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TAXFlash News from IncomeTaxCanada.net
:: Deadline fast approaching for RRSP contributions! Time to make a decision
:: Procrastinators rise up, the time is nigh to do what it is you do best. With the 2002 RRSP deadline falling on a weekend this year, you’ve received an extra few days to enjoy your indecision but the time to get off the couch and make a decision is upon you. If you want a write-off on your 2002 tax return the RRSP deadline is Monday March 3rd – that’s right, you’ve got two days to decide. To help you along with your decision, I’ve compiled a list of reasons why you should make an RRSP contribution before the deadline passes you by. 1. You aren’t getting any younger. Yes, it’s a fact, you, and everyone around you, are getting older. But unlike you, RRSPs get better with age. RRSPs produce the greatest result the longer they exist. Start early and let the power of compounding go to work. If you contribute $5,000 to an RRSP for 25 years you’ll be left with roughly $255,000 in your RRSP at the end of the period. If, on the other hand, you started the process 10 years early and contributed the same $5,000 per year for 25 years you’d have a nest egg of $420,000 at the end of 35 years. For the same total investment you’d have $165,000 more for your retirement comfort all because you started 10 years earlier. This is called the power of compounding and it doesn’t work as well the older you get. 2. You don’t like paying income tax. Hey, rest assured you’re not alone. Distaste for income tax is about the only topic on which Canadians can be said to speak with one voice. So if you don’t like paying tax, quit bellyaching and do something about it. RRSPs are government sanctioned tax shelters – make a contribution and save some tax. 3. Contributing to an RRSP isn’t as expensive as you thought. In my example above, you probably scoffed at the notion of forking out $5,000 for an RRSP contribution. If you did, you’re looking at the wrong number – what you should be looking at is the after-tax cost of the contribution, not the pre-tax cost. It’s the after-tax cost that is your out-of-pocket cash cost. For example, if you’re in the top tax bracket paying tax at 43.7 per cent, your net cash cost of a $5,000 RRSP contribution, after considering your income tax saving, is $2,815. Now that’s a number that looks a whole lot better wouldn’t you say? 4. Speaking of cost, open your eyes and look around, you may already have the funds needed to make an RRSP contribution. Do you have cash languishing in a bank savings account earning a pittance? What about Canada Savings Bonds you purchased on a payroll deduction plan? And remember cash isn’t the only asset that can be contributed to an RRSP – stock contributions will do the trick. If you contribute securities to an RRSP, you will be considered to have sold them for fair market value and it will be this value that will determine the amount of your RRSP contribution. If this deemed sale results in a capital gain you’ll have additional income to report in 2003. On the other hand, if the deemed sale results in a capital loss rules exist that will result in the loss being denied. 5. If the cupboards are bare and there’s simply no surplus cash hanging around, most of the banks will be more than willing to help you out. Borrowing money for an RRSP contribution is as easy as signing on the dotted line and the interest rates being charged are pretty darned good too. Play it safe and don’t overdose on debt – borrow only what you need and make sure you can pay it all back within a year or so. 6. Government provided pension benefits will not leave you living high on the hog in your retirement. In 2002, the maximum CPP retirement benefit was $788.75 per month or $9,465 per year. Old Age Security was $5,336 for 2002. Add it up and you’d be looking at slightly less than $15,000 per year. Old Age Security provides a Guaranteed Income Supplement ($6,325 for individuals in 2002) but no matter how you slice it, retirement income from government sources doesn’t amount to much. 7. Income splitting is where it’s at and an RRSP gives you a legitimate road map to follow. It’s a rare couple where both spouses end up in the same tax bracket when they retire without the benefit of financial planning along the way. Take a close look at your financial affairs and if you and your spouse are headed for different outcomes, use your RRSP contribution to level the playing field. 8. An RRSP contribution may help get you out of the new, higher tax bracket you moved into in 2002 and possibly at a lower cost too. Because RRSP contributions are tax deductions and not tax credits, the benefit from contributing to an RRSP increases as taxable income increases. Paradoxically, the effect of this is that as income increases the after-tax cost of buying an RRSP decreases. So not only can an RRSP contribution move you into a lower tax bracket, the after-tax cost of contributing may be lower too. 9. If your income spiked upward in 2002 and you’re expecting a drop in income in 2003 or future years, an RRSP may help to shift income from a high-income year to a low-income year. Say, for example, in 2002 you earned an income of $70,000. Early in 2003 you were laid off and the job prospects are not good. Contributing to an RRSP for 2002 would allow you to claim a deduction against your high 2002 income – a withdrawal of this amount in 2003 will have to be included in your income for that year but it may, nevertheless, be taxed at a lower rate if your prospects don’t turn around. Remember that withholding tax (i.e., a partial prepayment of tax) is taken when funds are withdrawn from an RRSP. It’s also worth pointing out that, while this type of planning can be useful in certain situations, it doesn’t make the best use of your RRSP contribution room so you shouldn’t make a habit of it. 10. If you’re considering buying a house for the first time or returning to school an RRSP contribution can help you participate in the Home Buyer’s Plan or the Lifelong Learning Plan. Remember CCRA isn’t the United Nations – the deadline is the deadline. Let it pass and forever hold your peace.
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney