Registered Retirement Savings Plans, Registered Retirement Income Funds, TFSAs and RESPs at one time, the rules for these types of registered accounts were pretty straightforward, but they have become rather complicated. Over the years, we have come across many accounts that have been set up incorrectly. Considering that these are some of your biggest assets, they can become very costly mistakes. Join us today as we take you through the best strategies to employ with your registered accounts to ensure you are retaining the maximum value of your investments.
Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management, and this is Think Smart with TMFG. Today on Think Smart with TMFG, Mike and I are going to be discussing all the mistakes that you can make when registering your different registered accounts. Mike, registered accounts are something that Canadians are very familiar with. A registered account is something like an RRSP, registered retirement savings plan, or a RRIF, a registered retirement income fund, a TFSA, a tax free savings account, or even an RESP, a registered educational savings plan. And one of the things that happens with each of these accounts is they all have different ways to set those accounts up, and often a lot of mistakes are made. So tell me, what are some of the good rules around, let’s say RRSPs and RRIFS. How should you set those accounts up?
Well, let’s start off with a few definitions, because we always use the term, because we’re in the industry, annuitant, right? And most people don’t know what annuitant is, right? So I always think of as annuity, if you get paid on annuity, you’re the one that’s going to benefit from the money. You’re actually basically the owner of the person, the annuitant would be the person who owns it. And when you go into spousal accounts, and things like there, there’s going to be a donor that’s going to be, let’s say the spouse, it was a husband put into a wife’s spousal RRSP. The wife would be, let’s say Jane Smith is the annuitant of the spousal RRSP and the spousal contributor would be John Smith. He put the money in, but later on once taken out, the benefit of it’s going to go to Jane, right, so that’s sort of the definition of annuitant.
And if you have your own RRSP, you’re the owner and annuitant. Sometimes things that gets a little bit confused is the second piece is there’s a successor annuitant, which is the person who would take it over, and then there’s the term beneficiary. And those are two different things. So think of the successor annuitant is the next owner of a plan. So if there’s one owner and that owner passes away, it goes to the successor. And then, the successor annuitant then becomes the owner of the plan. Now a beneficiary is a different type of situation. Again, it’s in the case where one person passes away. If you pass away, your RRSPs or your TFSA, and name a beneficiary, they’re going to get the benefit of the value of that account.
So it’s starting to get complicated already between successors and annuitants and beneficiaries. So let’s go back a little bit. When we started in the industry, all you needed to worry about was the beneficiary.
It was really simple. You had an RRSP, if you died, who’s the beneficiary of it? And if it was your spouse, they got that money tax-free. If it was dependent children, they were under the age of 18, they got it tax-free and everyone else there was taxes going to be due when you cashed in that RRSP.
The government decided that wasn’t simple enough. So they’ve come up with some new ways to do things.
So the new one is, as you say, it’s called successor annuitant. And so the best way to register, let’s call it a RRIF account. So you’ve got to register retirement income fund is to have your spouse’s successor annuitant. So if I died, my spouse, my wife, would then be the one who has that account. It would be her account.
If it’s a spouse, it goes through tax free. Again, it just, as if they took over. It’s like nothing ever happened, it just becomes their account. So it’s very smooth. The reality is even the beneficiary designation still allows all this to happen in the same manner. It just creates a lot more paperwork, a lot more complications and it just makes things more complicated.
So the recommended strategy is to go with successor annuitant?
What are some other considerations? Let’s say you have no children. Okay. And so you would make your spouse as the beneficiary or the successor annuitant, but would you have a secondary beneficiary?
Yeah. You can have a secondary beneficiary. I’ll give you where this is important. With older people, it’s many times important because you don’t know the condition that the spouse would be in when they receive that account. And sometimes one spouse would die and the other one may have Alzheimer’s. When they have Alzheimer’s, they can’t name a beneficiary. They’re no longer capable of making that decision. So along the line, when you name your spouse as your successor annuitant, you could also have an idea say just in case anything was going on there, I want to make sure that there’s a beneficiary named beyond that.
What about if you don’t have a spouse, who should be the beneficiary? Let’s say you have no spouse, but you do have children?
So children, it’s nice to have those beneficiaries. It avoids the will. So it skips through the will. It’s not part of the will, which is nice because it’s invisible. A will is a public document, but beneficiaries are not a public document. So if you want to leave some money to someone and not have it put out in public knowledge and public records, you can name them as a beneficiary on the accounts. If it’s RRSPs or anything like that it still has to go through the tax of the original owner, so you’re still paying things at your tax rate. If it was a tax re savings account, it would be tax free because it’s tax reinvestment.
