Be prepared

WALKER modified

Without mentioning Nine Eleven again (actually, never again), a few more thoughts on tax shelters, then a brief update on BucketHead, my dog.

Why you should borrow money.
Nope, not to get something venal like a vacation or hair plugs, but to put money into an RRSP before the deadline (Leap day – February 29th). Here’s how an RRSP loan works: borrow $10,000 and the bank will probably give you a cheap rate (ask for 2.75%). The lender will also provide a grace period of three or four months before a payment’s due – time for your tax refund to be processed. So, if you earn a hundred grand, you’ll be getting about $3,800 back. Use that to pay down the loan. Now you owe only $6,200, and yet have $10,000 in your plan. The interest is not deductible, but amounts to just $170 a year. Pfft.

Always marry someone richer than you…
That way they can open a spousal RRSP, since they likely have a higher income. Simply put, the person earning more contributes to a spousal instead up to their own limit and deducts that from their own taxable income. After three years the money belongs to the other person, who can withdraw it and pay less tax than the spouse saved. Presto. Income-splitting. (The spouse making the big money should do the RRSP thing while the other income, if possible, is used for TFSAs.) This works great for a mat leave, so always ensure you delay pregnancy until the maturation of the spousal plan. Click on my name for a fertility calculator.

…who has a fat pension.
Spousal plans are also a must for those hated people with juicy, government-like defined benefit pension plans. They usually have reduced RRSP room, but every sous of it should be shoved into a spousal, assuming your mate is not another pampered bureaucrat. That way you’re able to fully milk the deduction, reduce your taxable income and shift this wealth to your spouse for later enjoyment. Collapsing the RRSP in retirement will not up you into a higher tax bracket and thus further enrage your friends.

Be mindful of the Old People’s dole.
Technically it’s called CPP and OAS, but to the moisters who want the Boomers to die a slow death of starvation and polar bear baiting on an ice floe, it’s pogey. After all (they cry), why should wrinklies get free money from Ottawa when their spawn can hardly afford a first home costing $800,000? Let’s get our priorities straight! However, if you’re an old fart, or ever plan on aging in the future, understand the huge difference between an RRSP and a TFSA. The former defers tax and the latter eliminates it. So at age 71 all retirement plans turn into taxable cash or must be changed into an income-producing RRIF. That income (starting at more than 5% of the total per year) is dumped atop other earnings and can push your tax rate significantly higher. Bummer. But the same income flowing from a TFSA is not counted. No higher taxes. No clawback of the federal pogey. You can have it all. Irritating your entitled kids is just the icing.

Your mortgage & your RRSP.
Normally this is an exciting idea – making mortgage payments on your own house into your own RRSP and giving the bank the finger. But not now. Mortgages are too cheap, and an RRSP mortgage must be set up at a ‘market rate’ or the CRA will crush it. With five-year fixed loans in the 2.5% range, this is not exactly a great return, especially when you factor in the set-up and administrative costs. The loan must be admined by an arm’s-length institution. It has to be CMHC-insured. It must be lawyered. It’s a lot of work and expense to go through to make a GIC-type return. So, wait.

BUCKET HEAD modified

A number of kind people have asked about Bandit in the two weeks since my hairy beast went under the knife. He shredded the ligaments holding his knee together (it’s a common thing, sadly) leading to a Tibial Tuberosity Advancement (TTA). So now both he and I have titanium implants, which essentially makes us chick magnets.

His stitches came out today, and he’s walking like a guy with a big gun in his pocket. But the smile is back, the drugs are good and the prognosis, says his orthopaedic surgeon, is excellent. Six more weeks and he’ll be trotting perfectly, while once again looking like a cross between shag carpeting and out-of-control Q-tips.

The worst, though, is the bucket on his head, which must remain a few more days. So. Damn. Embarrassing. He resembles a satellite dish, and has learned to flip his water bowl about two feet into the air with the lip of it. All-in, that knee cost thirty-five hundred bucks. Next month he starts work at Starbucks.

Head start

ZIM modified

So 11% of kids in the UK think milk and eggs come from wheat. A scary number of nutbars on this blog believe Nine Eleven was a hoax. And 52% of Millennials are convinced you can use an RRSP to buy a car.

