Year-end tax and financial planning considerations

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Year-end tax and financial planning considerations

RESP contributions and withdrawals

Registered education savings plans (RESPs) are used to save for a child’s post-secondary education. Contributing to an RESP can give you access to government grants, including up to $7,200 in Canada Education Savings Grants (CESGs), typically requiring $36,000 of eligible contributions. The federal government provides matching grants of 20% on the first $2,500 in annual contributions. You can catch up on shortfalls from previous years, to a maximum of $2,500 of annual catch-up contributions. But there is a lifetime limit of $50,000 for contributions for a beneficiary.

If a child is a teenager and there are a lot of missed contributions, the year-end could be a prompt to catch up before it’s too late. The deadline to contribute and be eligible for government grants is December 31 of the year that a child turns 17. And you need at least $2,000 of lifetime contributions, or at least four years with contributions of at least $100 by the end of the year a beneficiary turns 15, to receive CESGs in years that the beneficiary is 16 or 17.

Year-end may also be a prompt for withdrawals. The original contributions to an RESP can be withdrawn tax-free by taking post-secondary education (PSE) withdrawals. When investment growth and government grants are withdrawn for a child enrolled in eligible post-secondary schooling, they are called educational assistance payments (EAPs) and are taxable. If a child has a low income this year, taking additional EAP withdrawals from a large RESP may be a good way to use up their tax-free basic personal amount.

RRSP withdrawals, or RRSP-to-RRIF conversion

If you’re considering registered retirement savings plan (RRSP) contributions to bring down your taxable income, year-end does not bring any urgency. You have 60 days after the end of the year to make contributions that can be deducted on your tax return for the previous year.

If you are retired or semi-retired, year-end is a time to consider additional RRSP or registered retirement income fund (RRIF) withdrawals. If you are in a low tax bracket, and you expect to be in a higher tax bracket in the future, you could consider taking more RRSP or RRIF withdrawals before year-end.

If you are 64, you may want to consider converting your RRSP to a RRIF so that withdrawals in the year you turn 65 can be eligible for pension income splitting. This allows you to move up to 50% of your withdrawals onto your spouse’s or common-law partner’s tax return. If you are still working or you have variable income, this approach may not be best, since RRIF withdrawals are required every year thereafter.

If you are 71, the end of the year does bring some urgency, because your RRSP needs to be converted to a RRIF by the end of the year you turn 71. You can also buy an annuity from an insurance company. You will typically be contacted before year-end by the financial institution where your RRSP is held to open a RRIF.

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TFSA contributions

For those investing or saving in a tax-free savings account (TFSA), year-end is not a significant event. TFSA room carries forward to the following year, so if you do not contribute by year-end, you can contribute the unused amount next year.

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