Government programs help you save money

It’s often difficult for producers to save money outside of the farming operation.

Farming requires intensive cash flow management techniques, especially if producers are trying to expand their operations. However, it can be important to try to be diversified and have savings for rainy days.

Contributing to a Registered Education Savings Plan, Tax Free Savings Account or Registered Retirement Savings Plan can be a sound plan with many incentives.

RESPs are a great way to save for a child’s or grandchild’s education. Benefits include:

  • The government will match 20 percent of the contribution up to a maximum of $500 per year, which requires individual contributions of $2,500 per year. As well, the grant caps out at $7,200 in total for the lifetime of each beneficiary. Everyone qualifies for this grant.
  • Tax-deferred earnings: Any investment income in the account is deferred to when it is taken out by the beneficiary. These earnings are attributed and taxed to the student using the funds. Generally, this is a much lower tax rate, and often no tax is applicable.

Be aware that RESPs do not allow you to deduct contributions from your taxable income.

TFSAs have similar benefits to an RESP:

  • All earnings are tax-free, leaving additional money in the account to be reinvested.
  • The withdrawals from TFSAs are tax-free, which avoids tax on investment earnings As of this year, TFSAs have an annual contribution limit of $5,500. Your limit could be $46,500 if you have never put money into a TFSA.

Like RESPs, the contributions are not tax deductible.

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RRSPs have two forms of tax benefits:

  • The contribution provides immediate tax relief because it decreases taxable income. RRSP contribution limits vary depending on income level, which for this year is 18 percent of earned income to a maximum of $25,370.
  • Investment income is accumulated within the account and grows tax-free until withdrawn.

RRSPs are normally considered a long-term savings vehicle. Withdrawals will be taxed, but there are exceptions, such as buying your first home or using the funds to pay for your education.

Different savings vehicles shine as a p erson matures and starts a family.

  • Young people should consider contributing to their TFSA be-cause reducing income through RRSP contributions will not provide significant tax benefits
  • Contribute to RRSPs when earnings increase because the contributions will reduce taxable income and provide tax savings.
  • Contribute annually to children’s RESPs to ensure that maximum grants can be received.

However, remember that significant penalties can apply if you invest in excess of your annual limit for any of the above accounts.

Many strategies are available so it is wise to consult with a professional on what strategy best suits you.

Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca

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About the author

Colin Miller — Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.

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