Value Your Tax Advisor as Well!

It is RRSP silly season again.  Every year at this time, we are inundated with radio, television and print ads that make no distinction as to who should be using RSPs.  In fact, quite the opposite is true, and everybody that has a pulse and an income last year is encouraged to get that deposit in before March 3^rd. The truth is, even before the introduction of the TFSA, RSPs were not wise choices for many individuals.  Why?  First, taxes!  More specifically, YOUR taxes.  The announcer, the actor, nor the writer of those ads, knows anything at all about YOUR taxes.  Second. Refund myopia!  How can we not love the idea of getting a cheque in the mail, from the government no less?  Short sightedness triumphs and we see the benefit of an instant refund without adequate evaluation of the eventual taxes.  All we see is that if we deposit $1000 we get a refund of $200, $300 or even $500.  We have immediately turned a $1000 into as much as $1500.  Wow!  What is being missed though, is would you be as happy if the opportunity was presented as, “If you put in $1000 dollars now, I will give you $200 immediately, but when you take your $1000 back out, I will charge you $500 or $600.”   Would you take that deal?  Every year many do.  How can that be the case?  Well, the explanation is in YOUR taxes and you are unique.  Get good advice.  Do not just follow the piper of RRSP ads.

TFSAs are a good alternative for many.  Possibly, they are a great alternative for solving YOUR problem.  Why?  Simply because you get the exact same benefit of tax free compounding without the risk of undoing this advantage with an untimely or final withdrawal.  Your tax free advantage is assured.   With a RSP, it is anything but.  TFSAs allow you to contribute $5000 per year for every year you are 18 or older after 2008 and $5500 per year beginning in 2013.  Any income earned will NEVER be taxed.  Yet the funds are readily available for withdrawal (subject to how it is invested) at any time.  They are an obvious good choice for non-RSP funds, but even so they need to be integrated properly into your investment plans, because they do carry a few disadvantages.  The most obvious one being some forms of investment income or gains are taxed at preferential rates and this preferable rate is lost on those assets when placed inside a TFSA.  Your choice of what investments to be carried inside the TFSA, your RSP and outside of both still requires careful thought to maximize the available tax advantages.

As technology has advanced, tax authorities everywhere have been able to increase information available to them and thus increase enforcement.   Canadians, who are long term visitors to the US, are seeing heightened enforcement.  If you spend too many days in the US this year (think more than 120 days/ 4 months) or in the 2 previous years, you may have to file a US tax return and pay taxes in the US.  In the least you have some US non tax forms to file.  Until recently, it was a practical reality, that neither Canada nor the US knew how many days you were in each country.  Increased data collection at the borders and sharing of information among governments has changed that.   Those 5 months in Florida may have additional costs attached to it.

Please hug your American friends, if they live here in Canada.  They will need it, since this year it gets even worse for US Citizens or past and present Green Card holders living in Canada.  The US Foreign Account Tax Compliance Act (FATCA) passed in 2010 is proposed to come into force at Canadian Financial Institutions on July 1, 2014.   This Act requires Canadian banks to provide disclosure of US persons’ accounts to the US.  US Persons can no longer assume they are invisible to the US tax authorities.  As a US person, there has always been a requirement to file and pay any US taxes, wherever they lived in the world.  Most US persons ignored this requirement if they lived in countries with a higher tax rate than the US and a treaty between their country of residence and the US.  A decade ago, this changed when the US began more seriously enforcing some asset reporting from US persons living abroad and filing an income tax return became part of the response.   Many chose to keep ignoring these requirements in the belief the US authorities knew nothing about their whereabouts.  No longer is this true.

Interestingly, a US person living in Canada and holding a TFSA may not have the same advantages as a Canadian and the account will not be Tax Free, likewise for RESPs.  Both of which are not recognized by US tax laws.   The convoluted laws also may affect the ability to hold Canadian mutual funds or some insurance policies.  So if you are American born, but have lived in Canada your whole life and are a citizen, you are deprived of the same tax rights as a Canadian born citizen unable to gain the advantages of a TFSA, RESPs, all Canadian Mutual Funds and certain insurance policies.