There’s a few other little stipulations in there too. If you have a underage child or a minor child or dependent child, if you name them as a beneficiary, it has a whole bunch of different rules about it. They can take it out over a period of time up to they’re 18. And I believe if you have a dependent child that is fully dependent on you, because of a disability, you can leave your RRSPs over to them and that will-
Tax free. It will go through.
Regardless of their age?
Yeah. So there’s a bunch of little rules for special situations.
You and I come across a lot of accounts that just aren’t set up properly. And so this is pretty common. We take over a new client and we look at the account registration and it’s not set up properly, for whatever reason. Maybe you have an expose that’s listed as the beneficiary. Maybe someone who’s not even alive anymore is listed as the beneficiary. So it’s really important to get these things straight. What about tax free savings accounts? So tax free savings accounts, the limit this year is $6,000. The total limit since they started these things in 2009 is now $81,500 that you could put into your TFSA. So some of those TFSAs are approaching 150,000 or more. Who do you make the beneficiary of your TFSA?
To start off, successor annuitant should be the spouse. Beyond that you have the choice to make it the kids. Another interesting planning thing is people have used that in many cases to leave money to certain people that they wanted to help out over life. Because again, it doesn’t have to go in the will, so you can leave it to your kids, but whoever you leave it to, there’s no advantage to leave into your kids. If your designated beneficiary going to avoid probate fees, but you can leave it to your kids, you could leave to someone who’s important to you, or you could leave it to a charity. And again, that’s going to give you a state of tax reduction in there too. So there’s a lot of choices in those tax free savings accounts.
So I’ve had a few examples where clients have passed away over the last few years and they used to have $120,000 each in a TFSA. Now one spouse is left and they’ve got 200, 250, $260,000 in that one TFSA account. And that’s because the account was set up properly. The money rolled in to the spouse’s account because they were the successor holder.
And you can have multiple beneficiaries too, which gives you an advantage. If you want to leave, let’s say a certain amount of money to a charity and you try to estimate where your TFSA would be, you can get a percentage like 20% of your TFSA. Usually we say, do not leave percentages in your will, because if you leave a percentage to a charity in a will, they’re required to audit the estate and find out what everything’s worth. Because a TFSA or anything like that has a specific value, if you say 20% of my TFSA is going to go to the Canadian Cancer Association, it’s just set up. It’s easy for them to do to just 20% of what that value is, gets sent out to the Canadian Cancer Association. A lot simpler than have anything like that inside your will.
Definitely. What about open accounts? So open accounts, we call them multiple names, open accounts, investment accounts, cash accounts. It’s money that’s not registered. What is the best way to set that up, if you’re married?
Oh, joint tenants with rights of survivorship.
So joint tenants, meaning they live together?
And right of survivorship. So if one of them passes away, it becomes the other individual’s account?
Now the account needs to get re-registered in their name, but it literally rolls over without any tax implications?
Is it a good idea to have multiple names on the account? What about putting your children on the accounts?
Well, you get in a lot of problems there. Number one, from what, you create a very gray area in taxes, for your accounts side of things. There’s income attribution rules but it gets very complicated. The second piece you have is now you take on the liability of any of your children. If your children gets sued, that’s now an asset of them. If they have a marital breakdown, that’s one of their assets. So it opens you up to a lot of risk and we find it’s just not worth it.
What about just leaving the account in the individual’s name? What if I put, Rob McClelland open account? Why would that not be a good strategy if I’m married?
Well, you’re subject to probate fees. So if it has to go to your spouse, the government’s going to take one point half percent to pass that asset along to your spouse. Plus it’s going to be held up for six months while probate clears. Joint tenants with the right of survivorship, literally within a week from when we find a client passes away, it’s in the surviving spouse’s name and all set up and running. It doesn’t miss a step in between.
What about RESPs, registered educational savings plans? We’ve been dealing with them over many, many years. Should you have an individual RESP or a family plan?
Families are much better. Just give you more options. Again, it’s more of a logistic side of things because you can move things. If there’re separate ones, you can still move in family members, but it’s a ton of paperwork and a ton of confusion. If you have a family RSEP there’s no disadvantage. So in all these things that we’re saying, when we suggest, let’s say successor annuitant or we success family RESPs, there’s really zero disadvantage to it. And there are disadvantage to the other piece. So this gives you all the advantages, none of the disadvantages, there’s really no reason not to set anything up that way.
