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August 12, 2016 | Legal advice

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.


Eric’s a fancy lawyer in southern Ontario. Personal injury law. Ambulance chaser. Seven years into it, he makes good coin – four hundred a year, which he earns through a personal corporation because he thinks he pays less tax that way. (He doesn’t.) Spends it all.

You’re a smart dude, I said gratuitously, after learning he’s a financial basket case. But how can you be so educated and affluent yet totally dumb about money?

“Because,” Eric replied, “nobody ever taught me. It’s why I read your pathetic blog. I don’t even really know what an RRSP is. But I do know I don’t have any. Should I?”

So this is for all the lawyers out there, wisely dispensing advice, and so dearly in need of some. Forthwith, a few things you need to know about registered retirement savings vehicles.

An RRSP is not a thing. You can’t buy one.

The biggest financial myth around (other than ‘gold is money’) is that an RRSP is a product you go to the bank and buy. Nope. It’s simply a way of investing money – a vehicle, not a thing. It means you agree to set aside funds for a future date in a vehicle registered with the government. In return they let you deduct that contribution from your income on the understanding you’ll pay tax when you take it out. This massively favours higher-income earners. The money is then put into assets which grow, tax-free. If you choose a savings account or a GIC, you seriously need help. Like Eric.

It doesn’t save tax. It just defers it.

Tax paid on money put into this vehicle is refunded to you on the next return you file. This may feel good, but it means the cash you’ve put into an RRSP has just become taxable again. You won’t be able to get it without paying up (unless you read the following). So contributing to an RRSP is like sex. Joy now. Consequences later.

The best possible use is to shift tax between years.

The original idea was to stuff an RRSP during years of work and high taxes, then cash the plan during retirement when your income and tax load are less. But with governments as pickled in debt as everyone else, it’s reasonable to expect future taxes will be higher than those of today. So use an RRSP for tax-shifting. Contribute when you make good money and can use the refund (to invest, of course), then cash out during years when you’re sick, laid-off, parenting or traveling Tibet finding yourself. If you make little or nothing in a year, the RRSP money comes out cheap.

Save big through income-splitting with your spouse.

A spousal RRSP is a must in any relationship when one spouse earns a lot less than the other. The higher-income person contributes to a plan in the other person’s name, gets all of the tax break, but after three years the funds become the property of the other spouse, who can remove them at a lower rate to have an affair. Just kidding. But maybe you should ask for receipts.

RRSP room never goes away. Hoard it for high-income years.

Earned contributions are called ‘room’ and they accumulate. So instead of piddling away your room during years when you’re not earning a lot, it might make sense to save it up for when the big money rolls in. Remember, the more you earn, the more room you create and the larger the tax break for making a contribution. The RRSP, more than any other tax vehicle, favours the rich. And yet the T2 gang attacked the TFSA. It was political, but fooled the kids.

Use it to save your butt when a pension is commuted.

A great use of all this saved-up room could be for when you retire and take your pension as a lump sum payment, instead of a series of monthly (fully taxable) cheques. A commuted pension typically comes in two hunks – one rolled into a non-taxable registered account and the second in cash. If you have room to use, the tax hit on the cash can be substantially reduced.

Yes, you can put a mortgage inside an RRSP. But don’t.

An RRSP mortgage sounds cool, and sometimes can be. If you have enough liquid assets in an RRSP to pay off a mortgage, you can then borrow back the money and hold it as an RRSP home loan, making payments to yourself. But it costs a lot to set up, requires an administrator, and you can’t charge yourself more than market interest. So save this strategy for when rates go back up.

Make a contribution without money. Get paid for doing it.

Yup, this is good. If you have assets now, like ETFs, or mutual funds, stocks, bonds or REITs, just transfer them into an RRSP up to your allowable room. This will count the same as if fresh cash were used, and earn a refund. The only problem is capital gains may be triggered on the way in, so be ready for that. Still, getting paid to sell yourself stuff you already own is totally phat.

No money? No prob. Borrow it.

Or you can borrow the funds to top up a plan, and come out ahead. For example, borrow ten grand at 3% to contribute, then get $3,500 back as a refund. Use it to pay down the loan and now you have $10,000 in assets for which you paid $6,500. Interest on such a loan is not deductible, but it’s a pittance anyway.

How much can you put in? Does Trudeau know?

Lots. 18% of what you earn in a year, to a max this year of $25,370. So someone making $140,000 can dump in twenty-five grand, and reduce their taxes by more than $11,000. See why it sucks not to be a 1%er?

Self-employed means always stuffing your RRSP.

Entrepreneurs usually don’t have corporate pensions, so it makes oodles of sense to be accumulating RRSP room, and using it. In retirement you can control your own income by drawing down those plans as you wish. It’s an argument for people earning money through corporations to draw a salary, instead of taking dividends.

RRSPs don’t last forever. Beware of the conversion.

You may think you’ll never turn 71, but plan for it. In that year all RRSPs must be converted to RRIFs, which means you must start cashing them in, by law. This money is added to your taxable income, and could shove you into a higher tax bracket, bringing untold misery. So think about removing some of it earlier when you can engineer a low-income year or two, and irritate the hell out of Millennials.

You can melt down an RRSP and pay no tax. Seriously.

Complicated, but doable. Borrow money on your LOC to invest in a non-registered portfolio, then pay the loan interest with RRSP or RRIF withdrawals. The money coming out of the registered plan is taxable, but the interest is tax-deductible. So, in effect, the government is financing your increase in net worth as you transfer your wealth out of the tax shelter, sans tax.

I could continue. But Eric has already nodded off. Figures.

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August 12th, 2016

Posted In: The Greater Fool

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