Don’t miss the opportunity

Between January 1, 2003 and December 31, 2007 the total return on the TSX / Composite Index increased 132 per cent.  As of the close on October 27, 2008, the Index has given back part of these profits by declining 38 per cent year to date.

Tax considerations should be secondary in ensuring your money is in the best possible investments at all times.  But when markets rise or decline significantly in a given year, it is more important to look at the tax consequences.  Tax loss selling is a term used for investors to sell some of the underperforming stocks to offset realized capital gains during the year.

In a year like 2008, the capital loss rules are important to understand.

RRSP accounts should hold your conservative investments, such as bonds and cash equivalents.  Your riskier equity positions should be held in a non-registered or taxable account.  Capital losses are only applicable to investments in non-registered and taxable accounts.  The term unrealized is associated with an investment you have bought but have not sold.  If you have sold the position it is “realized.”

Realized capital losses are generally only deductible against realized capital gains.  Realized net capital losses may be carried back up to three years and forward indefinitely.  For 2008, these rules allow you to carry realized losses back to the 2005, 2006, and 2007 taxation years.

The reason some people should consider realizing some losses in 2008 is to recover taxes paid in the previous three years under the capital loss carry-back rules.  We encourage people to look at both the fundamentals of their existing investments and look at the tax consequences to realizing any capital losses this year.

As an example, let’s use Mr. Mackenzie who purchased some stocks in a taxable account in early 2003.  Having made a nice profit, he sold some investments in 2005 generating a capital gain of $20,000.  Mr. Mackenzie also realized net capital gains of $6,000 and $4,000 in the 2006 and 2007 taxation years, respectively.  Mr. Mackenzie should review his total portfolio in 2008 to see if he can realize any capital losses in the current taxation year.  If Mr. Mackenzie had $30,000 in net capital losses, then he could carry back all of these losses to the three taxation years noted above.  If Mr. Mackenzie only has $10,000 in net capital losses he should carry this loss back to 2005 first.  Failure to take advantage of the carry-back rule fully in 2008 would mean the 2005 amount is lost.

We would encourage people to look at their tax situation early this year and gather these  four pieces of tax information:

  • Unused net capital loss carry forward information by year
  • Net capital gain information for 2005, 2006 and 2007
  • Realized capital gains or losses for 2008 from selling non-registered investments (not including RRSP, RRIF, RESP), including stocks, bonds, mutual funds, exchange traded funds, real estate, etc.
  • Listing of unrealized capital gains and losses on your non-registered investments (those that you still own and have not yet sold) by taking the difference between the current market value and the adjusted cost base.

The above exercise may appear easier than it looks.  The following is a quick list of items to factor in when looking at your 2008 tax situation and non-registered investments:

  • Mutual fund distributions or other income distributions designated as capital gains are generally included on tax slips (T3 and T5) that arrive in early 2009
  • Certain mutual fund and exchange traded fund distributions increase the adjusted cost base
  • Dividend reinvestment plans should be factored in when determining an average cost for tax purposes
  • If you hold the same security in multiple non-registered accounts you will have to calculate an average cost for tax purposes
  • Some investments have a return-of-capital component which reduces the original cost that you paid
  • Bonds purchased at a premium will create a capital loss at maturity and bonds purchased at a discount will create a capital gain
  • Investments denominated in a foreign currency should have a cost base that is converted to Canadian dollars (proceeds converted to Canadian dollars as well)
  • If you have any defunct or de-listed securities you should determine if you have previously claimed the capital loss
  • Ensure you factor in any February 24, 1994 elections that you made

The following outlines some general rules to adhere to before doing any tax loss selling:

  • Do not break the superficial loss rules.  If you are selling a security to realize a capital loss then you or an affiliated person (i.e. spouse, corporation) must not purchase the identical security within 30 calendar days.
  • Do not transfer positions that are in a loss position to your RRSP as an “in-kind” contribution as the loss will be denied.
  • Any donation of securities in-kind should be those that have unrealized capital gains.
  • Carry all current net capital losses back to the earliest year in which you have capital gains (maximum three years back).
  • Focus on quality investments rather than making decisions solely for tax purposes.
  • Eligible losses are those that “settle in 2008”.  Most investments that are sold settle 3 business days after the trade date (i.e. last day for tax loss selling on Canadian exchanges this year is December 24)

This column highlights some of the “tax” items to consider prior to “tax loss selling” or carrying realized capital losses back/forward.  If you have significant capital gains or losses, we encourage you to meet with your financial advisor and accountant and map out a plan.

Safe, secure GICs have downsides

Guaranteed Investment Certificates, or GICs as they are commonly known, are extremely popular savings vehicles.  They are the classic safe investment vehicle that provide a low-risk and low-return combination. Furthermore, many investors prefer GICs as they are a simple guaranteed investment that returns capital plus income.

