Guest Post Thursday: Knowledge First Financial

Knowledge First Financial urges parents to apply for BCTESG

1 in 5 BC children have received the $1,200 education grant

Approximately 80% of eligible children have yet to receive the $1,200 British Columbia Education Savings Grant. Knowledge First Financial, a Canadian RESP Provider, is urging parents to apply now and enjoy all the benefits of an RESP including compound, tax-free growth and the Canada Education Savings Grant (CESG) of up to $7,200. That means up to $8,400 of ‘free’ money for each child to help pay for post-secondary education for BC parents.

More than ever, post-secondary students have more freedom to choose programs and schools, more time to focus on studies and explore new opportunities, less stress and less debt thanks to the savings accrued from RESPs. Knowledge First Financial supports students in their post-secondary studies – in fact, when the BCTESG was introduced in 2015, Knowledge First Financial was one of the first RESP providers to support it.

If you’re the parent of a child born in BC in 2006 or later, here are three things to know about BCTESG:

 

What is BCTESG?

The British Columbia Training and Education Savings Grant is a $1,200 grant for post-secondary education established in 2015. To be eligible, parents or guardians and children must be residents of BC, and possess a Social Insurance Number.

How do I apply?

Firstly, you will need a RESP from a provider who can access the BCTESG – a sales representative from Knowledge Financial First can help set this up for you. You will be asked for proof of residency, such as a driver’s license, BCID card, BC Service Cards or a recent utility bill upon application.

When do I apply?

You can apply for BCTESG as soon as your child turns six up until the day before your child’s ninth birthday, however Knowledge First Financial recommends that parents apply as soon as possible. Deadlines for children born before August 15, 2009 are slightly different:

  • Children born in 2006: Apply between August 15, 2016 and August 14, 2019
  • Children born in 2007, 2008, before August 15, 2009: Apply between August 15, 2015 and August 14, 2018

 

Source: http://www.esdc.gc.ca/en/reports/resp_promoters/infocapsules/bc.page

 

Why apply now?

You’ll receive the education grants sooner and your savings will have more time to grow.   Learn more about why an RESP is a smart way to invest in a child’s future by setting up an appointment with a Knowledge First Financial sales representative today.

 

About Knowledge First Financial Inc.

Knowledge First Financial Inc. is a wholly owned subsidiary of the Knowledge First Foundation and is the investment fund manager, administrator and distributor of the education savings plans offered by Knowledge First Foundation. For more information about education savings plans from Knowledge First Financial Inc., please visit knowledgefirstfinancial.ca or refer to our prospectus.

As of April 30, 2016, Knowledge First Financial manages $3.62 billion in assets on behalf of more than 250,000 customers.

Knowledge First Financial® is a registered trademark of Knowledge First Financial Inc.

This post was written by Daryl Shriver, and he can be found through his Twitter account.

Some basics of Canadian Investing; Mutual Funds, Eligible Dividends and Deferred Tax

Here is a brief introduction to the absolute basics of investing Canada. If you know this, you really just know the basics.  If you do not know much about Mutual funds, Eligible dividends, income trusts, and deferring taxes owing then trust me, this is the tip of the iceberg.  The Investment Fund Institute of Canada (IFIC) has a mutual fund course as probably does the Canadian Securities Institute (CSI).  Both are sought after for entry into the financial sector.

At the very basic, here are the 2 main types of tax-sheltered investments you probably have heard about – RRSP or RRIF.  In both cases, you put money away into these investments which are NOT taxed at year-end.  you pay taxes when you withdraw or remove the funds after certain milestones, such as age 65. 

Investments that generate capital gains or Canadian source dividends are taxed more favourable than interest income because interest income earned from investments such as T-Bills, bonds, and GIC’s are generally taxed at the highest marginal tax rate.
• Dividends earned from a Canadian Corporation are taxed at a lower rate than interest income.  This is because dividends are eligible for a dividend tax credit, which recognizes that the corporation has already paid tax on the income that is being distributed to shareholders.
o This only applies to dividends from a Canadian corporation.
o Dividends paid from a foreign corporation are not eligible for the dividend tax credit.

As of 2006 there are now two types of dividends, eligible and non-eligible dividends, and they are treated differently from a tax perspective.
• Eligible dividends include those received from a public Canadian corporation and certain private, resident corporations that must pay Canadian tax at the general corporation rate. As a result, they have a federal tax credit of 18.97% and are grossed up by 145%.
• Non-eligible dividends include those received from Canadian-controlled private corporations not subject to the general corporate tax rate.  They have federal tax credit of 13.33% and are grossed up by 125%.

