Beyond owing a principal residence where the potential for long-term capital appreciation is 100% tax-exempt, contributing to a Registered Retirement Savings Plan (RRSP) is for most Canadian taxpayers the next most favourable long-term savings opportunity.

Introduced by the Federal Government in 1957, RRSPs encourage Canadians with earned income to contribute moneys for the benefit of their own retirement lifestyle needs and in addition to other employer-sponsored and government-sponsored benefits including Employee Pension benefits, Canada Pension Plan (CPP) and Old Age Security (OAS.)

Tax Savings Benefits:

For many Canadian taxpayers, eligible contributions made to an RRSP (Registered Retirement Savings Plan) are beneficial both in terms of immediate tax savings and longer-term income tax deferral. From a tax standpoint, RRSP contributions are considered a deduction from earned income. As a result of Canada’s progressive tax system, contributions made to an RRSP will result in tax savings equivalent to your marginal tax bracket (up to 43.7%!) Note too that investment returns earned within an RRSP are not subject to taxation until withdrawn (100% tax deferred returns;) when proceeds are then treated as income and taxed accordingly, though more often at a lower marginal tax rate (in retirement.)

Spousal RRSP contributions may be considered in situations where a lower income spouse is expected to enjoy a lesser marginal tax rate (in the future and/or in retirement.) As above, the contributor spouse will earn an immediate tax deduction against his/her earned income and will pass the future income tax liability on to the lower income spouse. Though Income Attribution rules prevent a lower income spouse from immediately withdrawing proceeds, with proper tax and retirement planning, spousal contributions can be highly beneficial from a tax standpoint.

Maturing Options & Pension Income-Splitting – Though an RRSP may be maintained until December 31st in year the Annuitant (plan owner) turns age 71, more often investors are maturing their plans early in an effort to take advantage of recently legislated income-splitting opportunities whereby income drawn from a Registered Retirement Income Fund (RRIF) and/or Life Annuity income can be shared after upon reaching age 65.

Contribution Limits & Timing:

Your 2009 RRSP maximum contribution is based upon the following formula:
1. Accumulated contribution room from previous years
2. Add: 18% of 2008 Earned Income
3. Less: 2008 Pension Adjustment
4. Add: 2008 Pension Adjustment Reversal

Your 2009 contribution limit is also subject to a maximum deposit of $21,000 – your 2008 Canada Revenue Agency Notice of Assessment will summarize your contribution eligibility. For next year (2010) the RRSP limit will increase to $22,000… and shall be linked to inflation thereafter.

2009 RRSP Deadline – Though many Canadian taxpayers contribute to their Plan(s) throughout the calendar year, the hard deadline for RRSP contributions is in fact the 1st 60 days of the new tax/calendar year, thus the last day to contribute and receive a tax deduction offsetting 2009 earned income is March 1st 2010.

Funding Options:

Cash and/or in-kind Contributions – Lump-sum cash contributions may be made at any time throughout the year and in the 1st 60 days of the new tax year. In-kind contributions where shares and/or other RRSP eligible investments are contributed in lieu of cash may also be considered. In-kind contributions are always made at Fair Market Value (FMV.)

Borrowing to invest – With interest rates at/near historical lows, it may be prudent to borrow for your 2009 RRSP contribution. This is especially true for taxpayers nearing retirement who have unused RRSP room carried forward, for those who are in their highest earnings years and/or taxpayers subject to a high marginal tax rate; where the offsetting tax savings could be significantly more than the cost of borrowing.

Because interest on moneys borrowed for an RRSP contribution are NOT considered a tax-deductible expense, often it is prudent to attempt to optimize an RRSP loan such that the loan is offset by tax savings – consider the following example:

*Assume for instance your Marginal Tax Rate = 43.7%
*Assume a planned contribution of $10,000

1. Top Up Factor = (1 ÷ $43.7%) - 1 = 1.2883
2. RRSP Loan = $10,000 own contribution ÷ 1.2883 factor = $7,762 loan
3. Total Contribution = $7762 loan + $10,000 own contribution = $17,762 total contribution
4. Tax Savings = $17762 total contribution * 43.7% = $7762 tax savings to offset the loan

Pre-Authorized Contributions – Dollar-Cost-Averaging and/or contributing by way of pre-tax payroll deductions (where available) into your RRSP may serve to moderate price variability and over time may in fact reduce the average cost of your investments. Moreover, many investors benefit from a more disciplined (pay yourself first) savings approach, rather than having to scramble and/or borrow to fulfill an RRSP contribution before the deadline.