The Canadian Deposit Insurance Corporation raised this guarantee from $60,000 to $100,000 in the 2005 federal budget.  CDIC provides valuable protection for investors primarily concerned with capital preservation.  When investors place money in eligible deposits they are automatically insured to a maximum basic coverage limit of $100,000, including principal and interest.  For information, visit

For all the simplicity and safety of GICs, investors sometimes pay little attention to the risk that their low interest earning investments may not preserve purchasing power over time. Interest rates on GICs are currently at low levels and when one considers the impact of taxes and inflation on their investments, the real rates of returns (return after accounting for inflation) can be negligible or potentially negative.

Let’s look at an example:  William has $300,000 in a non-registered annual pay GIC yielding 4 per cent, and has a marginal tax rate of approximately 43 per cent.  We will assume inflation is at 2.3 per cent.

GIC Income $300,000 x 4 Per Cent = $12,000

Taxes at 43 Per Cent                        =  ($5,160)

Net Return                                       =  $ 6,840

A net return of $6,840 is approximately 2.3 per cent.  With inflation at 2.3 per cent or higher the “real return” will be negative.  Investors with long-term objectives need to understand that the safety of GICs can actually erode the real purchasing power of their investments. In many cases, investors requiring income to provide for their day-to-day expenditures will be forced to encroach on capital as the real returns will be insufficient to meet their needs.

Clients dependent on GICs as their sole investment vehicles need to consider diversifying a component of their investments into alternative types of securities to provide inflation protection, generate tax-effective income, and to build long-term wealth.

Some tips for GIC investors:

Tip 1

We encourage investors to place no more than $100,000 per individual issuer.  Solution:  deal with a firm that is able to issue multiple issuers of GIC’s (as CDIC covers up to $100,000 held per issuing company).

Tip 2

GICs generate interest income which is fully taxed if held in a non-registered account.  Solution:  we encourage investors to look at the structure of their investments and consider putting GICs in their RRSP, as is the normal recommendation for most income generating products.

Tip 3

Occasionally we see GICs purchased near the end of the year in non-registered accounts.  Rather than purchasing a GIC at the end of the year it may make sense to put these funds into a high interest savings account until early January.  This would allow you to defer the annual interest one year.  A $100,000 one year GIC at 4.5 per cent purchased on December 6, 2006 would have $4,500 in taxable income for 2007.  Solution:  waiting until after December 31, 2007 to purchase a GIC would defer this taxable income one full year.

Tip 4

Many financial institutions will ask you if you would like to set up an automatic renewal of your GIC investments.  It only takes a few minutes to discuss rates and reinvestment options with your advisor when investments mature.  During these discussions you may want to consider different options and terms.  Most importantly you should make sure you are receiving a competitive rate.  Solution:  cancel all automatic renewals and ask your advisor to give you a call when your GICs mature.

Tip 5

Many structured products are attaching the “GIC” name in their advertisements.  One of the benefits of a GIC is its simplicity, transparency, and security.   Why does a GIC need to have some type of complicating feature to it?  Do those extra features benefit you or do they provide the issuer with more benefits?  Solution:  speak with your financial advisor for more information and avoid structured products that you do not understand.

Tip 6

Before purchasing a GIC you should determine if it can be transferred or sold.  Some GICs can be transferred to other institutions and some cannot.  In addition, most GICs cannot be sold prior to maturity.  Solution:  speak with your financial advisor for more information and attempt to purchase GICs that are transferable.


Filing an income tax return for your children

If you do not have taxes payable you are not required to file an income tax return, unless Canada Revenue Agency (CRA) has sent you a request to file.

For this reason, many children do not file a tax return.  Children may have income they have earned from a paper route, babysitting, yard work, wages and tips from service jobs, but brought home less than the exemption amount, which for the 2007 tax year this is $9,600.

Employers are responsible for deducting the appropriate amount of Canada Pension Plan contributions, Employment Insurance premiums and income tax if applicable.  Employees who are under the age of 18 are not required to pay into CPP, but there is no age limit for paying EI premiums, so don’t assume your payroll department is withholding the correct amounts.  We have seen situations where CPP was withheld when a child was exempt.  Children who obtain part time jobs during the summer will often have a small amount of income tax withheld from their pay cheques.

If your child is under 18 years of age and had CPP or income tax withheld then it is important that you file an income tax return.  By filing a tax return, your child should receive a refund of the CPP and income tax withheld, provided total income in 2007 does not exceed $9,600.

If your child has earned income below the basic exemption amount, no income tax is payable.  Let’s also assume that no income tax was withheld, and all withholdings were correct.  Why would you want to file an income tax return in this situation?  By filing an income tax return for your children you are reporting earned income and begin to accumulate an RRSP deduction limit.  The deduction limit is based on 18 per cent of all earned income reported.  If a tax return is not filed then no income is reported.

Consider  Ben, who has a paper route and helps his mother with some filing in her office.  Ben earned $5,000 at age 13 and does not have to file a tax return because he has no taxes payable.  If he does file an income tax return he will generate $900 ($5,000 x 18 per cent) in RRSP deduction limit that may be carried forward indefinitely.  Over a number of years your child may create a significant deduction limit.

Children’s tax returns are generally easy to complete.  Whether you obtain paper forms or use tax software, there should be no cost to complete these additional returns.  If an accountant prepares your tax return you should mention any income your children have earned.  There are two important points to note before you proceed with completing a tax return – your child must have a social insurance number and all first-time filers must mail in their income tax return.  After the first year your child will be able to Efile or Netfile returns.

Your child will receive a Notice of Assessment whre you will see an RRSP Deduction Limit Statement.  This is an excellent opportunity for you to explain what an RRSP is to your child.

Younger investors often confuse an RRSP as being a type of an investment.  Explaining to your child that an RRSP is a type of an account is a great finance lesson.

Although minor children can build up their RRSP deduction limit, it does not make sense from a legal standpoint to set up an RRSP account.  Children under the age of majority are unable to enter into a binding contract.  It also does not make sense from a financial standpoint for people with really low incomes to contribute to an RRSP.  Let your children know that their RRSP deduction limit may be carried forward and used in the future.  The deduction limit should be used when the timing is right and they can dedicate the funds for retirement.  The effort of building up the deduction limit today should benefit your child in the future when they are older and have greater taxable income.

We realize that some parents reading this will have wished that they had completed tax returns for their children over previous years.  The good news is that it is not too late for the current year.  If the numbers make sense you may want to consider looking at prior years as well.

From an education and future benefit standpoint, we like the idea of parents helping their children file income tax returns.  This is one of those excellent teaching moments that combine accounting and finance.

Filing your returns together pays off

This spring—more than ever— couples should be filing their income tax returns together.

There are tax advantages for couples, such as the ability to combine medical expenses and donations.  There is also some flexibility on which return certain amounts are claimed.  Married pensioners have one other very important reason to file together this year – the ability to split qualifying pension income.

Our tax system utilizes a series of tax credits and marginal tax brackets.  When you file a tax return in Canada it looks like one return but it is actually a combined provincial and federal return.  With multiple schedules many people look to the last number – how much is either payable to Canada Revenue Agency or am I a getting a refund?   It is important to note that changing one number on your tax return may have an effect on other credits and calculations within your return.

This level of complexity may make it difficult for pensioners who have prided themselves in always completing their own tax return.  Trying to complete the different pension splitting scenarios may require a excellent eraser if you are trying to figure it out on paper forms using a pencil and calculator.   Pensioners who have historically completed their tax return on paper may want to seek out a qualified accountant this year.

Public accountants should be on top of all the tax changes and use computers and tax software to complete returns, which makes it easier for them to do different income splitting calculations.

Here are some steps to consider to find the optimal splitting point:

  • Your accountant may complete your returns without any income splitting.  On the side, they may note the household tax liability (refund) with no income splitting.
  • The first step should assist you in determining who has the highest income before income splitting.  This step also involves looking at the incomes to determine if there is eligible pension income from the higher income spouse that may be split with the lower income spouse.
  • Computers make it relatively easy to enter different income splitting percentages.  You may split up to 50 percent of eligible income.  Start with splitting 10 per cent and recalculate the household total tax liability (refund).  Make a note of the combined tax liability (refund).  Your sheet should have two numbers written on it now, one with no income splitting and the other number splitting 10 per cent.
  • Increase the percentage in the computer to be split in small increments, such as five or ten per cent.  At each increment, make a note of the household tax liability (refund).  Continue this until the maximum 50 per cent is reached or until you see your tax liability increasing (or refund decreasing).   This is a quick way to find the optimal “splitting point”.

If you and your spouse or common-law partner has jointly elected to split pension income then the higher income spouse will be able to deduct an amount on line 210, equal to the amount added to the lower income spouse’s return which should be reported on line 116.  Line E on Form T1032 is the key dollar amount that your accountant may assist you with.  The “Joint Election to Split Pension Income” form T1032 must be filed with your income tax return before the due date.

People who have already gone through the above exercise may find that the higher income spouse may be receiving a tax refund and the lower income spouse may have taxes payable.  The shifting of income may cause a temporary cash flow problem for some couples as the lower income spouse may have a tax liability that is due by April 30.  The refund for the higher income spouse may not arrive prior to this date.  Unfortunately couples are currently not able to net their combined tax liabilities and refunds.

If you are using an accountant for the first time you should provide them with a copy of your previous year’s tax return and notice of assessment.  If you have tax slips on joint accounts they will have only one social insurance number for the primary person.  This does not mean that the income has to be reported 100 per cent on the primary’s tax return.  If the account is a joint account then you should communicate with your accountant how these slips should be split.  Income from joint investment accounts should be treated consistently from year to year.   If you are unsure of how to report this income, then speak with your accountant.


Sharpen your pencils: 30 days to tax deadline

So who should prepare your tax return anyway?

Ultimately, you are responsible for having your return filed with the Canada Revenue Agency no later than April 30.  If you have a business that is not incorporated you have until June 15 to file a return (tax liability is still due by April 30).

You may be torn between doing your own tax return or hiring a professional.

Some pointers:

Find the Right Accountant:  You do not require a professional designation to do bookkeeping or prepare peoples tax returns.  While there are some excellent individuals who are working in the industry it is important to note that there are no restrictions on who can call themselves an “accountant.”  The main accounting designations are Chartered Accountant, Certified General Accountant, and Certified Management Accountant.  All three of these designations required individuals to take courses and pass examinations.

Discount Options:  During tax time, discount tax booths pop up all over the city.  How do discount options compare to public accounting firms?  And should you pay a little extra for someone that has a designation?   There is nothing wrong with either.  It really comes down to the complexity of your return.  If your situation is straight forward then going to the place that is less expensive may be your best option, especially if you don’t need any advice.  If your situation has a level of complexity,visit a public accounting firm.  The old adage applies:  You get what you pay for.

Do-It-Yourself:  Off the shelf tax software programs are easy to navigate and ideal for individuals who have a computer and a simple return.  If all you have are T4 and T5 slips then this type of return doesn’t required advanced training.  If your situation is not as simple, you should find a qualified accountant.  The fees paid to an accountant for tax advice are generally deductible while the cost for a personal income tax software program is not.  Having a qualified accountant prepare your tax return may end up saving you taxes or the hassle of correcting an incorrectly filed return.  Having peace of mind that you are minimizing tax and taking advantage of all potential benefits often exceeds the fees you will pay.

Expectations:  What do you get for a discount?  The person preparing your return may or may not have an accounting designation.  Most discount options involve you dropping your information off and having your return prepared based on this information.  Some advertise a speedy process (same day).  As a finished product you may receive a summary page or complete income tax return with schedules.  Public accounting firms generally have a different system that involves a little more time.   Most public accountants send an annual tax letter and checklist to their prior year clients at the beginning of each tax season.  This checklist assists their clients in gathering information and notifying them if their current situation has changed from the previous year.  A junior person generally prepares your return and then has it reviewed by a manager.

Continuity:  If you have a found a good accountant then it is best to continue that relationship.  Chances are your accountant has both paper and electronic files that document your personal situation.  They have a history of your past and will be in a good situation to provide proactive advice.  A comparison of your previous return always helps when preparing subsequent returns.

Independence and Qualifications:  Your financial advisor should not be preparing your tax return and your accountant should not be recommending individual investments to you.  You should have two independent people that are qualified in their respective areas.  We encourage you to review your investments with your accountant and communicate your tax situation to your investment advisor.  Communication between your accountant and financial advisor is important, however, they shouldn’t be the same person.

Filing Too Early:  Regardless of who completes your return, take care that you do not file too early.  Information slips for T4s and T5s are not required to be mailed out until the end of February.  The regulatory mailing date for T3 slips is the end of March.  If you file too early and miss something then you will have to deal with Notices of Reassessments and T1 Adjustments.  If you have taxable investment income we encourage you to wait until the first week of April before completing your tax return.

Filing Too Late:  If you file your income tax return late, you should be aware of the interest and penalties that may result.  If you do not pay your 2007 taxes on time or if there is a balance owing once you receive your 2007 Notice of Assessment, the CRA will charge compound daily interest starting May 1, 2008.  The prescribed interest rate charged on overdue taxes is currently at 8 per cent but is reset every quarter.  If you owe tax for 2007, and do not file your return for 2007 on time, CRA will also charge a late-filing penalty.

Property tax deferment assists seniors

The Property Tax Deferment Program in British Columbia was established in 1974 intending to assist seniors and the disabled.  The program ensured that the property tax burden each year would not result in an individual having to sell their home to cover this obligation.

Property Tax Deferment is a low-interest loan program that assists qualifying homeowners in British Columbia in paying the annual property taxes on their homes.

The general Property Tax Deferment qualifications require that you:

  • Be the registered owner(s) of the home
  • Be 55 years of age or older OR a surviving spouse OR a person with disabilities as defined in the Regulations to the Land Tax Deferment Act
  • Be a Canadian citizen or permanent resident under the Immigration Act
  • Have lived in British Columbia for at least one year immediately prior to applying
  • Apply on the home in which you live
  • Have a minimum equity of 25% in your home based on assessed values as determined by BC Assessment
  • Pay property taxes to a municipality or the Surveyor of Taxes
  • Have a current fire insurance policy on your home

Only one spouse must be 55 or older where the home is registered in both names. At the time of application, the owner must turn 55 during that calendar year to qualify.  You can defer your taxes as long as you own and live in your home and continue to qualify for the program. The deferred taxes must be fully repaid, with interest before your home can be legally transferred to a new owner, other than directly to your surviving spouse or upon the death of the agreement holder(s).  A one-time administration fee of $60 is applied to new approved deferment agreements. You can renew your agreement each year. A $10 fee applies to approved renewals.

