Unintended Financial Market Consequences from Liberal’s Tax Proposal

 

Dear Finance Minister Morneau,

The general discussion thus far has been the impact on small businesses and retired professionals with corporate funds. In an effort to change many of my clients’ tax planning on how to deal with these proposed changes I had encountered what I believe to be an unintended consequence that will affect capital markets in Canada.

Is it really 73% taxes on portfolios

First lets discuss the proposed mechanism in how the 73% tax on corporate stock portfolios is supposed to work. Currently the tax rate on passive investments is approximately 48% inside corporations if we include the 38% Part IV refundable tax. This amount is refundable if the shareholders issue a dividend to themselves at a ratio of roughly 3:1 of each earned dollar to eliminate the Part IV refundable tax. Thus taxes earned on the portfolio are taxed at approximately the highest marginal personal rate and it would be better off if the shareholder pushed the income onto their personal side instead of leaving it in the corporation.

Should the proposals come into effect then the 38% Part IV refundable tax won’t be refundable anymore even if the shareholders dividend the income out of the corporation. Thus leading to a situation where there is going to be 48% corporate taxes, plus an approximate 25% personal taxes paid by the shareholder, for a total of 73% taxes combined.  This will differ across provinces and personal income situations but this is how the math roughly works.

My professional work planning for my clients in Calgary and Victoria

I operate two accounting firms serving small to medium businesses and wealthy individuals, one in Calgary and the other in Victoria. I’ve been running different scenarios changing client tax plans at least 4 to 5 times a day for the last 2 months; it’s been busy. It’s fair to say that I have a very good idea of the mechanics and how to tax plan under the new regime should these proposals become law.

My recommendation to my clients has been that we should consider doing a salary to disburse the income generated by the passive portfolio. Thus if we disburse all of the income generated by the company using a company expense then there is no passive income to be taxed at the 48% in the first place and we obtain a tax neutral scenario where the individual will pay at their own personal tax rates on the passive income. All I’m changing then is simply no more dividends and doing a salary instead.

This is not a perfect tax plan which I won’t get into here but at least it will deal with the immediate problem of keeping taxes at each shareholder’s individual tax rate instead of paying 73%.

Possible Side Effect Discovered

Upon running different tax scenarios I found that it turns out all types of passive income work using this simple change in planning. Rental income, interest, foreign dividends, and capital gains all more or less work to some degree. The problem was Canadian dividends, and by that I mean dividends issued from a publicly traded Canadian company, ie. stocks on the TSX. Part IV tax is triggered automatically and cannot be eliminated even if the company is in a loss position.

Then it reminded me of what was the original intent of Part IV tax, dividend gross ups, dividend tax credits, etc. and the entire mechanism that we’ve all grown accustomed to the last several decades. The original intent was in fact to give Canadian investors an incentive to invest in Canadian companies because the dividends paid out of these investments are tax advantaged, and I understood this as something that the government of Canada wanted.

It’s a protectionist measure by the government to give our home grown companies a competitive edge when looking for investment in Canadian markets. Effectively then if these tax proposals are implemented then instead of giving Canadian financial markets a protectionist advantage it has given them a disadvantage because a Corporate investment portfolio would rather invest in US investments if it paid the same returns than its Canadian counterpart due to the fact that a tax neutral scenario cannot be achieved when a Corporation receives Canadian portfolio dividends.

What does this mean?

I think an unintended consequence of deploying these proposed tax changes could inadvertently hurt Canadian stock markets and ultimately Canadian public companies.

Any rational investor holding a Corporate stock portfolio in Canada, would choose to hold US stocks in favour of a Canadian stock even if it paid the same dividend returns. Perhaps then a possible scenario is over a period of time we will see a devaluation of Canadian stocks because people would sell these investments from their portfolio.

With a lack of value being generated overall in the Canadian stock markets then in turn companies that wish to pursue an initial public offering (IPO) would choose to do it in more lucrative markets where they may get more investment capital. Companies are going to relocate their head offices to the US to pursue better valuation on public offering.

This is a huge issue with huge widespread consequences affecting everyone in Canada, not just small businesses anymore. Again I repeat that thus far, I haven’t seen anyone talk about this aspect of it yet. I don’t think this is an intended consequence and I don’t think the government has factored in the possible loss of jobs from corporate relocation, loss of market value for Canadians that want to retire off their RRSP’s, loss of investment capital in Canada, and loss of tax revenue from all of these things combined.

Final Remarks

This cannot possibly be measured effectively with any degree of assurance even if you have thought about these consequences. It could be a small impact or it could be a massive impact, you simply cannot measure what it would do to the stock markets. This is why the system was setup in the first place to consider all of these things like Part IV tax, dividend gross up, dividend credits, and the entire mechanism. They’re all intertwined as a complex system to support Canadian companies large and small, and the overall health of financial markets in Canada and for the average Canadian.

Sincerely Concerned,

 

Wilson Wong, CPA, CA.

 

 

What should you be asking your accountant?

accountants in calgary

 

 

 

 

 

 

It’s your company’s year end, you’ve submitted everything to the accountant and they’ve done all the work to prepare your financial statements and tax returns for the year. You sit down for a meeting and they’ve run through the numbers with you, sometimes they give you some small advice and sometimes they give you tax suggestions but you really don’t know what you should be asking them at this meeting. This sit down meeting should be one of the most productive tools you as a client have with your accountant.

I’m an accountant operating out of Calgary and here are some questions to ask your accountant…

What do you think my business is worth?

This is an excellent question. For many Canadians operating a small business, the value of what they get on a sale event is going to form a part of their retirement. Depending on your industry and type of business you operate, there is going to be different measurement on how to value your business. While your accountant may not be an expert at selling businesses they probably know the measurement that will be used to define your business’ value. We’ve seen different business sale transactions for different types of business and we’re going to be able to advice you on what applies to your particular business.

If you know precisely the measurements you’re going to be measured against then it would be a good idea every year to ask your accountant this question after your financial statements are done to get a rough idea of what your business is worth so you can either work on these metrics in the next year(s) or better yet, come to the conclusion that you can in fact retire.

The latest set of financial statements which the accountant just prepared will be all your accountant needs to give this assessment. Take this rough estimate with a grain of salt because accountants are not professional valuators but at least you have an idea of what metrics to work on.

How well are others in my industry performing? 

Accountants typically have multiple clients in the same industry. For example they may have several doctors, several dentists, several restaurant franchises, several construction companies. As a result they have a really good idea of how your competitors are doing. While for confidentiality reasons they won’t talk about individual company performance, but it would be very normal to have the discussion about how well your industry is doing as a whole.

This is important to know especially for those of you in Calgary because you’re probably wondering whether we’re out of a recessions yet or not. The Calgary recession is going to hit different industries in different ways and hence is going to have a different timing of when things will get better. For example in our practice we’ve noticed those in development projects in Oil & Gas are still struggling while those who are land owners with royalty rights are generally doing okay again.

While generalizing the industry isn’t definitive metrics but the accountant can at least give you a gauge on where you’re at compared to others. Or even showing you how you’re going to achieve the next level based on replicating the performance of leaders in your industry.

How are others dealing with my specific industry problem?

Similar to the same line of thought as the last question, you may have a specific industry problem and your accountant having spoken to all their clients is going to be able to tell you how to deal with your industry problem or at least tell you what others are doing.

Common industry problems may include…

  • Changes in labour rates in your industry – restaurant owners are always facing this when the minimum wage increases.
  • Requiring investment into your company – you may find your bank isn’t serving you anymore, your accountant may have a better lead on where financing is available.
  • Business risk in your industry – Not only can your accountant recommend a specific lawyer for your industry, they can also tell you in general how your industry is combating your primary business risk.

This is just a general list but the biggest takeaway is your accountant has probably seen how others in your industry is tackling your problem, you just need to ask them how.

