RRSP vs. TFSA

The one fundamental that all investment advisors can agree on is for you to save your money.  The grey area starts when deciding on which saving vehicles to use: your tax free savings account (“TFSA”) or retirement savings plan (‘RRSP”).

The key differences between your TFSA and RRSP are as follows:

• TFSA contributions are not tax deductible;
• Withdrawals from your TFSA are not taxable, including income/gains earned on the investment;
• The maximum annual contribution to your TFSA is $5,000 whereas your RRSP limit is 18% of your earned income up $22,970 for 2012;
• TFSA does not have a maturity date whereby you have to start withdrawing; and
• TFSA withdrawals can be re-contributed in the following calendar year.

Some of key considerations when deciding between your TFSA and RRSP are as follows:

• Your current vs. future marginal tax rate – If you are currently in a lower tax bracket you are not getting the full tax benefit of a RRSP in the year meaning it may make sense to contribute some of your money to a TFSA.  As your income level rises and tax savings become more a priority, a RRSP may be the answer.
• Receiving benefits – Certain benefits are calculated based on your level of income (e.g. Old age security, child tax benefits etc.).  RRSP withdrawals are included in this income calculation whereas TFSA withdrawals are not.
• Investment plan – If you are saving for the short-tem, a TFSA offers more flexibility in terms of withdrawing funds.

If you are now officially confused, you are in the majority.  Let Welch LLP help advise you on the savings strategy that best suits you.

- Mathew Irwin, CA
Partner
Welch LLP 

Dalton McGuinty and the 2% Surtax

So, under pressure from the NDP, Dalton McGuinty has added a 2% surtax to taxpayers that have income in excess of $500k…but is it really a 2% increase?

No, it’s not.

There is already in place a 56% surtax on high rate Ontario tax. By increasing the standard top rate from 11.16% to 13.16% (the publicized 2% increase) the net effect is actually to increase the  rate by 3.12% (2% x 1.56). Combined with the top federal rate of 29%, it now means that the highest personal tax rate in Ontario will come very close to 50%! The last time we saw tax rates that high, Bob Rae was the premier – and we know what happened to the economy when he was in charge.

This is not good tax policy when the government should be creating jobs not punishing the successful entrepreneurs.

- Don Scott, FCA
Director of Tax Services
Welch LLP

Other business-related incentive tidbits in the federal budget outside of the SR&ED changes

While the federal budget of last week contained widely anticipated changes to the Scientific Research and Experimental Development (SR&ED) tax credit, it also contained many other aspects of funding and incentives to encourage innovation and commercialization:

• $400 million to help increase private sector investments in early-stage risk capital, and to support the creation of large-scale venture capital funds led by the private sector.
• $110 million per year to the National Research Council to double support to companies through the Industrial Research Assistance Program.
• Western Innovation Program
• $ 14 million over two years to double the Industrial Research and Development Internship (IRDI) program.
• $12 million per year to make the Business-Led Networks of Centres of Excellence program permanent.
• $500 million over five years, starting in 2014–15, to the Canada Foundation for Innovation to support advanced research infrastructure.
• $105 million over two years to support forestry innovation and market development.
• $95 million over three years, starting in 2013–14, and $40 million per year thereafter to make the Canadian Innovation Commercialization Program permanent and to add a military procurement component.

To read Terry’s full article about these changes, please click here.

- Terry Lavineway
Director of Business Incentives
Welch LLP 

Changes to SR&ED Tax Credit in 2012 Federal Budget – Are they impactful and meaningful?

The Scientific Research and Experimental Development (SR&ED) program was one of the long-anticipated and highly debated areas expected to be addressed in the 2012 Federal budget. Politically, the government needed to show they were listening to their taxpayers over a number of recent years given the amount of consultations, the amount of press and discussion about the SR&ED program and, certainly, Innovation Canada: A Call to Action (also known as the Jenkins Report).

The biggest change introduced relates to the tax credit rate available to SR&ED claimants who are not Canadian Controlled Private Corporations (CCPC’s). The tax credit rate for non-CCPC’s will decrease from 20% to 15%. This is a significant reduction. The government’s view is that the reduction of the corporate income tax rate since 2007 along with the corporate tax restructuring of non-CCPC’s has resulted in growing pools of unused tax credits; these corporations are not generating enough taxable income in Canada to make use of all the SR&ED investment tax credits that they are generating. Therefore, the government reasons that they can reduce the rate from 20% to 15% without much impact. While this may be true in many cases, there are definitely large taxpayers in Canada who will be significantly impacted by this reduction.  Only time will tell how this change will impact the amount of R&D performed in Canada by multi-national corporations or even medium-sized corporations who do not qualify for the CCPC enhanced rate.

The other changes proposed are categorized as follows:

1. Simplifying the tax credit base
2. Increasing the cost effectiveness of the program
3. Enhancing Predictability

I further discuss these points in an article that can be found here.

- Terry Lavineway
Director of Business Incentives
Welch LLP