For more information and how to apply, visit the Ministry of Small Business and Revenue’s website at

You can also get information by email at or call toll free through Enquiry BC at 1-800-663-7867 and request a transfer to 250-387-0555.

Interest Charges

If you choose to defer your property taxes the deferred balance will be charged simple interest at a rate not greater than 2 per cent below the rate at which the province borrows money.  The interest rate is set every six months by the Minister of Small Business and Revenue. A key benefit to note is that the deferred amount is charged simple interest, this is better than compound interest that charges interest on interest.  Another benefit is that the interest rate charged is not greater than 2 per cent below the rate at which the province borrows money.  Currently the interest rate is 4 per cent and is set for the period October 1, 2007 through March 31, 2008.  The rate may change every 6 months and will be reset again on April 1, 2008.

Means Test

One of the most interesting components to this program is that there is no mention of a means test.  Individuals of all income levels may apply provided they meet the general qualifications.  Although the program may have been designed for those struggling to pay expenses, others may also take advantage of the terms of deferment.  With the interest charges as low as they are, individuals may choose to defer their property taxes for a variety of reasons.  From an investment standpoint this may make sense if an investor feels they could generate an after tax return greater than the interest charges.



Number of Households

Amount Deferred













GulfIslands rural



North Saanich



Alberni rural



Courtenay rural



Central Saanich









Duncan rural









North Cowichan






Nanaimo rural






Campbell River


















View Royal



Port Alberni



Source:  Ministry of Small Business and Revenue – Property Taxation Branch

Four Strategies to Consider

  • Strategy 1:  The most basic strategy is to use the funds that you would normally use to pay property taxes to fund day-to-day expenses.  This strategy is essentially the main reason the program was put into place.
  • Strategy 2:   Another strategy for the use of the funds is to build up your investment savings.  Topping them up now may prevent you from running into financial problems in the future.
  • Strategy 3:  For individuals who are 55 plus and still earning significant income, redirecting the cash to top up your RRSP contribution may be a prudent move.
  • Strategy 4:  If your ultimate objective is to enhance your overall estate value then proceeds could be used to fund a life insurance policy.

Prior to implementing any of the above strategies, you should contact your accountant and financial advisor to see what course of action is appropriate for you.


Borrowing to boost your RRSP

Some points to consider when using loans to augment savings

The maximum RRSP deduction limit has increased to $20,000 in 2008.  Those with an income of $111,111 or greater may qualify for this upper limit.  Members of a defined benefit pension plan will have to factor in any current and past pension adjustments.   Most people have salaries below this amount and often it is not easy to maximize annual contributions to an RRSP.

As the deadline for RRSP season approaches many investors may be asking if they should borrow to invest in their RRSP.  The answer really depends on your financial situation.  If you are contemplating borrowing to make an RRSP contribution we recommend you consider these following points:

Taxable Income

The greater an individual’s taxable income the more it makes senses to maximize RRSP contributions.  Reducing your tax liability is often a motivating factor for many individuals when making an RRSP contribution.  Those in the higher marginal income tax bracket should speak with their advisor.  Even if you do not have the cash on hand to make an RRSP contribution it may make sense to borrow the funds to make a contribution by February 29th.

Future Income

Individuals who are considered “employees” may receive a relatively stable monthly income that is predictable from year to year.  Business owners and entrepreneurs generally have fluctuating income resulting in a higher tax bracket one year and a lower tax bracket in another.  RRSP contributions may provide a unique way to smooth your taxable income.  Individuals may have one time spikes in income from selling a real estate investment or other type of investment that generates a significant capital gain.  Planning to utilize a portion of your RRSP contribution room to offset this future liability may make sense.

Term of the Loan

Interest rates are currently relatively low making borrowing for an RRSP fairly attractive.  Most financial institutions provide RRSP loans; however, the rates can vary considerably.  The better the terms of the loan the more attractive borrowing becomes.  Some individuals may choose to utilize their lines of credit, which may have favourable rates and the greater flexibility for repayment.  Business owners may want to utilize an RRSP loan rather than their lines of credit, which have been set up for emergencies.

Length of Loan

The general rule-of-thumb is that the quicker you pay back the RRSP loan the more advantageous it is.  Short-term loans of less than a year may have minimal interest costs and may assist those with fluctuating income.  The more difficult question is when do larger, longer-term loans make sense?  Long-term loans are often used to catch up on a significant amount of unused contribution room.  With longer-term loans it is even more important to weigh the other factors in this article.

Carry Forward Room

Prior to 1991, individuals lost their RRSP deduction room if they did not fully utilize it in a given year.  The good news is that unused RRSP contribution room may now be carried forward indefinitely and includes any unused RRSP deduction room accumulated after 1990.  The bad news is that if you wait too long then you’re missing the biggest benefit of an RRSP – the compounding growth that may occur on a tax deferred basis.  Regardless of the timing, we encourage most individuals to utilize their carry forward room prior to retirement.

