According to the 20th annual RBC RRSP poll, only 35 per cent of Canadians will have contributed to an RRSP for the 2009 tax year, the lowest percentage since 1996. It’s too bad that Canadian families dismiss the value of investing in RRSPs when there are many ways to maximize them and ultimately improve retirement outlooks or assist with other goals.
Those who are married or with a common-law partner should investigate spousal plans. A higher-earning partner can contribute to an RRSP registered in the name of the lower-income spouse to achieve a form of income splitting. The contributor earns an immediate tax deduction, while the annuitant spouse reports the income for tax purposes when the funds are withdrawn, ultimately reducing taxes.
At age 65 this should also mitigate Old Age Security clawbacks, either reducing or eliminating them, depending how much the two income levels are below OAS thresholds.
Spousal RRSP withdrawals must be in accordance with the three-year attribution rules, but making the contributions in December, rather than the January or February immediately following, can reduce the impact.
RRSP savings can help individuals buy their first home. The First-time Home Buyers’ Plan is designed so individuals can withdraw up to $25,000 from their RRSP to be used toward the purchase of a primary residence. It is restricted to first-time home buyers and those who have not owned and lived in a home in the past five calendar years.
The home must be in Canada and must be purchased before Oct. 1 of the year following the year of the RRSP withdrawal. The withdrawal must be repaid in equal annual instalments over 15 years, beginning in the second year. Any payment shortfall is considered taxable income in the year it occurred.
Individuals or their spouses can also make use of the Lifelong Learning Plan. A full-time student, acquiring qualifying full-time postsecondary education at a designated institute, can withdraw up to $10,000 in a given year from their RRSP over a four-year period as long as the total does not exceed $20,000. They must repay it in equal instalments over 10 years; otherwise it becomes a taxable withdrawal.
Anyone planning to use the First-time Homebuyers’ Plan or the Lifelong Learning Plan should think carefully. While the withdrawals are not taxable, the tax-free compounding achieved through RRSPs is lost. Also, individuals must be certain they can maintain the cash-flow requirements of the repayment schedules.
The concept of RRSPs is useful in teaching children about money and planning. Tax returns should be filed as soon as possible even though a child’s income may not be more than a paper route or babysitting money. Although they cannot open an RRSP until they are 18, they can reap future benefits.
By filing returns, the child can claim deductions and tax credits that are carried forward indefinitely, ultimately providing extra contribution room for their future RRSP. This can be particularly beneficial when they reach peak earning years, with the extra contribution room offsetting higher taxes. When they turn 19, they may even receive the GST credit, a tidy quarterly payment, just for filing.
As with all tax planning, individuals should make sure they understand all the tactics thoroughly. There are many different rules, so it is imperative to do your homework.
Kim Inglis is an investment advisor, CIM, with Canaccord Wealth Management, a division of Canaccord Financial Ltd., Member CIPF. For more of her columns visit www.kiminglis.ca The views in this column are solely those of the author.
