible and can help lower your tax payable. Generaly, for every $1,000 you can contribute you will realize a federal tax savings from $150 to $290, depending of your tax bracket. As with the RDSP and RESP, all earnings within the RRSP are tax-free, whether they are interest, dividends or capital gain. But unlike the other plans, all the money is taxed when withdrawn not just the earnings portion.

All of the registered plans are designed to help Canadians save for specific financial goals while reducing the tax payable. It is important to understand how the plans can be used to maximize tax savings as well as the risks involved investing in a plan. There are no guarantees that a registered plan will earn money so make sure you balance your investment risk with your financial goals.

 

[Question to Insight Editor:]

Q. I started a home-based business in May 2008. My income is solely commission. The bulk of my work is done at home and I am also required to use my own vehicle. My questions:

  1. When claiming the proportion for use of vehicle and my home expenses, are my calculations based on the 12-month calendar year or the 8 months I was actually in business?
  2. I noticed on the forms for claiming business use of home expenses that I could claim mortgage interest. I rent an apartment. Is there any part of the rent I can claim?

P. Soucy

A. Thank you for your questions P. Soucy.

Deciding to start a home based business is a huge decision and once you have made that choice, you have to do everything possible to make it a success. Recording keeping takes on a whole new meaning. First of all, you will have far more information that needs to be kept and then you have to find out all the new expenses that are eligible tax write-offs.

Business expenses are claimed for the period that you are in business therefore you should claim for the 8 months that you were actually in business.

When it comes to vehicle and home expenses, remember they must be claimed in proportion to business to personal use. So keep a vehicle log showing the mileage, and track that which is personal vs business.

This the same for your home office expenses, what proportion of you home is business? Use square footage to calculate and then apply that percentage to determine how much rent you can deduct as an expense.