With news agencies publishing stories daily about inflation, rising interest rates, and a possible recession, it’s wise to evaluate current investments and savings.
Saving 3 Months’ Living Expenses
To survive possible job loss or an extended work absence due to illness, the rule of thumb is to save enough to pay your living expenses for at least three months. Instead of leaving this in a savings account where it won’t earn much interest, speak with an investment professional to see if a tax-free savings account (TFSA) would be a good option. Interest earned on funds in a TFSA is not taxed. However, there are caps on how much can be put into a TFSA. Since the program started in 2009, the federal government has set a dollar limit each year. For 2022, the limit is $6,000. The amount you can hold in a TFSA accumulates each year you are 18 or older. More information about TFSAs can be found here.
The key when putting aside funds for a rainy day is to be able to access the funds quickly and easily if needed. Sharlane Bailey, owner of Canwest Accounting, advises against putting all your savings into a registered retirement savings plan (RRSP), as this is meant to be a long-term savings plan for retirement.
“Withdrawing from your RRSPs should be a last resort unless it’s for retirement, a first-time home purchase, or full-time schooling,” says Sharlane. “Withdrawing from your RRSPs comes with significant tax consequences and could even bump you up to the next tax bracket.”
Your financial institution withholds the tax when you withdraw funds from an RRSP: 10% on amounts under $5,000, 20% on amounts between $5,000 and $15,000, and 30% on amounts over $15,000.
Mortgage Interest on Rental Properties
The tax specialists at Canwest Accounting’s Victoria and Langford offices receive a lot of questions from individuals who own rental properties as investments. Usually, the biggest expense that can be written off the income from rental properties is the mortgage interest. With mortgage rates rising, these expenses are increasing as well. Sharlane states that one should not pay off an investment property before their personal property. In fact, maintaining a mortgage on a rental property provides considerable tax benefits.
To have the exceptional team at Canwest Accounting save you time and money by doing your taxes, bookkeeping, tax planning for your business, or filing estate returns, call or email us.
The suggestions and advice provided by Canwest Accounting should not be relied upon in place of professional advice. You are responsible for checking the accuracy of relevant facts and opinions provided.