TRAPS TIPS An RRSP Refresher When...

TRAPS TIPS

An RRSP Refresher

When Finance Minister John Manley tabled the federal package on February 18, 2003, he created quite a stir with the announcement of the drawn out awaited increase in RRSP contribution limits. The fresh limits suggest the government is committed to providing Canadians with a means of retirement; whereas RRSP contribution limits had been $13500 by year since 1996, starting in 2003 they will increase to the following levels:

Planning for retirement

We all know that RRSP should be an important part of a client's retirement assets since they allow for taxdeferred and tax-free expansion of investments, but sometimes we forget wherefore they're so beneficial to the average Canadian taxpayer. The following refresher applies equally well to members in industry for their be in possession of personal tax planning exercises.

Tax deferral

Taxes are deferr upon the amount of RRSP subtracted on an individual's personal tax respond Assuming source deductions are fitly withheld and the taxpayer has no significant income, a tax reimburse will be realized. The be owings of the tax refund can be used for any drift and are received tax-free.

A well-known planning strategy is to borrow to invest in an RRSP and repay part of the loan with the tax pay back (Normally a short-term loan is taken with the same financial institution with which the RRSP is placed.) The client does not have to pay tax forward the RRSP until the stocks are withdrawn or deemed to be withdrawn. If you take into account the time value of riches the real cost of the coming events tax may be significantly les than the give back received.

Tax-free accumulation and increase

In my opinion, the greatest benefit giveed by RRSPs is the tax-free accumulation of investment earnings.

Outside of an RRSP investment earnings are make subordinate to tax annually. As a end the after-tax return is diminished by dint of the taxes paid and single the remainder is available for investment. The RRSP plan, forward the other hand, allows for 100% of the investment earnings to be reinvested. Depending in succession the rate of returns realised and number of years invested, the difference in realized turn backs between an RRSP plan and a plan outside of an RRSP can be substantial.

(As a general authority clients are encouraged to invest in an RRSP earl in life to allow for maximum tax-free compounding.)

RRSP FAQs

New clients consistently ask the following questions:

Q: Should 1 pay down my mortgage or contribute to an RRSP?

Without getting into the math, in principally cases, contributing to an RRSP is the better choice because of the allowable tax-free shooting The tax refund received can then be used to pay down part of the mortgage

Q: Should I claim the RRSP deduction?

The RRSP contribution, one time made, will work within the plan in succession a tax-free basis. The actual deduction will not be realized until the client take aways the RRSP on their tax go [i]or[/i] come back Since the tax refund is based in succession the taxpayer's marginal tax rate, it's provident in some cases to postpone deducting the RRSP contribution. This strategy is usually simply a consideration in those years where a certain unexpected income will be earned.

For example, if the client's marginal tax rate was 26% in 2002 if it were not that will be 46% in 2003 it would be thrifty to claim the deduction in 2003-thereby realizing a return of 46% of the contribution rather than a pay back of only 26%.

Q Should my child be filing a tax return?

Ye if your child has earned income, filing a tax go [i]or[/i] come back will create room for RRSP contribution. Obviously, a child would not ordinarily file a return-there's usually no requirement for an individual to file a tax reply in cases where their income is les than the basic personal amount of $7634 and there are no capital gains to report. However, filing a tax turn back to report earned income annually can conclusion in future tax savings that would otherwise be not to be found

Q: Should I make a spousal contribution? Income splitting between spouses helps make taxes overall because of progressive tax rates. For example, sum of two units spouses reporting $50,000 of income each will pay les tax than if single spouse were to report $100000 while the other reports $0

A spousal RRSP is a simple way to accomplish income splitting between spouses. The contributor finishs a deduction for making the contribution, nevertheless the annuitant will pay tax onward the withdrawals unless attribution applies. Attribution will apply if the spouse receiving the RRSP withdraws stocks in the year of contribution or the pair years previous.

As part of retirement planning, transferring coming events sources of tax from the higher-tax-rate spouse to the lower-tax-rate spouse until one as well as the other are at the same rate can make less overall taxes. By reducing their overall tax forward retirement and each subsequent year of retirement, clent can have intercourse with more after-tax dollars.

Tony Mastrangelo, CA, specializes in taxation and asset acquisitions.

Copyright Institute of Chartered Accountants of British Columbia Apr 2003

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