Created in 2009, a Tax Free Savings Account (TSFA) is a registered savings vehicle that allows you to earn investment income tax-free inside the account. Canadians aged 18 and older, with a valid SIN (Social Insurance Number), can contribute up to $5,000 every year in a TFSA. Your TFSA can hold any combination of eligible investment vehicles, such as cash, stocks, bonds, GICs and mutual funds. You do not have to pay taxes on earnings within the account (including interest, dividends or capital gains) or on money you withdraw from the TFSA. Contributions to the account are not tax-deductible, however, unlike contributions to your RRSP.

If you withdraw money from your TFSA, your annual contribution limit increases by the amount withdrawn – but not until the following calendar year. For example, if you withdraw $1000 from your TFSA in 2010, in 2011, $1000 will be added to your contribution room.

It's important to remember not to exceed the maximum contribution room that you have for the year as you will be taxed one per cent a month on the highest excess amount for that month until you remove it from the TFSA.

Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits such as Old Age Security (OAS) benefits, guaranteed income supplement (GIS) or Employment Insurance (EI) benefits or credits such as the goods and services tax credit/harmonized sales tax credit, or the age credit.

RRSP (Registered Retirement Savings Plan)

Description
A registered Retirement Savings Plan (RRSP) is the most popular vehicle available to individuals to defer taxes and save for retirement. Contributions made to an RRSP are tax deductible. Furthermore, the earnings in the plan accumulate on a tax-deferred basis. The funds held within the plan will be taxable only when they are withdrawn. Typically, the investor's tax rate is lower at that time. RRSPs must be terminated/converted once the investor reaches the age of 71.

Registered Retirement Income Funds (RRIFs) and annuities are designed to distribute the assets that have accumulated in an RRSP by providing a steady flow of income to the investor upon termination of the RRSP.

Setting Up an RRSP
Anyone 71 years or younger who has earned income in Canada (and thus a social insurance number) can create and contribute to an RRSP, including non-Canadian residents. There is no limit on how many RRSPs an individual may hold, but the total permissible contribution limit remains the same.

Spousal RRSPs
Spousal RRSPs are plans where the plan holder's spouse is the contributor. This allows couples to split their income in retirement years in order to minimize their income taxes. Usually, the spouse in the higher tax bracket is the contributor since it is the plan holder (in a lower tax bracket) who will eventually receive the income from the plan and will thus pay less tax. Since the contributing spouse is not the plan holder, he or she has no control over investment decisions.

The eligibility requirements to set up a spousal RRSP are identical to those for an individual RRSP.

Contributions
For any given year, tax-deductible contributions may be made during the year or within 60 days after year-end. The investor decides if the contribution made during the first 60 days of a year is applied for that or the preceding taxation year. Unused contribution room may be carried forward to future years.

Over Contributions
There is a maximum cumulative over contribution limit of $2,000. Any amount over this limit is subject to a 1% penalty per month.

Please note:
• This only applies to plan holders older than 18 years of age.
• Over contributions cannot be deducted from taxes. However, they may be deducted in subsequent years when RRSP room becomes available.
• Earnings on over contributions are not subject to penalty fees.

Refunds of Excess Contributions
Excess contributions may be withdrawn by completing a T3012A form. Once withdrawn, these funds must be declared as income but no withholding taxes are applied. A tax-deduction is granted to offset the increased income taxes payable.

Unclaimed Contributions
Amounts contributed in any given year need not be deducted in that year. These amounts may be carried forward and deducted in future years.

1. Canadian residents
• Withdrawals must be declared as income in the year of withdrawal.
• Canadian residents receive a T4RSP form indicating the amount of the withdrawal that must be included in income. Quebec residents receive a Relevé 2 form as well.
• Withdrawals are subject to withholding taxes.

