IFC Tax and Retirement Planning 4 — Questions and Answers
Question 1: Under which circumstance can TFSA contribution room be re-contributed in a subsequent year?
- Only if the withdrawal was due to a financial hardship
- Any withdrawal amount is added back to contribution room on January 1 of the following year (Correct answer)
- Re-contribution room is never restored after a withdrawal
- Re-contribution is allowed immediately in the same calendar year
Correct answer: Any withdrawal amount is added back to contribution room on January 1 of the following year
Amounts withdrawn from a TFSA are added back to the holder's contribution room at the beginning of the next calendar year.
Question 2: What is the primary tax advantage of contributing to an RRSP?
- Withdrawals at retirement are tax-free
- Contributions generate a deduction reducing current taxable income (Correct answer)
- All investment gains inside are exempt from tax permanently
- Contributions can be deducted against capital gains only
Correct answer: Contributions generate a deduction reducing current taxable income
RRSP contributions are deducted from taxable income in the year of contribution, reducing the taxpayer's current income tax liability.
Question 3: Which pension income qualifies for the pension income tax credit at the federal level for individuals under age 65?
- CPP benefits
- OAS benefits
- RRIF withdrawals
- Annuity payments from a registered pension plan (Correct answer)
Correct answer: Annuity payments from a registered pension plan
For individuals under 65, only pension income from a registered pension plan (RPP) qualifies for the pension income tax credit.
Question 4: A client over-contributes $3,000 to their RRSP beyond the allowed room. What is the penalty?
- 1% per month on the excess amount (Correct answer)
- A one-time flat penalty of $500
- The excess is simply included in taxable income immediately
- No penalty if corrected within 90 days
Correct answer: 1% per month on the excess amount
CRA charges a 1% per month penalty on cumulative RRSP excess contributions above the $2,000 lifetime over-contribution buffer.
Question 5: How does income-splitting using a spousal RRSP benefit a high-income earner?
- The contributor claims the deduction but the lower-income spouse will eventually report withdrawals as income (Correct answer)
- The CRA allows the couple to split all investment income equally
- It eliminates all tax on RRSP withdrawals
- The spouse receives a tax credit equal to the contribution amount
Correct answer: The contributor claims the deduction but the lower-income spouse will eventually report withdrawals as income
The contributing spouse gets the tax deduction now, while the lower-income spouse will pay tax on eventual withdrawals at a lower marginal rate.
Question 6: Which of the following describes Old Age Security (OAS) clawback?
- OAS is reduced for all Canadians over age 75 regardless of income
- High-income recipients must repay part or all of OAS through the OAS recovery tax (Correct answer)
- OAS payments stop automatically if net income exceeds $50,000
- OAS is clawed back only if the recipient has RRSP income
Correct answer: High-income recipients must repay part or all of OAS through the OAS recovery tax
The OAS recovery tax (clawback) requires recipients whose net income exceeds the annual threshold to repay a portion of their OAS benefits.
Question 7: What is the key difference between a defined benefit (DB) and a defined contribution (DC) pension plan?
- DB plans are only available to self-employed individuals
- DB plans guarantee a specific retirement income, while DC plans depend on investment returns (Correct answer)
- DC plans provide a guaranteed income regardless of market performance
- DB plans have no contribution limits, while DC plans are capped
Correct answer: DB plans guarantee a specific retirement income, while DC plans depend on investment returns
A DB plan promises a predetermined retirement benefit based on salary and years of service, while a DC plan's benefit depends on accumulated contributions and investment performance.
IFC Tax and Retirement Planning 4
Under which circumstance can TFSA contribution room be re-contributed in a subsequent year?