Archive for the ‘RRSP’ Category

When you agreed (if you agreed) to become someone’s executor, I don’t know if everyone is really ready for the work that’s required of you.  If you have some money, there’s usually a trust company who will happily charge you a fee to help you through the process.  If the estate is large or complicated, I recommend looking at these services because as executor you have now taken on legal responsibility to ensure the will is executed and not to scare anyone, if it’s found that not everything has been done properly the estate and government CAN (not would) legally seek compensation.

The Ontario government has a pretty good website to help you to deal with the situation:  http://www.ontario.ca/government/what-do-when-someone-dies

So first you need to determine if the person has died intestate which is the legal term for someone who died without a will.  If that’s the case the government will seek out an executor (most likely a close relative) and ask them if they want to be executor and if the answer is yes, the estate will be disposed of and distributed according to a government formula.  Usually it works like this (I have listed Ontario law, but most other provinces follow something similar):

  • If have spouse and no children  (issue – don’t have to be legitimate) – everything to spouse
  • If spouse and issue  AND estate less than 200K – everything to spouse
  • If spouse and  One issue AND estate greater than 200K – first 200K to spouse and remainder 50/50 to spouse and issue
  • If spouse and multiple issues AND estate greater than 200K – first 200K to spouse remainder 2/3 equally divided among children and 1/3 to spouse
  • No spouse and no issue – parents first and if no parents then equal among siblings  and if no siblings then nieces and nephews and if no close relative then next of Kin and there’s a whole table to see who’s down the line.

The government will be happy to deal with the estate for you (for a fee with set rates).

Say you are an executor for someone who died testate (have a will) then you as the legal representative is there to ensure the will gets executed the way the deceased intended.

But before you get happy handing out money, you need to ensure the following are done:

  1. Get a death certificate  and the will (originals) – this will be your ID as you act as executor.
  2.  Determine if the estate needs to be probated.  The probate will affirm your position as an executor but it is not legally required and often it’s avoided to save some money.  In Ontario the probate fee is approx 1.5%.  General rule of thumb is that if the estate is simple (cash, RRSP) and the amount are small, usually around 50-100K you maybe able to get away with out filing probate.  If that’s not the case then probate will be required before you will be able to sell property or take money out of bank accounts etc from financial institutions.  If probate is required you will have to head to court and fill appropriate paperwork and pay the fee.  Again fee structure vari province to province so look up your local rules.

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All members of the Canadian forces who are enrolled before Mar 1, 2012 are facing a impending decision on what to do with their payment in lieu of Canadian Forces Severance Pay (CFSP).  For some it will mean several hundred dollars, for others who have been around a while, it could mean up to over $20,000.

All member should have by now received a letter indicating what their eligible time period is and will have to make a decision on which of the following three options they will be picking between 14 Dec 2012 – 13 Mar 2013.

The choices are :

1. Take the cash now;

2. Take part of the cash now and part of it when you release from the forces; or

3. Take the full amount  when you release.

From the “water cooler” talk most people seem will be picking the “cash now” option.   However, I don’t get the sense that this decision is made with any detailed analysis and that it’s taken because it seems to be the common sense thing to do.

Well being a member of the forces and also a Certified Financial Planner, such hand-wavy approach to money matters will never do.  So I ran some scenarios to see if the accepted wisdom is indeed the right approach.

My conclusion are:

If you are not a Pte, and intent to contribute the funds to your RRSP, then it make sense to take the cash out option.  Otherwise, waiting is a better choice.

Now to to reach the conclusions I made the following assumptions:

1.  I assumed that you will have normal career progression as per pay band – if you are planning to commission, the result maybe different.  You can test that easily by doing your individual analysis.  Email me if you want the spreadsheet that will allow you to do that easily.

2.  I have ignored the effects of inflation because I assume that our pay will increase somewhat in step with inflation and using real returns I made this a non-factor.

If you want to look at the spreadsheet feel free.

Hope this helps you make your decision.

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So what should you do with your RRSP if you leave Canada? The simple answer is you can keep your RRSP as is.  However, if you want to access the funds in the future there will be a 25% tax withholding, this amount is considered your tax paid. If you are happy with this you don’t need to do anything further.

If you believe your tax payable should be less than 25%, you can elect to file Canadian taxes and the difference would be refunded.  Keep in mind that for RRSPs the amount you redeem is considered income for that year, which means unless you have a small RRSP and no other sources of income, your income tax payable for the amount is not likely to be less than 25% .  You may also need to report the amount redeemed as part of your income in your new country as per that country’s income declaration requirements.

If you are certain ahead of time that your income tax payable would be less than 25% you can fill out Form NR5, Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to be Withheld. This will reduce your withholding before the redemption even occurs.  This process isn’t any easier than filling out taxes, but it only needs to be done every 5 years so it will save you needing to fill out taxes each year if you are doing multiple redemptions.

Another option is to convert your RRSP to a Registered Retirement Income Fund (RRIF) and receive regular payments from the accounts.  The same minimum withdrawal requirements apply for RRIFs as they do with RRSPs and the 25% withholding tax also applies to all payments (unless your country of residence has specific tax treaties).  A reduced tax withholding amount of 15% is possible for US-Canada. This reduction applies if the payment is less than the greater of 10% of fair market value or twice the minimum withdrawal requirement (amount of withdrawal < greater [10% of FMV, 2x RRIF minimum withdrawal]).  A preferential NOTA BENE rate can be acquired but only if redemption is scheduled for regular periods.

As an example, suppose you have a $100,000 RRSP (as of December 31, fair market value) which has now been converted to a RRIF, you are currently 65 years and you want to make withdrawals.

The minimum required for RRIF withdrawal for the year is 4% or $4000.  You would like to withdraw $12,000 a year or $1000/mon.

Under standard non-resident rules you will receive $750/mon with 25% tax withheld.

If you are in the US, to get the reduced rate: 10% of FMV is $10,000  and twice the minimum withdrawal is $8000. The greater of the two is $10,000.  This means the first $10,000 of redemption is tax withheld at 15% and the excess amount is tax withheld at 25%

So for our example, the first 10 months you will received $850/mon and the last two months  you will receive $750/mon.

If you are in the UK such periodic payments should not be subject to any withholding.

If you are thinking of withdrawing from your RRSP I would strongly suggest you research your own country’s tax treaty and discuss it with your institution before proceeding.  They may still want to withhold 25% and let you deal with CRA to claim any amount that was taken in excess.

Of course, you always need to remember that the amount you take in as income may be subject to taxes in your new tax jurisdiction and will need to be reported as per their tax rules.

You may be able to transfer the amount into registered retirement plans, i.e. 401K etc.   The reverse can be done regularly by any large financial institutions in Canada, but I generally find Canadians financial services personnel have more experience dealing with moving money to US than US financial services personnel have in transferring money to Canada.

So in summary – file an NR5 if you really think your tax rates will be less than 25% and see what number they will come up with. Know your tax treaties and use any tax treaty rules in your favour as able, but be prepared to work with your Canadian institution and educate them as required.

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