Quote Originally Posted by Snoopy View Post
SBQ, thanks for this insight on how investment taxation works in North America. A couple more questions (OK three) if you don't mind.

1/ The RESP (education savings plan): The government matches your contribution dollar for dollar and you can pull out the money to pay uni fees. But how much money can you put in if you are 17 and want to go to university? Minimum wages in NZ are much higher than in the USA for example (not sure about Canada). So if you have an entry level part time job as 15, 16 year old you aren't going to be able to save that much, even with a 1:1 top up. And tuition fees in the USA (not sure about Canada) are much higher than NZ? So overall aren't you going to be much better off taking a Uni course in NZ (no fees in year one remember) than in North America, even despite a 1:1 government subsidy on RESP contributions?

2/ You say dividends accumulated in these schemes are 'tax free'. But in the USA the company has already paid tax on the money they pay out as dividends. So in this sense the dividends are taxed at the time of payment, even if you as an individual shareholder do not pay the tax yourself. I am surprised in your implication of there being no withholding tax on dividends either!

3/ Once you reach retirement you can cash in your 'tax free' portfolio. But you are taxed once your portfolio is redeemed aren't you? So 'tax free' really means 'deferred tax'. Otherwise you wouldn't be telling us how you can minimise tax by choosing the point at which you cash your superannuation in. So how much tax do you pay when you cash in your portfolio in the end?

TIA

SNOOPY
@1) It's not dollar for dollar matching! Key factors in RESP is you have a lifetime maximum $50K contribution limit. Cdn gov't match 20% of your contributions to a maximum of $500 per year and a lifetime maximum of $7,200 so you're best to start young like at age 3 or 4 if you intend uni enrollment right after highschool (of course not limited to as it can be any age - many go back to school in their 40s and 60s). The 20% figure is key so to get the most benefit, you should contribute $2,500 a year and if you missed 1 year of contribution, you could on the next year put in $5,000 and you would get $1,000 grant ; note this is limited to 1 year ie can't put in $25,000 and get 10 years of grant. There is ALSO in additional CESG and Canada Learning Bond for those on the low income. All that is invested compound tax free and when the student goes to, the deal is their income would be low or pretty much zero. In Canada the 1st level of income around $12K is tax free - much similar to how Australia does. Keep in mind in Canada, if the RESP is invested in assets to produce capital gain; in Canada ONLY HALF of the gain becomes taxable income. So if they sold $24,000 in shares and had $12,000 in gain; they would report only $6,000 as taxable income which is only half of the $12K exemption threshold.

But what if the student finds uni education isn't what they wanted? No problem. Up to $50K the RESP can be rolled into their RRSP (conventional retirement savings plan similar to Kiwi Saver).

So the RESP is not designed to start at age 17 and go to uni the next year ; at best you would only get the $500 grant. Like any investment plan you have to think in several years or decades.

https://www.greedyrates.ca/blog/resp-canada/

@2) In NZ we have with-holding on everything because of IRD's obsession of taxing accounts before the person can get hold of the funds. In N. America the only withholding you see are for non-residents. Basically when you open up a bank account, if you provide a tax #, the bank assumes "it's YOUR responsibility" as a resident to declare the interest or investment income at tax filing every year. In Canada all banks / brokers etc are required to send tax summary docs to their clients but if you live overseas, well the rules are different and there must be withholding. In NZ, to the wage/salary earner there is no requirement to file a tax return; no tax return means no assessment to get some sort of tax credit back despite there may be a credit if the person overpaid in withholding by being in the wrong tax bracket; unfortunately to IRD's benefit.

Dividends are taxable in Canada but at a much lower rate than general income. However the lowest tax impact is capital gain. But in accounts like TFSA, the broker files in an exemption where the dividend is fully paid with no with-holding. On my father's TFSA account, he received dividends on his BP shares (which is a UK company) in full amount. Interestingly this applied on the international level and not dividends received from Cdn listed companies. How? Because companies that issues dividends do not withhold tax on it. It's entirely up to the INDIVIDUAL to file their tax return and declare their dividend income. Now flip the tables around and how would the foreign investor feel by owning NZ shares that have withholding on the dividends? How would they get that taxed portion back? Perhaps this is why most foreign managed funds have sidestep NZ investments and why we see a dwindling level of liquidity on the NZX.

@3) I assume you're referring to TFSA? Unlike the other registered investment plans RESP, RDSP, RRSP, the TFSA is entirely 100% tax free during the years invested AND when you sell up; really 100% tax free. But likewise, any losses are not allow for claim for credit.

The investment world in Canada has many to suit each individual's situation. Those with disabled children get RDSP. Those into academics look to RESP. Those who are rich and wealthy look to TFSA, well actually all residents can benefit with the TFSA. One thing common in ALL these investment plans is the 'deferral of tax' with exception of TFSA with doesn't matter when you sell up. The oldest program would be RRSP which is similar to Kiwi Saver but much more elegant. What is not elegant to structure your income in years you have low or year income and the ABILITY TO CHOOSE how much you want to have as taxable income? Isn't that what retirement is all about? If i'm 67 and want to buy a new caravan or RV, I would sell the amount of shares I want, pay the capital gain tax enough to cover my living cost and new toy and as you know, most seniors have little or no salary / wage income so they would benefit being at the lower end tax bracket. Whereas in Kiwi Saver, the funds are slammed tax every year on the performance of the fund; with no distinction of the individual's tax situation over their lifetime. So to answer your question, how much tax does a person pay at retirement? Well that's entirely up to you until the day you die, for which the entire account would be deemed sold and tax on the capital gains would apply (fortunately, only 1/2 of the gain is taxable income).