Should I contribute to a TFSA, RRSP or both?
Should I contribute to a TFSA, RRSP or both?
With the Tax-Free Savings Account (TFSA) available for saving in a tax-free environment, does it still make sense to contribute to a Registered Retirement Savings Plan (RRSP)?
RRSPs can work well if you contribute while you are in a high tax bracket and withdraw when in a lower tax bracket. You can generate a higher net rate of return with an RRSP when the effective tax rate at the time of withdrawal is lower than the effective tax rate at the time of contribution. A TFSA can provide a higher return if the reverse occurs.
For example, if you contribute $1,000 to an RRSP when you are in a 20 per cent tax bracket, your net cost is $800 after the tax savings. If you are in the same tax bracket when you make a withdrawal from your RRSP, your net withdrawal will be equal to your net cost after paying the taxes ($800). However, if you are in a higher tax bracket when you make the withdrawal, say 40 per cent, then your net withdrawal will only be $600 after the taxes are paid (assuming market is flat and there is no return).
TFSA, RRSP OR BOTH?
A TFSA can be an ideal savings vehicle if you are in a low income tax bracket. RRSPs may not be well suited to low income Canadians. The RRSP tax savings are insignificant and you may be in a higher tax bracket when you make withdrawals, as the earlier example demonstrates. You may also want to consider that TFSA withdrawals do not impact income tested benefits and credits, such as child tax benefits and credits, Old Age Security (OAS) or Guaranteed Income Supplement (GIS).
If you now find yourself in a lower tax bracket, such as when on maternity leave, and have made RRSP contributions in the past, you may want to consider withdrawing from your RRSP to make a TFSA contribution. However, remember that funds withdrawn from your RRSP cannot be re-contributed at a later date.
One strategy would be to contribute to your TFSA now and accumulate RRSP room to be used later when in a higher tax bracket to optimize the tax benefits.
This is a situation where you may want to maximize both your RRSP and TFSA contributions. In fact, the tax savings or refund received from the RRSP contribution could be used to fund the TFSA.
YOU MAY WANT TO RETHINK YOUR HOME BUYERS PLAN SAVINGS
If you are saving for a down payment on a house, a TFSA might be a better option than saving in an RRSP and withdrawing under the Home Buyers Plan (HBP). There are several reasons for this.
■ The flexibility to recontribute the TFSA withdrawal without time limits.1 If HBP repayments are not made on time, the annual repayment amount is added into your income and any missed repayment amount means the RRSP room is lost forever
■ There is no restriction on how much you can withdraw from your TFSA while the HBP restricts you to $25,000 from each your RRSP and your spouses RRSP. Alternatively, you could each contribute $5,000 a year for 5 years to a TFSA and then withdraw $25,000 plus any investment earnings tax free and with no required repayments
■ There are no conditions on TFSA withdrawals, whereas the HBP requires you to be a first time home buyer.
Similar logic could be applied to the Life Long Learning Plan. By using a TFSA to save and fund continuing education, contributors can gain increased withdrawal flexibility while eliminating any enrollment requirements or repayment conditions.
Whether to save in a TFSA, RRSP or both may depend on your savings needs, your eligibility for income tested benefits and your current and expected future financial situation and income level.
1 Amounts withdrawn in a taxation year will be reflected in contribution room in the following year.
Article courtesy of Manulife Financial and should not be relied upon for investment or tax advice. It is recommended to speak to a financial planner to review your particular situation.
Ontario just introduced a 16-point plan to control real estate, including a Foreign Home Buyer Tax
On April 20, 2017, the Ontario government introduced the Ontarios Fair Housing Plan, a 16-point plan to control real estate, address thedemand for housing, increase supply, and protect buyers and renters.
The 16 measures in the plan include a legislation that would implement a new 15 % Non-Resident Speculation Tax (NRST), similar to the 15 % tax on foreign buyers already introduced in Vancouver last May.
Once legislation passes, the tax would be effective retroactively to April 21.
The measures are aimed at cooling down the hot housing market in the Greater Toronto Area, where prices were up 33 % from a year ago while condominium rents rose 8.3 % in the first quarter from a year ago.
Now that two major cities have been impacted by a Foreign Buyer Tax, only time will tell if investors will look to other Canadian cities to invest their funds.
