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Get the Government Working For You
Now, more than ever, it makes sense to
ensure that your money is working as
hard as it can. There are a number of
government programs that assist
Canadians in reaching their financial
goals. We have put together a simple
example of the effect of combining two of
the more popular programs available
(Labour Sponsored Tax Credits &
Education Savings Grants) to illustrate
the potential benefits of getting the
government working for you!
LABOUR SPONSORED TAX CREDITS
As you know, Canada’s tax burden is
substantially higher than in many other
countries including the United States, the
United Kingdom, Australia, Switzerland
and Japan. With up to half of your
earnings each year going towards your
total tax bill, it makes sense to try to
minimize the tax bite and access
government funding where possible.
One effective way of tax-efficient
investing is through retail venture capital
funds, known as labour sponsored
investment funds (LSIFs). Retail venture
capital funds offer tax credits of up to
35% and are RRSP eligible.
Venture capital funds invest primarily in
the shares of private small and mediumsized
Canadian high growth companies.
These funds offer the potential for
superior returns over the long-term with
the added value of attractive tax benefits.
However, LSIF’s must be held for a
minimum of eight years, or the tax credit
must be repaid. These funds are not
suitable for all investors but can be a
great addition to a diversified long-term
portfolio.
Ontario taxpayers are entitled to a tax
credit of up to $1,750 or 35% of the first
$5,000 invested in this asset class each
year. To increase the benefit even more, a
LSIF held within a registered retirement
savings plan (RRSP), gives you the added
advantage of decreasing your net income
for tax purposes. For example, an
investment of $5,000 invested within an
RRSP would result in a $1,750 tax credit
and additional savings of $2,320 for an
investor at the top tax bracket
with a marginal tax rate of
46.4%. By investing $5,000,
you end up with your initial
investment, as well as $4,070
in tax savings to do with as you
wish.
GOVERNMENT GRANTS FOR REGISTERED EDUCATION SAVINGS PLANS
In Canada, we are very fortunate to have
the Registered Education Savings Plan
(RESP) program. The fact that the
government provides a grant equal to
20% of eligible contributions adds to the
already outstanding benefits of this
program. Each child has accumulated
$2,000 of eligible contributions ($400 of
grant) each year since the grant program
was introduced in 1998. No one can deny
the need for higher education, even more
so now than in the past, and taking full
advantage of the government grant
program makes great sense.
If you were to take the Labour Sponsored
Tax Credits and RRSP tax savings in the
previous example and use these to
generate an additional 20% in
government grants for you child’s or
grandchild’s RESP, you would produce a
grant of $814 on the $4,070 of tax savings
contributed to the RESP. This results in
an RESP with $4,884 deposited using the
government’s money ($1,750 Labour
Sponsored Tax Credit, $2,320 of RRSP
tax savings and $814 of Registered
Education Savings Grant) plus all of the
potential tax free growth that accumulates
until the money is withdrawn for
educational funding.
Using this strategy you end up with
$5,000 in your RRSP plus $4,884 in a
RESP for a grand total of $9,884 in
investments from the initial $5,000
deposit.
This is just one strategy to make sure that
your money is working as hard as it can.
If you would like additional information
on Labour Sponsored Investments and/or
the RESP Program please don’t hesitate to
give our office a call or visit our web site
at mingassociates.com
(Using Labour Sponsored funds with a 30% tax credit
and/or investors with a lower marginal tax rate will
result in a lower RESP Deposits and grants but the tax
savings and grants will still be significant.)
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