Interest Costs

Interest on a loan for your RRSP is not tax deductible. However, money borrowed to earn non-registered investment income may be deductible. This is why it may make sense to use extra cash to contribute to your RRSP and borrowed funds for non-registered investments.  If you have non-registered investments and are considering an RRSP loan you should meet with your accountant first.  There may be a way you can arrange your finances to ensure that more interest costs are deductible.

Return on Investment

This is perhaps the most difficult component for people to analyze.  If you knew with certainty the investment returns you would obtain then the decision may be easier.  Let’s step back and disregard how your investments may perform in the near term.  An RRSP is normally established with a long-term time horizon.  The focus should be on picking the highest quality investments that will prevail in the long run, regardless of market volatility.  We understand that many people scramble to make a last minute contribution to their RRSP.  This is okay provided care is taken when making the investment decision.  If the energy is focused on picking the best investments and the best advisor, then an RRSP loan may make sense.

Simple Strategy

Last year we highlighted a simple strategy that investors could adopt to ease the cash flow burden of trying to come up with their RRSP contribution limit every tax season.  Let’s consider an investor with a $20,000 RRSP contribution limit for the upcoming year.  For this investor we recommend multiplying their RRSP deduction limit by 75 per cent and dividing by 12 to obtain the monthly pre-authorized contribution amount of $1,250.  In either January or February of the following year, the investor could utilize their line of credit or obtain a short term RRSP loan to contribute another $5,000 to top up to the maximum.  After filing the tax return, the combined RRSP contributions of $20,000 may provide enough of a tax refund to pay off the short-term loan or line of credit.  This of course assumes that sufficient tax was withheld on other sources of income throughout the year.

The above strategy is a combination of “automatic” savings by paying yourself monthly and a “forced” short-term loan strategy that creates the discipline to pay off the loan as soon as possible.  This combination has worked well for many successful investors.

Deducting contributions will require strategy

Confusion often results between the terms “RRSP deduction limit” and “unused RRSP contributions.”  Both of these terms are used on the RRSP Deduction Limit Statement at the bottom of your Notice of Assessment from Revenue Canada.

Yesterday, our column dealt specifically with the term RRSP deduction limit.  This column outlines how the unused RRSP contributions is integrated with RRSP deduction limit.

Most investors who contribute to an RRSP claim the deduction immediately on their tax return.  Investors should understand that they do not have to claim the deduction immediately.  In some cases it is recommended that you do not claim the deduction immediately.  If you carry forward an amount it is referred to as “unused RRSP contributions.”

Why would you contribute to an RRSP and not claim the deduction immediately?  The main reason is to shelter the income from tax.  Once you have made the contribution into an RRSP all income generated within is deferred regardless if you have claimed the deduction.  Two other main reasons why you may not claim a deduction immediately are the contribution exceeds current year taxable income, and future income is expected to be higher.

We have provided three illustrations below with different situations where a person may have unused RRSP contributions at the end of the year.


Mr. Bloomberg recently received a significant inheritance of $200,000 from his mother who passed away.  Mr. Bloomberg came to see us and asked for our recommendations.  Prior to our meeting we asked Mr. Bloomberg to gather some information together including his mortgage statement and 2006 tax Notice of Assessment.  We noted that Mr. Bloomberg had $78,000 left on his mortgage with a very small penalty for prepayment.  We recommended that Mr. Bloomberg repay this debt.  Next we looked at his Notice of Assessment and noted that he had a $79,754 RRSP deduction limit.   Mr. Bloomberg is earning approximately $58,000 per year, but over the years, he has not been maximizing his RRSP contributions.  Mr. Bloomberg expects to work for at least another five years and believes that his income will increase over current levels.

Based on the information gathered we recommended that Mr. Bloomberg contribute $79,754 to his RRSP.  Based on his current level of income Mr. Bloomberg should speak with his accountant and determine how much of this contribution he should claim in the current year and how much he should carry forward as unused RRSP contributions.


Mrs. Thomson recently became a widow at the age of 55.  Her deceased husband had a life insurance policy with a death benefit of $250,000.  Mrs. Thomson mentioned that she has no debt and approximately $77,300 in RRSP deduction limit.  Mrs. Thomson is planning to work another ten years and has expected income during this period of approximately $50,000 a year.

We recommended that Mrs. Thomson shelter $77,300 from tax immediately.  However, we also recommended that she claim the deduction over the next few working years.  At the beginning of every year we would encourage Mrs. Thomson to roll some of the remaining non-registered funds to top up her RRSP.  Based on $50,000 a year, she will have another $9,000 each year in additional RRSP room.  She may also want to take advantage of the $2,000 excess contribution that CRA allows over the deduction limit.


Over the last 20 years Mr. Reuter has worked hard as a realtor.  His knowledge and expertise has been in real estate and he has focused nearly all of his investments in that area.  Mr. Reuter has never contributed to his RRSP and has an RRSP deduction limit of $143,600.  Mr. Reuter is now in the process of selling one of his rental properties.  We have estimated that his taxable capital gain on this property will be approximately $33,800 and the total proceeds will be approximately $389,000.