I’m going to sell my business or add more shareholders what do you think?

Not the same thing as the first question about what your business is worth. You’ve probably advanced to the point where you’ve got a good idea how much the business is worth or you may even be selling a part of your business to new partners. You’re probably to the point of discussions with your prospective buyer and you either have a rough price in mind or you know firmly what the price is. This is the perfect time to talk to your accountant even if its not your year end meeting.

The objective of this question is two folds…

  1. The accountant is going to be able to tell you how to structure the deal effectively for tax purposes, and even give you a rough idea of how much taxes you might pay in this transaction.
  2. A discussion of how to avoid the business traps and pitfalls in any sale event. We’ve seen every transaction and every horror story when a person sells. Good time to talk about these before you sell.

I often get the client coming to us as an after fact to the sale, this is a bad idea, talk to the accountant before you ink the deal.

How much taxes did I effectively pay system wide?

This is not an easy question to answer and you’ll be putting your accountant on the spot a little bit. I rarely get asked this question myself but I have find it to be probably the most important question one should ask when they sit down for the year end meeting with the accountant.

This is a complex question because you pay taxes at the corporate level, then based on what you withdrew from the company and depending on how you withdrew this income you will further pay taxes at the personal level. Adding another wrench to the complexity, perhaps you want to ask your accountant what your effective tax rate was in the last year.

Knowing the answer to this question is going to allow you to optimize your taxes between the Company and your Family.

Concluding Remarks

The most common situation we see is a client isn’t having these above discussions with their accountant. I often find that I’m forcing myself to ask the client these questions, and sometimes the client thinks we’re just doing it for small talk.

Perhaps next time you meet with your accountant you can have this highly productive discussion, or if you feel the need to, you may contact us for a complimentary consultation and have that discussion with us instead.

Cheers.

Proposed Liberal Tax Changes: Anticipated Results & Strategies for Small Business

calgary small business accountants

To start with, I’ve read through the monster of a discussion paper that the Finance Minister had issued earlier this summer. I’ve also been keeping up to date on what other professionals have been saying about this topic. It has taken me a couple months to write this post because I’ve been too busy working with our clients to come up with tailored strategies.

Businesses are a very interesting living entity, it is a collection of people, processes, assets and liabilities. It does not have emotions and its only true moral responsibility is to remain profitable. While a business can certainly decide to have more moral responsibilities, but remaining profitable is the undisputed constant for all businesses. With these new tax changes being proposed by the Liberals most are saying that this will hurt small businesses. I personally think it will make small business more resilient.

I remember a few years ago talking to several franchise owners when the threat of a minimum wage increase was pending. Both the franchise owner and the head offices had already considered how to deal with that situation. It resulted in strategically less hours for staff but the remaining staff simply had to work harder. This is what businesses do, we persevere. We will adapt and be more aggressive. Any policy that seeks to hurt businesses will usually have the opposite result and hurt the counter party.

Small business will respond to this tax proposal that threatens profitability for its shareholders. There will be many strategies that a small business can employ…

 

The Obvious Business Solutions

Option #1 – Staff downsizing – Everyone knows this one is going to happen. The belief is it would be a challenge convincing the remaining staff to work harder filling the holes for those who have been let go. The truth is it won’t be a challenge as I have seen among my clients in my Accounting practice in Calgary that rate cuts, wage cuts, benefit cuts, post layoff, the fear factor of the result is going to be enough to convince remaining staff to produce a higher capacity. Alternatively, if you have a consulting business you may have the ability to offshore and outsource to a lower cost third world country.

Option #2 – Investing in automation – We’re all seeing it, the automated check out machines, or simply processes no longer being done by humans. In the past it may have been more profitable to hire humans to do a certain task but many businesses will revisit the topic of automation and see if simply an investment into automation is going to keep profitability up.

