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February 3, 2016 | Head Start

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


So 11% of kids in the UK think milk and eggs come from wheat. A scary number of nutbars on this blog believe Nine Eleven was a hoax. And 52% of Millennials are convinced you can use an RRSP to buy a car.

There may be little hope for the first two groups, but we still have time to save the moisters. In fact, it’s a reasonable bet most people have a hazy, sketchy, foggy or nebulous idea what tax shelters are all about. So here are some things to remember, and teach you kids when they ask, “What do I need to know to grow up?”

A TFSA is not a savings account.
Not sure even the finance minister gets this. The tax-free account is for investing money, (hopefully for retirement decades away) not for saving it for a vacation. Stick a wide variety of growthy things in there and never pay tax on the gains. Best, it can pay you constant income in retirement (or unemployment) and the money is never reported as income. No new tax bracket. No pension clawbacks. This is the finest money machine we get, despite being gored in a dumb political move.

They’re not products.
TFSAs and RRSPs are not things. You don’t buy one at the bank. They’re just ways of sheltering stuff from being taxed. So you can open a registered account (that’s what they’re called) at the bank, through an advisor, with an online brokerage, at the credit union or with one of those robots. Then stuff it.

What’s the difference?
Two major points. TFSAs are massively democratic, because everybody gets the same chance to contribute – now $5,500 a year. RRSPs, on the other hand, reward the rich the best. The more you earn, the more you can salt away from tax – up to $25,000 a year. You’re right. T2 got that one wrong. Second, a tax-free account contribution doesn’t get you a tax break but neither are withdrawals taxed. Putting money into RRSPs nets a tax cut up to 50% of the cash invested (that’s elephantine), but withdrawals are taxed according to your income when you withdraw.

Retirement plans aren’t for retirement.
That’s so analog. The best use of RRSPs is for tax-shifting – reducing taxable income in years when you’re doing great, and supplementing your income when things blow up or change. So if you pump money into a plan when working you can reduce the amount sent to Ottawa. Reclaim the money if you get punted, pregnant or paused and enjoy it with less (or no) tax. You have effectively shifted income from a year you don’t need it to one when you do. RRSPs can also be used to buy a house, using the tax refund as part of the down payment, for financing education or a baby. Open up a spousal plan and income-split with your less-taxed squeeze.

Cash not required.
No extra money this month? No sweat. It’s easy to feed either a TFSA or an RRSP by making a ‘contribution in kind.’ Transfer something you already own (like a crappy bank mutual fund, ETFs, brain-dead GICs or the four RBC shares your grandmother gave you) into your registered plan and they count the same as money. All future growth will be tax-free, but past growth may be subject to capital gains tax. Be cool – that’s a minimal charge.

Room for life.
Each year that you work you accumulate new RRSP ‘room’, generally equal to 18% of your wages. Each year you clock over age 18, you get TFSA room. Doesn’t matter if you use it then or not, because all of this potential contribution just keeps adding up. This can be a godsend if your job is terminated. Much of a severance or retirement package can be rolled right into an RRSP tax shelter. Or, as you age, become addicted to this blog and grow embarrassingly wealthy, investments can be moved into your TFSA where all tax is eliminated and income can stream back out – non-reported to the CRA. Better than sex.

Know how you’re hosed.
The greatest tax is levied on what people earn working. Equally penalized is money made by collecting interest (like on a GIC) or rent (that investment condo). Your ‘marginal’ tax rate is the level at which any additional money coming into your hands is siphoned off by government. So if you work for a living and make $100,000 in BC, your marginal rate is 38.3% – which means you’ll pay $38 in tax on each hundred bucks your high-interest savings account generates. But if you own an ETF instead that yields a $100 capital gain, the tax is just $19. Yep, today savers lose twice.

Other salient stuff.
Your spouse can take over your RRSP when you kick, but only if you name him/her as the ‘beneficiary.’ Kids, dogs and friends are not so favoured. The account becomes taxable. A TFSA can be taken over by a spouse if he/she has been named as ‘successor holder’, which means it gets folded into their existing plan, becoming their property. In contrast, the beneficiary of a TFSA (anybody else) gets the cash or assets in the account, but the days of tax-free growth end.

Finally, interest on money borrowed to contribute to a registered account is not tax-deductible. But loans for non-registered (or taxable) accounts give you that break. An RRSP loan can make sense if the tax refund is used to pay the loan down. TFSAs loans just suck. Ask your mom for the money instead, and tell her you’re buying a condo. She’ll be so proud.

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February 3rd, 2016

Posted In: The Greater Fool

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