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RRSP Contribution

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Jim Maroney Jim Maroney

:: Don't have enough money for an RRSP contribution this year?

:: February 20, 2004

Rest assured you’re not alone. Hot on the heels of Christmas credit card bills, RRSP season does fall at a rather inopportune time. Then again, it doesn’t matter what time of year, many people just don’t have thousands of dollars laying around with no place to go.

If funds are a little tight this year, you may want to take a look at investing in a labour-sponsored venture capital corporation (LSVCC). Combining a LSVCC investment with an RRSP contribution can reduce the out-of-pocket cost of your RRSP contribution considerably.

In BC, the largest LSVCC is known as the Working Opportunity Fund (WOF for short). Started in 1992, WOF has grown to almost $500 million in size with over 50,000 investors. WOF invests equity capital in small to medium sized businesses in BC's emerging industries including information technology, life sciences, advanced manufacturing, film & entertainment, and environment sectors. Eligible investors must be residents of BC.

WOF provides a 15 per cent federal tax credit and a 15 per cent provincial tax credit for every dollar invested up to $5,000. Above this amount, there is no further credit provided at the federal level although the provincial credit does continue up to investments of $13,333. This means that the biggest bang for your buck is found on investments of $5,000 or less.

Let’s consider an investment of $5,000 for purposes of example. Assume further that personal income tax is payable at 43.7 per cent, the highest personal tax rate in BC. By way of background, remember that a tax credit is a direct reduction in tax, therefore, a $1 tax credit is the same as a $1 tax saving. This differs from a tax deduction wherein the tax saving is a function of the taxpayer’s personal income tax rate.

Carrying on with our example, a $5,000 investment in WOF will provide the investor with a federal tax saving of $750 (15 per cent of $5,000) and a provincial tax saving of $750. Now contribute this same $5,000 investment to an RRSP and deduction will yield a tax saving of $2,185 (43.7 per cent of $5,000).

Tally it all up and you’ll find that the after-tax cost of your $5,000 investment is only $1,315 ($5,000 - $750 - $750 - $2,185). In other words, you’ve only paid roughly 26 per cent of the actual cost. Think of it as a sale sign that shouts “up to 74 per cent off” – kind of hard to ignore isn’t it?

Savvy consumers know that you get what you pay for so what’s the catch? The catch is something called risk. Take a look at the industries WOF invests in and you’ll quickly see that they are, without exception, higher risk industries. Not only are they risky, they’re small to medium sized to boot. All of this means investors need to look beyond the cost and consider the quality of the underlying investment. Remember many, including investment advisors, considered Nortel shares cheap when they hit the $50 mark not too long ago.

RRSP contributions - LSVCC may be the answer

Do a search on under labour-sponsored funds and you should find a list of LSVCCs and a comparison of their rates of returns. What you’ll see is considerable volatility year-over-year with many funds showing large positive returns in one year followed by large losses in a subsequent year. One fund even shows a negative ten-year return – investors in this fund can’t be feeling too sprite about the tax saving they received when they made their original investment knowing that the investment has returned a big fat zero (or less) over ten years.

And if you’re thinking you can simply bail out if the investment starts to plummet you’d better think again. LSVCCs have minimum holding periods (8-years in the case of WOF) so jumping ship isn’t an option. Consider yourself locked in for the long haul.

To its credit, WOF has faired well in comparison to other similar funds. In fact, WOF is the top LSVCC performer in the country. Go to and drill down to see the rates of return and comparison to the S&P/TSX composite. Notice the important roll the tax credits play in the rates of return achieved. Take the tax credits out of the equation and even WOF isn’t something to crow about.

If money is tight, talk to your investment advisor about investing in an LSVCC this year. Most provinces and territories have LSVCCs, although, the rules and allowable credits vary between jurisdictions. LSVCCs should not form the bulk of your retirement investments – balance is key. Finally, remember, the tax credits and the tax write-off are one-shot deals, ultimately you’ll be stuck with the investment for the minimum holding period so you’d better be content going in.

Free Tax Advice Article Submitted to Income Tax exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

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