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1-'AGE ICI THE CITIZEN, WEDNESDAY, FEBRUARY 7, 2001.
Tips to understanding RRSP investing basics
If you're like most Canadians, you
are just now turning your mind to
your annual Registered Retirement
Savings Plan (RRSP) contribution.
Before you act, make sure you
understand the basics of RRSP
investing, as well as changes affect-
ing RRSPs this year.
Why are RRSPs the cornerstone of
a retirement plan?
Pre-retirement, RRSPs lower your
taxes because you can deduct the
amount of your RRSP contributions
from your taxable income.
Meanwhile, your RRSP assets grow
in value, without attracting tax,
allowing you to save for retirement..
When you retire and draw funds
from your RRSP, your income may
be lower, so the withdrawals will be
taxed at a lower rate.
What is the RRSP contribution
deadline?
The deadline for RRSP contribu-
tions is 60 days after the end of the
year. The deadline for the 2000 tax
year is March 1, 2001.
How much can you put into your
RRSP?
"Generally speaking, you can con-
tribute up to 18 per cent of your
earned income in 1999, to a 'maxi-
mum of $13,500," explains Sam
Zuk, a chartered accountant in
Toronto.
However, adds Zuk, this amount
will be lower if you have any pen-
Did you know that almost half of
your earnings last year went towards
paying your total tax bill?
According to the Fraser Institute,
an independent Canadian economic
research firm, Ontario's 2000 Tax
Freedom Day was June 22. That
means it took nearly_ six months for
average Ontario residents to finally
begin working for themselves.
And while tax rates are finally
falling, Canada is still one of the
most heavily taxed countries in the
world. It makes sense to try to min-
imize the tax bite as much as possi-
ble when considering your RRSP
investing strategies.
One effective way of tax-efficient
investing is through retail venture
capital funds, commonly known as
labour sponsored investment funds
sion adjustment and past service
pension adjustment, and it will be
higher if you have any unused con-
tribution room from prior years or a
pension adjustment reversal, which
is reported on a T10 slip. "The best
way to confirm your maximum con-
tribution limit is to check your 1999
tax assessment notice from the
Canada Customs and Revenue
Agency (CCRA)," advises Zuk.
You can also confirm the amount
with the CCRA directly by calling
the Tax Information Phone Service
(TIPS) at 1-800-267-6999. When
you call, you will be asked to pro-
vide your social insurance number,
your month and year of birth, and the
total income you reported on line
150 of your 1999 tax return.
What if you can't afford to con-
tribute the maximum?
"If you can't contribute the maxi-
mum, the unused amount will be car-
ried forward and can be used in any
future year," says Brian Quinlan, a
CA in Toronto. "But you should try
to contribute the maximum allowed,
particularly if you are in a high-
income tax bracket."
You may even want to consider
borrowing to make your maximum
RRSP contribution.
"This may make sense if you are in
a high marginal income tax bracket
and are certain that you will be able
to repay the loan in a relatively short
(LSIFs). LSIFs offer attractive tax
credits and are RRSP eligible.
Ontario taxpayers are entitled to a
tax credit of up to $1,500 or 30 per
cent of the first $5,000 invested in
this asset class each year. The feder-
al and Ontario governments each
offer 15 per cent credits.
The tax savings are even greater if
the investment is held inside a regis-
tered retirement savings plan
(RRSP). If you contribute $5,000 to
an RRSP and use the proceeds to
purchase an LSIF you will receive a
$1,500 tax credit and an additional
tax savings due to the $5,000 tax
deduction. For example, if you
earned between $52,000 - $60,000 in
2000, your $5,000 investment
would end up costing just $1,675
once you take into consideration the
period of time, say less than one
year," says Zuk. "Don't forget that
even though the interest paid on
RRSP loans is not deductible for tax
purposes, your contribution is likely
to result in a tax refund, which could
be used to help repay the loan."
When should you claim your
RRSP deduction?
Most people claim their RRSP
deduction the same year they make
it, but that's not always the best thing
to do, says Zuk. "If your taxable
income is very low, it might make
more sense to defer your deduction
to a year in which your income and
tax rate are much higher, meaning
you will save more," he explains.
Meanwhile, the funds you put into
your RRSP will continue to com-
pound, tax-free.
What's new this year?
Changes announced in the
February 2000 federal budget and
October 2000 federal "mini-budget"
should be considered when you are
selecting investments for your
RRSP.
"The changes mean that, effective
Oct. 18, 2000, capital gains are taxed
at half the rate of interest income,"
explains Quinlan. "As well, there are
reductions to the tax on Canadian
corporate dividends."
Quinlan says these changes should
be taken into account when review-
ing your RRSP assets. "You will
tax credits and RRSP tax savings..
You should be aware, however,
that the tax credits must be repaid if
the investment is not held for at least
eight years.
In addition, because LSIFs invest
in primarily small and medium sized
private companies they are consid-
ered small business investments.
This means the government allows
you to boost your foreign content
limit in your RRSP from the current
regulatory limit of 30 per cent to a
maximum of 50 per cent.
Maximizing your foreign content
offers you access to a wider choice
of investments from countries
-around the world, increasing your
diversification.
benefit most by keeping your high-
est-taxed investments — such as
Guaranteed Investment Certificates
or Canada Savings Bonds — inside
your RRSP, and the less-taxed
invdstments, such as those yielding
capital gains and dividends, outside
your RRSP," he advises.
Another change for this year
relates to the limits on foreign con-
tent in your RRSP. "For the 2000 tax
year, foreign content can account for
up to 25 per cent of the cost amount
of all properties in a self-directed
RRSP, compared to 20 per cent in
past years," says Quinlan. "For 2001
and future years, the limit will be
increased to 30 per cent." Still have
questions about your RRSP? Ask a
chartered accountant for assistance.
Brought to you by The Institute of
Chartered Accountants of Ontario.
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