We explained to Mr. Reuter that contributions to an RRSP may offset the taxable capital gains.  We also provided Mr. Reuter some information on alternative investments that he could focus on outside of real estate.  We recommended that he could use a portion of the proceeds from the rental property and contribute $143,600 to his RRSP.  He could deduct enough to reduce the capital gains tax and his real estate income in the current year.  The remainder of the contribution he may carry forward as “unused RRSP contributions” to offset against future rental properties that he sells and his real estate commissions.

Excess Contributions

When you have an unused RRSP contribution amount it is important that you monitor this amount along with the RRSP deduction limit line.  Be careful that the unused amount does not exceed your deduction limit by more than the $2,000 buffer that CRA allows.

If the unused amount exceeds the deduction limit amount by more than $2,000 then you have made what is referred to as an excess contribution.  Excess contributions are subject to a one per cent tax on the excess amount for every month they are left in the RRSP.  If you have excess contributions, you may have to complete and send a T1-OVP return with payment to your tax centre no later than 90 days after the end of the year in which the unused contributions exist.  Failure to file this return may result in further interest and penalties.   We would encourage all investors who have an excess contribution to proactively deal with their mistake before CRA sends you a letter.

Understanding RRSP terminology and your existing tax situation may ensure that you take full benefits of your options, including when to deduct your RRSP contributions.

RRSP deduction limit has value

Registered Retirement Savings Plans have been around since 1957, allowing investors to sav for their retirement while providing a shelter on tax.

One of the most significant legislation overhauls to RRSP legislation was in 1991 with the carry forward provision.  Now investors no longer have to make a “use it or lose it” decision.

The provision allowed unused RRSP contribution limits after 1990 to be carried forward.  The RRSP deduction limit is included on your Notice of Assessment that Canada Renue Agency sends after you file an income tax return.

Your RRSP deduction limit may be carried forward indefinitely.  This is an important component for everyone to note, considering most people have incomes that increase over time.

Consider Mr. Samson, who is 25 years old and has been a professional student for much of his life.  He decided in 2006 to start working and earned $40,000.  In 2007, Mr. Samson’s RRSP deduction limit is $7,200 ($40,000 x 18 per cent).  Mr. Samson feels that he will be making a larger salary soon and would rather dedicate his current year earnings to paying off his student loans.  He does not lose the $7,200 RRSP deduction limit.  Every year that he does not contribute to an RRSP he will be accumulating a greater deduction limit to be used in the future.  If his income increases then he may save more in taxes by delaying his RRSP contribution.

Marketing by financial institutions may be one reason people rush out and make last minute contributions.  It may also be recent news question whether Canada Pension Plan and Old Age Security will exist when they retire.  Or perhaps it is some internal fear of having enough to live on at retirement that pressures so many into making RRSP mistakes.

Check your Notice of Assessment and your deduction limit before you make any contributions.  You should understand what each line represents.  If you are a member of a defined benefit plan then your statement will have pension adjustments.  If you are a member of a defined contribution plan you should factor in contributions made through work.

The sum of both of these contributions should be factored in prior to making any additional RRSP contributions.  Care should be taken to ensure that you do not contribute over your deduction limit.  Canada Revenue Agency provides a buffer of $2,000 before an excess contribution is subject to tax.

Here’s another illustration to make the point:

For nearly 20 years Mr. Phillip has focused his after tax savings to paying down his mortgage.  At 50, he is proud that he is mortgage free.  Mr. Phillip has managed to accumulate approximately $97,200 of RRSP deduction limit.  Now that he is mortgage free he would like to accelerate his retirement savings but does not know where to begin.  Mr. Phillips annual income is $85,000 and he has been dedicating approximately $1,500 a month towards mortgage payments.  Annually Mr. Phillip’s RRSP contribution room is increasing by approximately $15,300 (18 per cent x $85,000).   We discussed with Mr. Phillips that since he no longer has to make monthly mortgage payments, he should consider making monthly pre-authorized contributions to his RRSP.   We mapped out a plan that he could contribute $1,950 monthly to his RRSP, claim the amount as a deduction and save taxes.  The net amount would likely be close to his previous monthly mortgage payment of $1,500.  Best of all, by age 61, Mr. Phillip should have caught up and fully utilized his RRSP deduction limit.

Contribute Early

Time has an amazing way of compounding investment returns.  Investors who begin contributing early to their RRSP are more likely to be financially prepared for their retirement years.  The sooner people begin investing; the longer the savings will be able to grow on a tax sheltered basis.  Tax deferred compounding over a larger number of years should naturally result in a greater accumulation of funds.  One benefit to waiting later in the year to contribute is the greater certainty you will have regarding your income levels and your actual deduction limit.

Avoid Mistakes

If a person pulls funds out of an RRSP, they do not recover the deduction limit.  This amount is lost.  Clearly understanding that your RRSP deduction limit will not vanish if not used should ease some financial pressures.