This change was introduced by the government of Canada in order to present a more balanced tax treatment between corporations and income trusts as Canadians were investing more and more in income trusts and less and less in corporations and why wouldn’t they, since prior to 2006 income trusts were not taxed on any income allocated to unit holders, whereas dividends paid by a Canadian corporation are paid out of after tax earnings. 

To combat this, many corporations began to restructure their operations to become income trusts.  Something had to be done.

In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of interest, royalty or lease payments, which are normally deductible in computing the operating entity’s income for tax purposes.  These deductions reduce the operating entity’s tax to nil.   

The trust “flows” all of its income received from the operating entity out to unitholders.  The distributions paid or payable to unitholders reduces a trust’s taxable income, so the net result is that a trust would also pay little to no income tax, which is never a good thing in the government’s eyes.

So who then gets hit with the tax bill??  The net effect is that the interest, royalty or lease payments are taxed at the unitholder level;
1. A flow-through entity whose income is redirected to unitholders, the trust structure avoids any possible double taxation that comes from combining corporate (T2) income taxation with shareholders’ dividend taxation
2. Where there is no double taxation, there can be the advantage of deferring the payment of tax.  When the distributions are received by a non-taxed entity, like a pension fund, all the tax due on corporate earnings is deferred until the eventual receipt of pension income by participants of the pension fund.
3. Where the distributions are received by foreigners, the tax applied to the distributions may be at a lower rate determined by tax treaties, that had not considered the forfeiture of tax at the corporate level.
4. The effective tax an income trust owner could pay on earnings could actually be increased because trusts typically distribute all of their cashflow as distributions, rather than employing leverage and other tax management techniques to reduce effective corporate tax rates.  It’s easier to distribute all the funds out and show nothing being retained that it is to implement strategies to reduce corporate tax owing which is the path most often taken. 

Where can a holder find their dividends reports?  Dividends are usually shown on the following CRA slips:
• T5, Statement of Investment Income
• T4PS, Statement of Employees Profit Sharing Plan Allocations and Payments
• T3, Statement of Trust Income Allocations and Designations
• T5013, Statement of Partnership Income
• T5013A, Statement of Partnership Income for Tax Shelters and Renounced Resource Expenses

When completing a Canadian tax return, where should a holder enter their dividend information?

Enter on Line 180 the taxable amount of dividends (other than eligible dividends) as follows:
• box 11 on T5 slips
• box 25 on T4PS slips
• box 32 on T3 slips
• box 51-1 on your T5013 or T5013A slips.

Enter on Line 120 the taxable amount of all dividends from taxable Canadian corporations, as follows:
• boxes 11 and 25 on T5 slips
• boxes 25 and 31 on T4PS slips
• boxes 32 and 50 on T3 slips
• boxes 51-1 and 52-1 on your T5013 or T5013A slips.

What do I do if I did not receive an information slips?

Ignore it and the CRA will let me off the hook?  No chance.  If you did not receive an information slip, you must calculate the taxable amount of other than eligible dividends by multiplying the actual amount of dividends (other than eligible) you received by 125% and reporting the result on line 180.  You must also calculate the taxable amount of eligible dividends by multiplying the actual amount of eligible dividends you received by 141%. Report the combined total of eligible and other than eligible dividends on line 120.

So what exactly is a capital gain?

Capital gains occur when you sell an asset for more than you paid for it. This gain is offset by any losses and can be further reduced by any expenses that are incurred by the purchase or sale of the asset – resulting in net capital gain.
Taxation of capital gains: 50% of a net gain is taxable at the appropriate federal and provincial rates.

My accountant advised me I need more “Tax deferral”.  What does she mean?   She means contributing the maximum amount to your RRSP which provides an immediate tax deduction and tax sheltered growth as long as the investment(s) remain in the plan.

Other less commonly used strategies include:
• Universal Life Insurance is a policy that combines life insurance coverage with a tax deferred investment component. Premiums paid are first used to ensure life coverage and the balance accumulates in an investment account where it grows tax deferred.
• Registered Educations Savings Plan (RESP) is a plan where contributions are used to fund a child or grandchild’s post secondary education costs.
o initial contributions are not tax-deductible
o any income earned within the plan is only taxable in the hands of the student at the time of withdrawal.

More is coming in the next few days, weeks and months…