Your questions have been piling up in the my inbox, and today I'll answer two of them.
Just a reminder: I receive a lot of readers' e-mails, and I can't answer all of them personally. However, I read all of your questions and use them to formulate column ideas that, I hope, will resonate broadly with readers. I also choose certain questions to answer directly in my Investor Clinic column, often with the help of outside experts.
The main purpose of Investor Clinic, after all, is to educate people about investing, and hearing from readers helps me to know what's on your minds. So keep the e-mails coming.
Let's get to your questions.
Our nieces are in their late 20s and my wife and I would like to help them with their savings. Can we contribute directly to their registered retirement savings plans (RRSPs) or must I give them cheques, which they deposit and then contribute to their RRSPs? We have been trying for years to get them to think long term toward their retirement and the benefits of starting young, unfortunately with little success to date.
I asked John Waters, head of tax and estate planning with BMO Nesbitt Burns, to weigh in on this one.
"In this scenario the best course of action would be to gift the funds to your adult nieces in order to enable them to contribute directly to their respective RRSPs, provided they each have sufficient unused RRSP contribution room available," Mr. Waters said. It's important to realize that, once the money is inside in their RRSPs – regardless of how it got there – your nieces will have control over the funds, he said.
Keep in mind: If you make a gift to a minor child, including a niece or nephew, the income earned on the money could be attributed back to you. The income attribution rules could also potentially apply to adult children on loans where no or low interest is charged, if income-splitting is one of the main purposes of the loan. However, gifts to your adult nieces – or to one's own adult children – would not invoke these attribution rules.
Another consideration, Mr. Waters said, is whether or not your nieces would be better off contributing to their tax-free savings account (TFSA) rather than their RRSP, assuming they each have unused TFSA contribution room available. There are pros and cons to each approach: Although an RRSP contribution will generate an immediate tax deduction, future withdrawals from the RRSP will be taxable (except for amounts qualifying for the Home Buyer's Plan or Lifelong Learning Plan). On the other hand, while the TFSA contribution will not generate a tax deduction, future withdrawals from a TFSA are not taxable, he said.
"In weighing the benefits of contributing to an RRSP versus a TFSA, you should consider the tax rate at the time of contribution and the time of withdrawal," he said.
"There are a number of considerations but, as a rule of thumb, an RRSP contribution will generally be more beneficial where you are in a higher tax bracket when contributing than you expect to be when drawing upon your RRSP funds, including the impact of a possible clawback of any government benefits. However, if your nieces are currently in a low tax bracket, a TFSA contribution may be preferred."
Is there a telephone number or website where I can find out my remaining TFSA contribution eligibility? I think I have invested close to the maximum, not including the $5,500 allowable contribution for 2015, but I lost track of the precise figure.
The good news is that the Canada Revenue Agency has both a telephone number (1-800-267-6999) and a website where you can check your TFSA contribution room. The bad news is that the information might not be up to date.
I used the CRA's My Account service to check my own TFSA contribution room. The website said it was $11,000, but it's actually zero because I have maxed out my contributions every year. I checked my wife's TFSA room – same problem. The reason for the discrepancy is that the CRA does not yet include contributions made in 2015. What's more, the website says it "may not yet reflect all the TFSA transactions you made during the previous year." So our 2014 contributions haven't been recorded yet, either.
The 1-800 number was even less helpful. When I called, I got the following recorded message: "As the CRA is currently receiving information from financial institutions, we are unable to calculate your TFSA contribution room for 2015 at this time."
As a result, the onus is on the TFSA holder to determine his or her contribution room accurately. The website provides a TFSA calculator, but you'll need records of all of your previous contributions and withdrawals in order to use it. If you don't have that information, check with your financial institution.