And the Oscar goes to ... the RRSP

Mar 03, 2017 | Dian Chaaban


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PricewaterhouseCoopers, the accountancy firm that has overseen the counting of the Oscars ballots for 83 years, apologized Monday for the very awkward blunder – when the award for best film was mistakenly presented to La La Land instead of the actual winner, Moonlight.

While talk of the best picture blunder started the week off, the focus quickly shifted to many other headlines (including Trump’s first official speech to Congress and the Bank of Canada’s interest rate announcement, to name a few) and client conversations revolved around the theme of last minute RRSP contributions.

Contributing to your RRSP throughout the year is a great habit to get into because it encourages dollar-cost averaging, more time for compounded growth and less stress during the inevitably busy RRSP season. But contributing to your RRSP today also means planning for the future and taking a proactive planning peek at your future cash-flow and marginal tax rates.

If you are a high-income earner today (and also anticipate high-income expectations for your retirement), you will likely need to also look beyond your RRSP to fund your retirement. While the tax advantages offered by an RRSP are significant, its contribution limits can be a limiting factor for high-income earners. So what else can you do? Fortunately, there are several tax-wise ways you can save for your retirement beyond your RRSP…

Different investments, different tax rules = aim for tax-efficient income

Most high-income earners already save beyond their RRSPs in regular non-registered accounts. As a result, you may already be aware that different types of investment income are subject to different tax treatments outside of your RRSP. Therefore, your investment mix is an important consideration if you want to invest in a tax-wise fashion. Note that while evaluating investments based on their after-tax return is important, you should also consider such other factors as the investment’s risk, the opportunity for capital appreciation, liquidity and so on.

I love Dividends

Due to the Dividend Tax Credit, dividends from a Canadian corporation generally receive the most preferential tax treatment at all income levels. Capital gains are close behind with only half of any net capital gain taxable at your marginal tax rate. Interest income, on the other hand, is fully taxable at your marginal tax rate. As result, when looking at your overall investment mix, it can make sense to allocate more of your interest-bearing investments to your RRSP, where they will be sheltered from taxes.

The Tax-Free Savings Account (TFSA)

A TFSA offers you the ability to earn tax-free investment income. Even though your contribution limit each year is limited to $5,500 (unless you have some room you haven’t utilized yet), over time this amount can grow into a significant sum because of its tax-free compounded growth. If you have children over the age of 18 they may also have some TFSA room to ‘share’ as a household.

Tax-exempt life insurance

Instead of leaving your non-registered investments exposed to your high tax rate, consider investing through a tax-exempt life insurance policy. The income generated by your assets accumulates tax-deferred, as in a registered plan. For retirement income, simply use the insurance policy as collateral for tax-free bank loans. When your estate is settled, the loans are repaid with the insurance proceeds, and the remainder goes to your beneficiaries, also tax-free.

The Individual Pension Plan (IPP)

An IPP is a defined benefit pension plan established by an incorporated company for business professionals. An IPP may enable you to make higher tax-deductible contributions compared to your RRSP and enhance your retirement income. In addition, the contributions are tax-deductible to your corporation, making it ideal for self-incorporated professionals and owner-managers.

Your own personal circumstances and retirement timeline will ultimately determine how suitable these strategies are for you. Working with us and a qualified tax advisor can make all the difference.

With so much going on and information coming at us from every angle, it's sometimes hard to keep your finger on the pulse of what's happening. In an effort to keep you in-the-know and provide you with some conversation nuggets for the weekend, I've compiled the following hit list to fill your conversation pipeline.

Now you are in-the-know with Word on the Street.

Enjoy the weekend.

D.

Dian Chaaban

Investment & Wealth Advisor

Chaaban Wealth Management Group

416.842.4234