Well, here we are at the end of another RRSP season. The rush is on to get the contributions in, and the rush is on to figure out where to stuff it. I guess at this point if you haven’t made your contribution yet, the important thing to do is just to make sure it is in an RRSP account somewhere; we can always figure out in a later column what to invest in.
This week, I thought I would include a piece by Jamie Golembek, head of tax and estate planning for AIM Trimark Funds. I think you will find it to be of particular interest, especially at this time of year.
Resolution 1: MAXIMIZE RRSP CONTRIBUTIONS
The contribution limit for registered retirement savings plans for 2006 is the lesser of 18 per cent of 2005 earned income or $18,000. If you don’t have the cash, consider making an RRSP contribution “in-kind.”
Keep in mind, if you contribute a fund with an accrued loss “in-kind” to an RRSP from a non-registered account, that loss is permanently denied. A better strategy would be to switch the fund to a money market fund, realize the capital loss, and then contribute the money market fund to the RRSP.
Resolution 2: MAXIMIZE RRSP FOREIGN CONTENT
With the elimination of the foreign content limit, you now have the option of investing your entire RRSP or registered retirement income fund globally, without any artificial restrictions. Yet surprisingly, many investors are still hovering around the former 30 per cent foreign content limitation.
Resolution 3: SET UP A SPOUSAL RRSP
Spousal RRSPs remain one of the last legal methods of income-splitting between spouses or common-law partners. The primary benefit of a spousal plan is that funds withdrawn from it can be taxed in the hands of the annuitant rather than the contributor. If the annuitant spouse is in a lower tax bracket than the contributor spouse in the year of withdrawal, there may be an absolute and permanent tax savings.
Resolution 4: INVEST OUTSIDE AN RRSP
Investing in shares of multi-class mutual fund corporations (where each class of shares represents a different fund) has an advantage over investing in plain-vanilla mutual funds in that investors can switch from one class of shares to another without incurring any immediate capital gains tax. A secondary, but oft-forgotten benefit, is mutual corporations are generally able to minimize the amount of annual capital gains distributions by using capital losses of one class to offset capital gains otherwise distributable for other classes.
Resolution 5: OPEN UP RESPS FOR (GRAND) CHILDREN
It is nearly eight years since the federal government reinvigorated struggling Registered Education Savings Plans by introducing the Canada Education Savings Grant (CESG) program, which provides a 20 per cent grant on the first $2,000 a year of annual RESP contributions for each beneficiary. Higher grants may apply to low- and middle-income families.
Keep in mind if you have not set up RESPs for children or grandchildren, there is a huge opportunity to go back and collect prior years’ CESGs, cumulatively retroactive to 1998.
Resolution 6: MAKE YOUR INTEREST TAX DEDUCTIBLE
Still carrying a mortgage but also investing outside your RRSP? Under a strategy approved several years ago by the Supreme Court of Canada, you can sell non-registered investments (subject to any capital gain/loss considerations), pay off the mortgage (again, subject to any early payment penalties) and then get a secured line of credit against your home to repurchase the securities sold. This way, your otherwise non-deductible interest becomes tax deductible.
Resolution 7: CONSIDER INCOME SPLITTING
The Canada Revenue Agency announced that the prescribed interest rate for the first quarter of 2006 will remain at 3 per cent. A spousal loan income-splitting strategy whereby the higher income spouse (or partner) loans funds to the lower income spouse to invest may be ideal given the near-record-low prescribed rate required to be charged on such loans.
Resolution 8: CONSIDER A SYSTEMATIC WITHDRAWAL PLAN
Looking for tax-effective cash flow from your mutual fund account? Consider setting up a systematic withdrawal plan which allows you to receive regular, tax-efficient cash flow from your funds. Most fund companies offer this type of plan.
Resolution 9: DONATE “IN-KIND” TO CHARITY
Consider donating appreciated stock or mutual funds directly to charities in 2007. Not only will you get a tax receipt for the fair market value of the stock or funds donated, but you also will be able to reduce your capital gains inclusion rate to 25 per cent from the usual 50 per cent.
Resolution 10: PLAN NOW NOT TO GET A TAX REFUND
Finally, if you regularly get a significant tax refund each spring, perhaps due to RRSP contributions made during the year, you should consider applying to the CRA for a reduction of tax withheld at source by your employer. Because CRA’s Form T1213 needs to be completed each year, January or February is an ideal time to begin the process anew.