Option #3 – Exit Canada Altogether – This is a real thing. Professionals are a large group of important businesses that are being most affected by these changes. In my parent’s government generation it was perceived that it was unfair that professional businesses didn’t have a method to split income using dividends with their spouses. This encouraged a brain drain to the USA. Now we’re going backwards. This type of anti-professionals rhetoric is always going to cause some professionals to leave altogether. In my accounting practice, conversations about exit taxes are being had all the time.

 

What happens to Taxes & Government

The obvious strategies that will be employed above will ultimately cause tax revenues to go down. While the Liberals are anticipating a higher tax revenue it is unlikely to happen due to several factors…

  1. Personal incomes taxes account for the most tax revenue – with wages and salaries overall being paid by small business anticipated to be a smaller proportion, tax revenues are likely going down.
  2. Shareholders can choose how to pay themselves – Even with punitive income splitting strategies no longer being applicable, there will be another way devised to pay shareholders efficiently. From my accounting practice here in Calgary, we’ve observed that in fact shareholders will deliberately pay themselves less, thus generating less taxes.
  3. Offshoring & Exiting businesses will lead to additional tax revenues being reduced. Corporate taxes are a part of it, and with both personal and corporate taxes being reduced there’s really not much meat left on the bone…

The result of a reduced tax base is going to lead to additional tax increases is my speculative opinion. We can anticipate the next several years of tax changes that will lead to several more policies that are intended to hurt small businesses. You can already observe this phenomenon by looking at the last 2 budgets, progressively increasing tax rates at the highest levels and increase dividend tax rates. Both of these are targeting small business owners. We have been a group targeted for more revenue for the last two years and I project many more changes for years to come. Who else would pay for the Liberal Deficit?

Business owners are a smaller voter base than non-business owners. Some small businesses in fact have the ability to pay more but that’s simply not Canadian, we don’t live in a Communist society. If we look to our neighbour to the south we will see that continuous attack upon businesses will lead to a change of a more populist government. Eventually, it is possible for us that a government change will happen. Lets be honest, small businesses would love to see Mr. Trudeau out the door by next election but that’s probably not happening because he has an extremely high approval rating overall. If the Liberals go to election today, they’re probably staying.

We will have to be patient, pro-actively plan and anticipate government’s next moves and already have in place strategies for our small business that will counter-measure any possible future developments. It’s not hard…

 

Pre-emptive planning for Small Business

Here comes the fun part…

Small businesses and their shareholders are adaptive and resilient people, they simply would not just sit back and allow the government to confiscate their belongings. If you look at Communist regime takeovers in the last century you’ll notice that the first to leave are usually the business owners. They see it coming and they leave in advance of any full takeover.

These are the questions our Clients are asking us for solutions…

  • What do I do with my stock portfolio in the company?
  • What do I do if I can’t pay my spouse a dividend?
  • What will happen to the rental properties in the company?
  • When will these changes come into effect and how does it affect me?
  • My spouse works hard for my business you mean I can’t pay them anymore?
  • Is there a point in keeping money in the company anymore?

All good questions that I have answers to but are all individual specific depending on your circumstances. Here’s some broad based ideas…

Part One – Adjust to the tax regime – I have been talking to many clients and updating them all individually on what the anticipated results would be for their business. Everyone has a different scenario. The first step you need to take is to talk to your accountant and strategically change the way you pay yourself, your family, and where or how you accumulate wealth. We have found methods of changing passive income into business income. We have also been anticipating how to keep income splitting available to owner families after the tax changes. There are going to be metrics and measurement of whether a family member “deserves” a dividend from the company. There are many examples in the tax act that allude to how this will be achieved. The best thing to do is to pre-emptively consider and employ methods that will keep you compliant for the future. For most of our clients this type of planning has been the most important. Have you thought about how you’re going to keep income splitting for your family? otherwise a private discussion with your accountant is recommended.