There may be little hope for the first two groups, but we still have time to save the moisters. In fact, it’s a reasonable bet most people have a hazy, sketchy, foggy or nebulous idea what tax shelters are all about. So here are some things to remember, and teach you kids when they ask, “What do I need to know to grow up?”

A TFSA is not a savings account.
Not sure even the finance minister gets this. The tax-free account is for investing money, (hopefully for retirement decades away) not for saving it for a vacation. Stick a wide variety of growthy things in there and never pay tax on the gains. Best, it can pay you constant income in retirement (or unemployment) and the money is never reported as income. No new tax bracket. No pension clawbacks. This is the finest money machine we get, despite being gored in a dumb political move.

They’re not products.
TFSAs and RRSPs are not things. You don’t buy one at the bank. They’re just ways of sheltering stuff from being taxed. So you can open a registered account (that’s what they’re called) at the bank, through an advisor, with an online brokerage, at the credit union or with one of those robots. Then stuff it.

What’s the difference?
Two major points. TFSAs are massively democratic, because everybody gets the same chance to contribute – now $5,500 a year. RRSPs, on the other hand, reward the rich the best. The more you earn, the more you can salt away from tax – up to $25,000 a year. You’re right. T2 got that one wrong. Second, a tax-free account contribution doesn’t get you a tax break but neither are withdrawals taxed. Putting money into RRSPs nets a tax cut up to 50% of the cash invested (that’s elephantine), but withdrawals are taxed according to your income when you withdraw.

Retirement plans aren’t for retirement.
That’s so analog. The best use of RRSPs is for tax-shifting – reducing taxable income in years when you’re doing great, and supplementing your income when things blow up or change. So if you pump money into a plan when working you can reduce the amount sent to Ottawa. Reclaim the money if you get punted, pregnant or paused and enjoy it with less (or no) tax. You have effectively shifted income from a year you don’t need it to one when you do. RRSPs can also be used to buy a house, using the tax refund as part of the down payment, for financing education or a baby. Open up a spousal plan and income-split with your less-taxed squeeze.

Cash not required.
No extra money this month? No sweat. It’s easy to feed either a TFSA or an RRSP by making a ‘contribution in kind.’ Transfer something you already own (like a crappy bank mutual fund, ETFs, brain-dead GICs or the four RBC shares your grandmother gave you) into your registered plan and they count the same as money. All future growth will be tax-free, but past growth may be subject to capital gains tax. Be cool – that’s a minimal charge.

Room for life.
Each year that you work you accumulate new RRSP ‘room’, generally equal to 18% of your wages. Each year you clock over age 18, you get TFSA room. Doesn’t matter if you use it then or not, because all of this potential contribution just keeps adding up. This can be a godsend if your job is terminated. Much of a severance or retirement package can be rolled right into an RRSP tax shelter. Or, as you age, become addicted to this blog and grow embarrassingly wealthy, investments can be moved into your TFSA where all tax is eliminated and income can stream back out – non-reported to the CRA. Better than sex.

Know how you’re hosed.
The greatest tax is levied on what people earn working. Equally penalized is money made by collecting interest (like on a GIC) or rent (that investment condo). Your ‘marginal’ tax rate is the level at which any additional money coming into your hands is siphoned off by government. So if you work for a living and make $100,000 in BC, your marginal rate is 38.3% – which means you’ll pay $38 in tax on each hundred bucks your high-interest savings account generates. But if you own an ETF instead that yields a $100 capital gain, the tax is just $19. Yep, today savers lose twice.

Other salient stuff.
Your spouse can take over your RRSP when you kick, but only if you name him/her as the ‘beneficiary.’ Kids, dogs and friends are not so favoured. The account becomes taxable. A TFSA can be taken over by a spouse if he/she has been named as ‘successor holder’, which means it gets folded into their existing plan, becoming their property. In contrast, the beneficiary of a TFSA (anybody else) gets the cash or assets in the account, but the days of tax-free growth end.

Finally, interest on money borrowed to contribute to a registered account is not tax-deductible. But loans for non-registered (or taxable) accounts give you that break. An RRSP loan can make sense if the tax refund is used to pay the loan down. TFSAs loans just suck. Ask your mom for the money instead, and tell her you’re buying a condo. She’ll be so proud.