So what about your house? Why might you put your house in one spouse’s name and not the others?
A lot of business owners do this. If they’re at risk of being sued, they want to make sure their house is a protected asset. So you see that many times. From tax treatment, even if you put in your own name, people get confused. They think that it gives you double principle resident, it doesn’t. You’re only allowed to have one principle residence. If your spouse has a name and their name and you have one in your name, only one can be designated as your principal residence.
It’s interesting. I actually think our house is registered in Ingrid’s name. Our cottage is joint. So, I was about being sued. Luckily, touch wood, I have never been sued and that’s my plan for life, to never be sued. I don’t know whether I need to change it, but probably at some point it might be worthwhile to go and do an adjustment on it.
Yeah, because nowadays it would start to make sense because of the value of homes, right? If you get a home it’s two or $3 million, which is an expensive home right now, and if you figure $3 million at 1.5%, you’re $150,000 in a fee. That’s nothing, just a fee to pass your… This is for the government to fill one form and take your house and move it from your wife’s name to your name, they’re going to charge you $150,000 to do that. It’s insane.
You’ve deemed to have sold the house.
Yeah. You don’t have to pay tax on it, but still that fee is insane for one paper transaction.
What about making your kids as… And if you’ve got a primary resident. We’ve got three kids, should we make them joint owners of the cottage or joint owners of our house, which is our primary resident? What should we do there? What are your thoughts?
And just to correct myself, sorry, it’s $45,000 in 3 million. I was thinking that probate fee was expensive. So on a $3 million house, you’d be about 45,000 in probate fees.
But would you have to pay a land transfer fee?
Usually not between spouses or anything like that. Usually they have a… Depends on where you’re doing it, but usually for, I think it’s called for love and admiration or something, you can transfer houses between family members without land transfer taxes.
So let’s go back to the question. Should you bring your kids in to ownership of properties, a vacation property, your primary residence?
I think it’s more clean to do a sale. If there is a child that wants the property, I think sometimes it does make sense to start that process before it becomes an estate issue. But I think it should be done as a clean buy. Maybe the parents hold a mortgage or something like that. But when the child has the ownership, they should also take the responsibility of it too. And that makes it more fair for the families. And plus the big thing is the bills disappear, right? And when that comes over, a lot of parents say, I’m going to throw my kids on everything and they’re still paying all the bills. And they’re a situation, they don’t use the cottage anymore. They’re paying for all the upkeep and the kids are having their name. And you got to have a sense of fairness too. So if one child has the cottage going into their name, they should have the money put out for that.
So, long and the short of it, you can make a lot of mistakes in terms of account registration. Some mistakes that are really difficult to recover from.
Especially when you’re taking some of the biggest assets that you own, your house, some of your investment accounts, et cetera. Are there any extra tips that we thought we might provide that, couple of things that we do for our clients to take advantage of?
Fees, you can direct your fees. Anything to do is if you charge your TFSA fees to your open account, it allows that TFSA to grow tax free, not a big deal, but it helps you out a little bit over time.
So if you’re paying a 1% fee or a 1.5% fee, that TFSA account will grow that much faster tax free.
Yeah, so that helps out a bit. Other things RRIFs, taking a RRIF payment, you can choose to take the younger spouse as the age base for the payments, which allow you to take a lower minimum payment. It creates less taxable income for you along the way.
I think that’s really important, especially if your spouse is quite a bit younger yet, if they’re five or 10 years younger, you should always do that. It just gives you more flexibility. And so those are some things that we’ve learned over the years that really work.
And also maximizing low tax brackets. That’s something we always talk about. Canada is, we’re known as expensive nation in tax. We’re very expensive for people working and making decent money. We’re actually a very cheap country if you are a senior citizen who’s on average income. It’s not that expensive of a country. If you make $30,000 a year, your marginal tax rate’s only 20%. Your flat tax rate’s going to be somewhere around 10%, it’s pretty low. And when you get into that, if someone has low income, they don’t have a lot of pension income, sometimes you can bring up that taxable income on some very low tax rates.
So are you saying that you think our retired clients are getting a good deal? I think that’s a dangerous road to go down.
I see the tax returns.
I think we should end the podcast right there. That brings us to the end of another week. Thank you for joining us. This is Rob and Mike with Think Smart from The McClelland Financial Group of Assante Capital Management, reminding you to live the life that makes you happy.
Assante Capital Management (16:53):
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