An RRSP should generally be set up to fund your retirement and involves a long-term discipline.  If you feel that you will likely have to make a withdrawal then you should consider waiting until you are confident that the funds are committed until retirement.  We would rather see someone miss out on a little bit of time to ensure they are not making the mistakes that some people make.


The top 10 mistakes made with RRSPs

A Registered Retirement Savings Plan is not for everyone, but for those who are considering RRSPs or have them, it pays to head off some of the most  common mistakes.

Prior to setting up an RRSP, determine whether you are likely to make one of the following 10 common mistakes:

1.  Often people rush to make a last-minute RRSP contribution and give little thought to the underlying investment.  Spend a few minutes to remember how long it took you to earn that money and slow the selection process down.  Solution:  If you are in a rush we recommend that you consider making contributions to your RRSP in cash and look at all your available investment options prior to making an investment decision.

2.  Over contributing to your RRSP may result in T1-OVP penalties and interest.  This past year we noted a campaign by Canada Revenue Agency that resulted in several letters being sent to individuals who have made over-contributions.  Solution:  Before you contribute to your RRSP, be certain of your limit.

3.  Making contributions to an RRSP and pulling the money out before retirement.  Often this results in more tax being paid than what you initially saved as a deduction.  The shorter the time period between the contribution and withdrawal, the less likely you are to have received tax deferment of income.  Contributing funds and withdrawing the funds uses up your contribution room, which is a big negative.  Solution:   Avoid contributing to an RRSP unless you can commit the funds until retirement.

4.  People who have an RRSP account should understand that all income generated in the account is tax deferred.  This is by far the biggest advantage of an RRSP.  Over time, this should save you much more in taxes than the initial deduction for the contribution.  People who have non-registered investments understand that income generated in these accounts is taxable.  Pulling funds out of an RRSP prior to age 72 is generally the wrong decision when non-registered funds are available.  There are some exceptions, such as shortened life expectancy.  Solution:  Using the capital within your non-registered investments first will reduce your current annual income and defer taxes further.

5.  Some people have multiple RRSP accounts held at different financial institutions.  They may have $10,000 at institution A from a 2004 RRSP contribution, $6,000 at RRSP institution B from a 2005 RRSP contribution, and $8,000 at institution C from a 2006 RRSP contribution.  This may result in additional RRSP fees being charged to you and result in you paying more fees than you need to pay.  More importantly, your investments become more difficult to manage.  Solution:  Consolidate your RRSP accounts at one institution for better management, to reduce fees, and to open up more investment options.

6.  Underestimating life expectancy is also a common mistake.  All too often people in their 60’s begin pulling money out of their RRSP solely to avoid paying a large tax bill if they were to pass away.  We encourage people to plan for the most likely outcome rather than the worst-case scenario.  Solution:  Avoid early withdrawals and ensure that you take full advantage of the deferral benefits of your RRSP.

7.  When you open an RRSP account you must make a beneficiary selection.  If you are married or living common law then the natural choice is your spouse for the tax-free rollover provisions on the first passing.  Often widows will still have their deceased spouses named as beneficiary.  We have seen cases where people have remarried and have their ex-spouse still listed as a beneficiary.  In some cases naming your estate may be the best option.  Solution:  Speak with your advisor and ensure you have the correct beneficiary on your RRSP account.

8.  We encourage people to give careful thought to the type of investments they hold within their RRSP and outside of their RRSP.  Good structure decisions are important and are easier when all of your investments are at one institution.  To illustrate this we will use an individual that has equity investments within their RRSP that may generate dividend income and future capital gains (all income within an RRSP is treated as regular income for withdrawals).  Let’s also assume that this same individual has GICs and term deposits at the bank that are not within their RRSP.  Although this individual does not require income, he is being taxed every year on the income.  Solution:  Have interest generating investments within your RRSP along with equities that you may trade from time to time.  Outside your RRSP consider investments that are long term holds that generate primarily capital gains.  For non-registered accounts, Canadians are not taxed on unrealized gains until the investment is sold.  If you purchased a basket of blue chip equities outside of your RRSP and held them for 20 years you would not be taxed on the gain until the investment is sold.  In effect you have created two types of tax deferred plans.

9.  People who do not have pension income (not including CPP and OAS) should ensure that they are taking all planning components into consideration before requesting early RRSP withdrawals.  Withdrawals from an RRSP are not eligible for the pension income amount and they are not eligible for income splitting.  Solution:  If you require funds then we encourage you to wait until at least age 65 and then convert funds to a RRIF before withdrawal.  RRIF income received at age 65 or older may be eligible to be split and qualify for the pension income tax credit ($2,000 each per year).

10.  One of the biggest mistakes we see is failure to make an RRSP contribution.  Individuals who are making large salaries without a pension need to take advantage of their RRSP contribution room.  Not having the discipline to set aside funds for retirement will result in making sacrifices at retirement.  Solution:  Consider making an RRSP contribution.