Lockdowns have changed our lives in many ways. In addition to the various restrictions imposed to protect our health, we’ve seen work reorganized in a way that many of us find most welcome, namely telecommuting. Combined with restrictions on social gatherings and closures of various establishments, these changes have made urban living a little less attractive for some people. Are you one of those who long for a house in the suburbs or a bolt hole in the countryside?
For others, the pandemic has deprived them of their jobs or has given them the urge to go back to school so that they can improve their career prospects. No matter what your favorite project is, how you choose to finance it matters.
Your RRSP can give you a leg up
Generally used to save for retirement, the Registered Retirement Savings Plan (RRSP) is a tax-sheltered investment vehicle whose contributions provide a tax deduction, which in point of fact is only a tax deferral until the money is withdrawn.1 That’s why it’s an ideal long-term savings tool. So how can an RRSP help you realize your dream of getting out of the city or going back to school?
The HBP is a major ally
If you’ve never owned property, consider the Home Buyers’ Plan (HBP). It offers a significant benefit to anyone who wants to buy or build their first home by allowing an RRSP withdrawal of up to $35,000, with no tax impact, provided that the RRSP is repaid within 15 years starting from the second calendar year after the one in which the withdrawal is made. It should be noted that repayments do not qualify for deductions.
In 2019, new rules were put in place for the use of the HBP by an individual after the breakdown of a marriage or a common-law relationship. Of course, you must meet the eligibility requirements for the HBP and the RRSP withdrawal to be able to take advantage of it.2
The LLP is also an option to consider
Are you unhappy at work or, worse, have you lost your job because of the pandemic? Such setbacks are unfortunate, but they could mean that now is the right time for you to make a new start by going back to school! Why not take the opportunity to enhance your professional profile by adding a few feathers to your cap? The Lifelong Learning Plan (LLP) allows you to make a tax-free withdrawal so that you or your spouse can go back to school. Each of you may withdraw up to $10,000 in a calendar year to a maximum of $20,000 for the duration of your participation in the LLP; moreover, your participation can be repeated as many times as you wish.
To meet the requirements, you must have an RRSP, be a resident of Canada and be enrolled full-time in an eligible training program at an accredited educational institution. The amounts withdrawn from your RRSP under the LLP will have to be repaid over a 10-year period, unless you die, cease to live in Canada or turn 71. In such cases, the withdrawals will have to be repaid sooner.3
The TFSA serves a variety of objectives
If you’re an adult resident of Canada with a social insurance number, the Tax-Free Savings Account (TFSA) can help you save for certain projects – establish an emergency fund, acquire a car, buy a cottage and so on. You could use your TFSA to finance a return to school, to make a down payment on a house or to buy that cottage you’ve been dreaming of!
The TFSA is a highly flexible vehicle. For example, it allows you to save without being taxed, and all the investment income generated by your savings – whether interest, capital gains or dividends – is completely tax-free.
Above all, with a TFSA you can contribute or withdraw money at any time without losing your contribution rights, provided you follow the applicable rules, such as not exceeding the annual contribution limit, because any excess carries a tax penalty of 1% a month.4
For more information, visit the Canada Revenue Agency website.5