2. Non-Canadian residents
• The gross amount of the withdrawal is subject to a 25% non-resident tax unless otherwise specified by a tax treaty or by Revenue Canada.
• An NR4 form is issued stating the withdrawn and withheld amounts.
• Revenue Canada can lower the withholding tax upon reception of an NR5 form making the request. A valid reason must be supplied.

Beneficiary Designation
Beneficiaries may be designated within the plan itself or in a will (in Quebec, it must be stipulated in a legal will). In case the name of the beneficiary listed on the plan differs from the name stated in the will, the will takes precedence.

Transfers
Funds may be transferred from one RRSP to another without tax consequences. This can be done using a T2033 form

Death
Upon death, the funds in an RRSP or RRIF are normally taxed with the estate unless transferred to the spouse's RRSP or RRIF, provided that the spouse is named as beneficiary. Otherwise, the funds may be transferred and taxed with a financially dependent child or grandchild, unless used to purchase a term annuity to age 18.

Marriage Breakdown
Subsequent to a court order, upon a marriage breakdown, an RRSP may be split and transferred to a spouse. To comply with the transfer, StrategicNova would require a copy of the judgment and a completed T2220 form.

Retiring Allowance
A retiring allowance (which includes severance pay and amounts received for wrongful dismissal) may be transferred tax-deferred to an RRSP rather than taxed as income when received. There is a limit of $2,000 for each year/part year of employment before 1996, plus $1,500 for years of employment before 1989 for which no employer pension contributions have vested. A transfer of a retiring allowance requires a TD2 form.

Pension Plans
Transfers from Registered Pension Plans (RPPs) and Deferred Profit Sharing Plans (DPSPs) to an RRSP are generally not allowed. Due to the nature of pension funds, these transfers must be done into a locked-in RSP (LRSP or a LIRA). If the pension funds are not locked in, then the transfer is allowed.

RRIF (Registered Retirement Income Fund)

Setting Up an RRIF
An RRIF must be set up through a transfer from an RRSP. This can be done at any time, but is usually done in the year that the investor turns 71, when the RRSP must be terminated.

Required documents:
• RRIF application form
• T2033 form required to transfer the assets from an RRSP
Spousal RRIFs

An RRIF must be set up by the end of year in which the RRSP plan holder turns 71. In the case of spousal RRSPs, spousal RRIFs must be set up. The plan holder remains the same and it is she or he who receive and declares the income payments. Furthermore, a spousal RRIF cannot be transferred to an individual RRIF.

RRIF Income Payouts

A. Withdrawals in the first calendar year of a RRIF's existence

There is no minimum amount that must be withdrawn in the first year of an RRIF's existence. Accordingly, any withdrawals will be subject to withholding taxes in addition to normal income taxes.

B. Withdrawals in subsequent years

Each year, a minimum amount must be withdrawn. This amount differs and must be calculated at the beginning of each year.
There are two methods to calculate the minimum amount depending on whether the RRIF is a qualifying one or not. A qualifying RRIF is one that was set up prior to 1993 and has had no deposits after 1992.

LRSP & LIRA (Locked-In Registered Plan)

Setting Up an LRSP/LIRA

Required documents:
• LRSP/LIRA application form
• LRSP/LIRA Addendum (The Addendum specifies the locking-in provisions)

Why Are Funds Locked In?
Pension plans are regulated by particular legislation. Each province has it's own legislation (Pension Benefits Acts), while federal legislation governs the pension plans of certain types of companies. When an employee with a pension plan terminates his or her employment, the Pension Benefits Acts permit the employee to transfer vested pension benefits to an acceptable alternative plan. Since most pension benefits are locked-in, the alternative plan must also be locked-in. Thus, the locking-in provisions ensures that the characteristics of the pension plan are maintained and provides the annuitant with an income stream similar to that which the pension fund would have paid upon retirement.

LIF (Life Income Fund)

Setting Up a LIF

Requirements
• LIF application form
• Addendum (The addendum specifies the locking-in provisions)
• Spousal consent