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July/August 2012

Commentary - Hans H. Mathisen

I'm sorry, but I have no Commentary for July and August. But, I can still provide you the valuable benefits and financial insight of LIFE LETTER and LIFE LETTER MATURE:

RRSP vs. TFSA - What's the difference?- LifeLetter for July discusses TFSAs and RRSPs. If you are serious about saving for your future, it is important to know the differences between the two tax-efficient savings plans.

Home ownership can be less taxing than you think - Understanding the financial incentives for home ownership available in the Income Tax Act may save you thousands when buying a home. August's LifeLetter discusses some of the incentives available for homebuyers.

LIFE LETTER MATURE - July's entry discusses Late Career Retirement. If you're entering the last 10 or 15 years of employment, now is the time to truly solidify your plans for achieving your retirement goals. August's LLM looks at Portfolio Diversification and some risk management for your long-term investment stategies.

HAPPY INVESTING!
Sincerely,
Hans Mathisen


 

 

 

LIFE LETTER

RRSP vs. TFSA - What's the difference?

Tax Free Savings Accounts (TFSAs) were introduced in 2009 and they seem to be struggling to catch on. Registered Retirement Savings Plans (RRSPs), however, have been around for over fifty years and attract billions of dollars of deposits each year. If you are serious about saving for your future, it is important to know the differences between the two tax-efficient savings plans.

While RRSPs and TFSAs seem to be very similar on the surface, they are really apples and kumquats apart. The only similarity is that, within limitations, earnings inside either plan are allowed to grow without current taxation.

Deposits - Contribution limits to an RRSP are based on a percentage of income of the preceding year to an annual maximum, plus any unused contribution room, minus a pension adjustment. So, the maximum contribution for 2012, ignoring unused room and pension adjustments, is 18% of 2011 income to a maximum of $22,970. Any contributions made to an RRSP are deductible from income for the tax year you choose.

There are no income requirements to make a deposit to a TFSA because deposits cannot be deducted from income. The limit is currently $5,000 per year and any unused portion of this limit can be carried forward and used in another year.

Withdrawals - RRSPs are a tax-postponed savings plan. When withdrawals are made, they are fully taxable in the year they are received at whatever the tax tax rate is for the plan holder.

Income arrangements from an RRSP must be made before the end of the year in which the plan holder turns age 71. There are also minimum amounts that must be withdrawn each year and these minimums increase each year.

TFSAs are a truly tax-free plan for saving money. Withdrawals are not taxed and actually get added back to contribution room. For example, John contributed $5,000 each year since 2009. He has no contribution room left. He makes a withdrawal of $6,000 for his dream vacation in 2012. This means that in 2013 he can contribute $11,000 to his TFSA.

You can keep a TFSA for as long as you want. Unlike RRSPs, you will not be forced to take an income or withdraw funds from your TFSA at a certain age.

Government Benefits - Because income from an RRSP shows up on a tax return, it may affect government benefits such as Old Age Security (OAS). Withdrawals from a TFSA are fully tax free and will not cause a reduction in OAS benefits. For some, this means they may qualify for the Guaranteed Income Supplement (GIS) even though they are receiving an income from their TFSA.

RRSPs and TSFAs are different animals. They each have distinct features and benefits that will affect people in different ways. Both of these tax preferred plans can play a role in your future.

Tax Efficient Savings– because it’s the right thing to do.

Call Hans Mathisen today at (306)242-7042.
or email -
hans@mathisen.ca

Copyright © 2012 Life Letter. All rights reserved

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LIFE LETTER

Home ownership can be less taxing than you think

Front lawns across Canada are sprouting For Sale signs. That this annual phenomena occurs at about the same time as the tax refund season may be purely coincidental. Understanding the financial incentives for home ownership available in the Income Tax Act may save you thousands when buying a home.

Home Buyer’s Tax Credit: First introduced in 2009, this program provides first-time home buyers with a credit based on $5,000 of home purchasing expenses. The credit is calculated by multiplying the $5,000 by the lowest marginal federal tax rate of 15% which equates to $750 in your pocket. Although this provision targets "first-time" homebuyers, you may qualify for the credit even if you have previously owned a home, as long as you have not owned one for at least four years. The credit is available to anyone with a disability at anytime as long as the new home provides an enhanced living environment for caring for the disability.

Home Buyers’ Plan (HBP): The HBP allows first time homebuyers to withdraw up to $25,000 each from their RRSPs without incurring tax. Treated as a tax-free loan, you must repay the funds to your RRSP within 15 years. If you miss a payment, you will be taxed on that portion of the withdrawal. Don't forget to specify the portion of your RRSP contribution that is for the HBP on your tax return.

Property tax refund: Depending on province of residence, you may be eligible for a tax refund or a tax credit for property taxes paid during the year. For example, Ontario offers a refundable tax credit of up to $250 for low to moderate income homeowners. tax to $250 for low to moderate income homeowners.

Mortgage interest deduction: Unlike the United States, your mortgage interest is not tax deductible in Canada. However, an increasing number of Canadian homeowners are taking advantage of the tax deductions available on investment debt by converting their mortgages into investment loans. It’s a rather convoluted strategy that must be carefully considered in light of your overall financial situation and risk tolerance. Always consult a financial and tax professional when considering such strategies.

Home office expense deductions: If you operate a business out of your home, you may be able to deduct a portion of your housing expenses. Among several criteria for determining deductibility of your home office is that the space used for business must not be used for personal living needs.

Principal Residence Exemption (PRE): Perhaps the biggest tax incentive provided homeowners, the PRE exempts capital gains earned on the sale of a principal residence from taxes. The residence can be either your primary residence or a vacation home as long as they are both "inhabited" some time throughout the year. Careful consideration should be given as to which property to apply it to ensure you receive the maximum benefit.

Homeownership has never provided more tax breaks than it does right now. There’s something for everybody, so it is important to understand the provisions that could benefit you.

Tax Efficient Home Ownership – because it’s the right thing to do.

Call Hans Mathisen today at (306)242-7042.
or email -
hans@mathisen.ca

Copyright © 2012 Life Letter. All rights reserved

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Mathisen Financial, Inc.
335 Redberry Road
Saskatoon, Saskatchewan S7K 4W5
Bus. (306) 242-7042 Fax. (306) 242-4314
Email:
hans@mathisen.ca