Q. After making the maximum RRSP contribution this year, I will get a tax refund. What’s the best strategy for using this money? – Persaud D.
A. There are several options available to you. A good idea is to pay down or eliminate debt, starting with your highest interest rate debt. For most people, this is credit card debt which can have interest rates as high as 28% or more. If you don’t have credit card debt, you may have other debt such as a mortgage, or you may have children and want to start a Registered Education Savings Plan (RESP). Otherwise, use the tax refund to make an early contribution to your RRSP for 2006. A final piece of advice is to plan now not to get a tax refund in 2006! If you regularly get a significant tax refund each spring, perhaps due to RRSP contributions made during the year, consider applying to the Canada Revenue Agency (CRA) for a reduction of tax withheld at source by your employer.
Q. I am the single mother of a special needs young adult who lives in a group home. I understand that I can roll over my RRSP savings to him on a tax-free basis, much the same way as when a spouse dies. Is this true and if so, how does one go about it? -Rosemary A.
A. A child/grandchild of any age, who was dependent by reason of physical or mental infirmity, can receive RRSP/RRIF payments to an RRSP/RIFF or annuity to age 18. If a child/grandchild was financially dependent on the deceased any portion of the RRSP or RRIF can be transferred to an RRSP, an annuity or a RRIF in the child’s name on a tax-free basis. A child/grandchild will be presumed to be not financially dependent if his/her income is greater than $15,244 (2006 proposed). If the child/grandchild was financially dependent but not handicapped, the RRSP or RRIF funds can only be transferred to an annuity to age 18. If the child/grandchild’s income in the year prior to the annuitant’s death exceeds the basic personal exemption (proposed $9,039 in 2006), then he/she is not presumed to be financially dependent.
In the circumstances of transferring RRSP/RRIF assets upon the death of the annuitant, the financial institution does not determine if the financially dependent child/grandchild qualifies for the tax-sheltered rollover. Instead, the registered plan is paid out to the estate and the deceased’s legal representatives and the qualified beneficiary jointly file a T2019 (RRSP) or T1090 (RRIF) with CRA to have the designation overridden. Also note that by designating someone other than the estate as the beneficiary of the RRSP/RRIF, it is possible to save probate fees. It is advisable for you to consult tax and legal professionals to ensure your get the best advice for your individual situation.
Bev Moir is a financial planner with The Moir Team at ScotiaMcLeod in Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member CIPF.
This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.
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