About 65 percent of Canadian adults have Registered Retirement Savings Plan accounts.
More than $300 billion in RRSP contribution room is available to us each year, but only $30 billion, or 10 percent, is invested annually.Because most of this amount is invested just before the March 1 deadline, it appears that many Canadians view their RRSP primarily as an immediate tax reduction strategy.
However, there are other things to consider if you wish to maximize the benefits of your RRSP.
If you know that your tax bracket in 2005 will be higher than 2004, invest in your RRSP before March 1 but defer taking the tax deduction until the 2005 tax year.
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The money will grow immediately while sheltered from tax. At the same time, the deduction taken in 2005 will be worth more.
You may also deduct part of your contribution and defer the rest until next year if this will keep you in a lower tax bracket. Make certain, however, that the benefits of being taxed in a lower tax bracket are not wiped out by the loss of a tax refund from an RRSP contribution in the higher tax bracket.
Foreign content
RRSP rules say 70 percent of your holdings must be in qualified Canadian investment vehicles and only 30 percent may be foreign content. Considering that Canadian investment vehicles represent only a small proportion of the securities available worldwide, this requirement places a lot of your RRSP eggs in a small basket.
There are several ways to legitimately increase your foreign content exposure. Foreign content is calculated based on the book value of the foreign investment compared with the total book value of your RRSP.
This means that if the purchase price of a foreign investment made three years ago was $1,000, that is the amount used to calculate your foreign position, even if the investment has grown in value to $2,000. If you sell Canadian content that has appreciated significantly, the cost of your Canadian properties will increase, thereby reducing the proportion of your foreign investments below the 30 percent threshold.
Some mutual funds are considered Canadian even if their portfolio is structured with 70-30 Canadian-foreign content split. The foreign content of such funds is not included in the 30 percent limit.
Other investments include Canadian corporations with significant foreign business, foreign-denominated securities and clone mutual funds that track foreign funds and indexes through linked notes that safely increase foreign exposure beyond the 30 percent limit.
Beneficiaries
Make certain the beneficiary listed on your RRSP is your current spouse. Previous spouses have been known to enjoy a RRSP payout at the expense of the current spouse because the beneficiary designation on the RRSP was not updated.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. His views do not necessarily reflect those of The Western Producer. Roche can be contacted at fbc@fbc.ca or call 800-860-7011.