Canadian home sales up on a month-over-month basis in March
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales were up on a month-over-month basis in March 2017.
- National home sales rose 1.1% from February to March.
- Actual (not seasonally adjusted) activity in March was up 6.6% from a year earlier.
- The number of newly listed homes climbed 2.5% from February to March.
- The MLS Home Price Index (HPI) was up 18.6% year-over-year (y-o-y) in March 2017.
- The national average sale price increased by 8.2% y-o-y in March.
Home sales over Canadian MLS Systems edged up 1.1% in March 2017, surpassing the previous monthly record set in April 2016 by one-quarter of a percent.
March sales were up from the previous month in more than half of all local markets, led by the Lower Mainland of British Columbia, London St. Thomas and Montreal.
Actual (not seasonally adjusted) activity in March was up 6.6% year-over-year, with gains in close to 75% of all local markets. Sales in the Greater Toronto Area (GTA) posted the biggest increase, which offset a decline in the number of homes changing hands in Greater Vancouver.
The number of newly listed homes rose 2.5% in March 2017, led by gains in the GTA, Calgary, Edmonton and the Lower Mainland of British Columbia.
With new listings having climbed by more than sales, the national sales-to-new listings ratio eased to 67.4% in March compared to 68.3% in February.
A sales-to-new listings ratio between 40 and 60 is generally consistent with balanced housing market conditions, with readings below and above this range indicating buyers and sellers markets respectively.
The ratio was above the sellers market threshold in about 60% of all local housing markets in March, the majority of which are located in British Columbia, in and around the GTA and across southwestern Ontario.
There were 4.1 months of inventory on a national basis at the end of March 2017, down from 4.2 months in February and the lowest level for this measure in almost a decade. The number of months of inventory in March 2017 stood at or below one month in the GTA, Hamilton-Burlington, Oakville-Milton, Kitchener-Waterloo, Cambridge, Brantford, Guelph, Barrie District, parts of the Niagara Region and parts of cottage country.
The Aggregate Composite MLS HPI rose by 18.6% y-o-y in March 2017. Price gains accelerated for all benchmark housing categories tracked by the index.
Prices for two-storey single family homes posted the strongest year-over-year gains (+21%), followed closely by townhouse/row units (+17.9%), one-storey single family homes (16.6%) and apartment units (16.3%).
While benchmark home prices were up from year-ago levels in 11 of 13 housing markets tracked by the MLS HPI, price trends continued to vary widely by location.
In the Fraser Valley and Greater Vancouver, prices have been recovering in recent months after having dipped in the second half of last year. On a year-over-year basis, home prices in the Fraser Valley and Greater Vancouver remain well above year-ago levels (+19.4% y-o-y and +12.7% y-o-y respectively).
Meanwhile, y-o-y benchmark price increases were in the 20% range in Victoria and elsewhere on Vancouver Island. Guelph recorded a similar price gain, while Greater Toronto and Oakville-Milton saw prices rise in the 30% range in March.
By comparison, home prices eased by 1.2% y-o-y in Calgary and by 1.5% y-o-y in Saskatoon. Prices in these two markets now stand 5.4% and 5.1% below their respective peaks reached in 2015.
Home prices were up modestly from year-ago levels in Regina (+1.7%), Ottawa (+4%), Greater Montreal (+3.3% y-o-y) and Greater Moncton (+4.7%).
Year-over-year price gains were led by different benchmark housing categories in each of these markets. In Regina, apartments posted the biggest price increase, which snapped a long series of price declines for apartments that began in early 2015. In Ottawa, prices rose most for one-storey single family homes. In Montreal, two-storey single family home prices posted the biggest gain; meanwhile in Moncton, it was townhouse/row unit prices that climbed the most.
HPI) provides the best way of gauging price trends because average price trends are prone to Home Price Index (MLSThe MLSbeing strongly distorted by changes in the mix of sales activity from one month to the next.
The actual (not seasonally adjusted) national average price for homes sold in March 2017 was $548,517, up 8.2% from where it stood one year earlier.
The national average price continues to be pulled upward by sales activity in Greater Vancouver and Greater Toronto, which remain two of Canadas tightest, most active and expensive housing markets.