Self-Directed Plans – an RRSP may be considered a kind of safety-deposit box within which you can purchase any RRSP eligible investment; from Guaranteed Investment Certificates (GICs) and bonds, to common and preferred stock, mutual funds and guaranteed insurance-backed solutions. Even your own Mortgage may be eligible among many other potential solutions. As an experienced Wealth Planner and dedicated ScotiaMcLeod Wealth Advisor, I can help you define an appropriate Investment Policy and shop the market for the most suitable investment solutions in pursuit of your lifestyle and retirement goals ahead.

Rule of 10 – Not unlike investing in real estate, choosing investment solutions for your RRSP is more about time-in and not necessarily timing. As above, the real value of an RRSP contribution extends far beyond the benefit of immediate tax savings. In fact, it is long-term tax deferral which often results in a greater benefit. Without the hindrance of annual tax obligations, an investor can choose investments more conservatively than he/she would in a taxable account, often leading to more predictable results over the long run.

Though advisors sometimes quote the Rule of 10; which suggests an investment will double in value over 7 years if it achieves a 10%/annum return, because investment returns are rarely consistent year over year, prudence often weighs on the side of a more conservative investment strategy – maybe the Rule of 7 is more appropriate for tax-advantaged RRSP savings?

10/30/60 Rule – Studies have shown that future retirement incomes withdrawn from an RRSP and/or from a RRIF are comprised of:
· ~ 10% from actual contributions made throughout your working career
· ~ 30% from growth and income earned on these contributions prior to retirement
· ~ 60% from growth and income earned on RRSP/RRIF deposits post-retirement
*Though you may transition from your career into retirement and onto the next phase of life, you don’t necessarily ever retire from investing…
RRSP vs. Tax Free Savings Account (TFSA)?

Surplus savings beyond what you contribute to your RRSPs may be directed into Tax Free Savings Accounts ($5000/year each, cumulative beginning 2009.) Unlike an RRSP, there is no immediate tax deduction, however earnings/growth within the TFSA is tax exempt.

• Moneys withdrawn from a TFSA can be re-deposited in future years (not the current calendar year.) For most taxpayers, from a benefit standpoint, contributions made to a TFSA should be considered after maximizing RRSP contributions (exceptions apply.) As above moneys borrowed for a TFSA contribution(s) are not tax-deductible.
  

RRSP vs. Mortgage?

For many Canadian taxpayers, a principal residence is representative of their largest asset. Beyond the tax-exempt status of a principal residence as eluded to above, real estate ownership generally is often favoured over other marketable securities because it is a tangible asset. Just as Location, Location, Location is often the most important consideration when purchasing a home, for other marketable securities it is Due-Diligence, Diversification and Discipline which define value over time.

Beyond understanding and comfort, for many investors the decision as to whether to contribute to an RRSP or pay down a mortgage is a function of net (immediate and deferred) tax savings resulting from contributing to an RRSP and the cost of mortgage interest. With current mortgage interest rates near historical lows, it may be more prudent (today) for Canadian taxpayers to apply surplus savings (and/or borrowings) to an RRSP contribution and where applicable use resulting tax savings to pay down the mortgage principal thereafter...

Conclusions – Contributing to your RRSP regularly is one of the soundest ways to turn your retirement goal in to reality – the earlier you begin contributing, potentially the larger your retirement nest-egg will be. Be sure to contact me soon to arrange an assessment of your retirement strategies and explore solutions which could help you optimize your overall Wealth Planning picture; including retirement, taxation, investment management, asset and income protection and legacy planning solutions.

Dale A. Swan, CSWP, CFP, FMA, FCSI
ScotiaMcLeod Wealth Advisor

Life Underwriter

ScotiaMcLeod Financial Services Inc.

Direct 604-661-7455
Toll-free 800-263-8637
Fax 604-661-749 123

650 West Georgia Street

Suite 1100, PO Box 11615
Vancouver, BC V6B 4N9