Part Two – Adjusting retirement planning – For small business owners our accumulated wealth in the company is our retirement savings plan. If you’ve already reached this stage of your business, then you’re going to need to employ strategies to convert passive income into business income. Not all types of passive income will qualify for conversion into business income that’s why we need to look at what types of income you are generating in retirement and look at the cost benefit of employing conversion strategies. When we receive new clients we often see this being an overlooked component of retirement planning, that you have always qualified to convert your passive income into business income but the previous accountant will not consider these options out of keeping the tax filing simple for themselves. Looking at your personal tax picture is even more important when you’re retired, you want to find ways to keep your Old Age Security (OAS) and balance that with a reduced income splitting capability. For many of our 55+ small business clients this is something we’re being asked everyday. Have you thought about what to do with your passive income in the business or post retirement? If not then you need to talk to an accountant.

 

Perhaps the Liberals have a hidden agenda

I always like to think that people in power are smart, why not right? If that’s the case, then the Liberals must already know that their tax policy is all about optics, and is actually going to generate less tax revenues for them in the long run. They must also know their spending policy is not sustainable. If they know this, and they’re smart, then they must have a plan to counter this right?

This leads me to distrust them in a way that I don’t think their optical policy is truly what is going to be enacted. In the last 2 fiscal budgets they would threaten heavy handed tax changes and then back off at the moment of truth. I hear a lot of my professional peers believing that this is going to stick, and I will probably tend to agree with them. This change is coming down but it is likely going to be a watered down version, just based on prior year examples of their regime.

Buying votes is one thing, but the Liberals are going to need to give small business owners and their shareholders a breathing space to continue to profit healthily. I for one believe the final version of the tax changes will contain many areas of weakness compared to the language they’ve been using in the discussion paper. For each business, you’re going to need to deploy different custom strategies with your accountant; that’s what we’re doing.

 

Concluding Remarks & Take aways

Talk to your MP. Email the Finance minister. Sign petitions. These things do help and is how we’ll reach this watered down version of the discussion paper.

You need to pre-plan regardless. You need to think about how you’re doing business, how to do it better, and how the tax changes will affect you. Chances are your accountant will have a strategy to protect you.

Lets be patient and see what happens but pro-active in thinking up strategies.

Married Couples tax consideration

Getting married is a really big event in life. Strangely enough it has big impacts on your taxes. Even if you’re not married and you’re in a common law relationship this article will affect you.

In Canada all individuals file separate tax returns, but if you’re married there are effects on both of your individual tax returns. You may choose to file “separately” with your own accountants or maybe one of you use Quicktax and the other uses a Chartered Accountant like myself but in the end the Accountant will be wise enough to tell you there are details that I will need from the other spouse’s tax return even if I’m not filing for them.

The following is a discussion on some of those items that will affect the both of your individual tax returns:

1) Spousal Credit – the most basic of them all. If one spouse doesn’t work and the other works (or at least 1 spouse is making less than $11K annually) then the other spouse can claim a tax credit as consideration for taking the other spouse as a dependant.

2) Amount for Children – Any parent can claim this $2K tax credit but only 1 of you may claim it. You would be surprised to know that when married parents decide to file separately on their own they both end up each claiming this credit.

3) Childcare Expenses – if you have kids and you have costs of childcare such as a nanny or daycare centre that you pay for, regardless of which parent paid for the amount the rule is the lower income spouse gets to deduct this from their taxable income. There is no choice in the matter.

4) Universal Child Care Benefit – Similar to the Childcare Expenses the spouse with the lower income is the one who must claim the amount on their income taxes, sometimes it is the higher income spouse who made the application for the UCCB and as a result the RC62 slip is in the name of the higher income spouse. It doesn’t matter which spouse’s name is on the RC62 slip it you should claim it on the lower income spouse, besides, it’s more tax advantaged this way.

5) Medical expenses – you may claim eligible medical expenses for yourself, your spouse, or common law partner, and your kids under 18. The most tax advantaged way to administer this is to give all of the medical expenses to the lower income spouse. Again it doesn’t matter which spouse paid for it.

6) First time Homebuyer’s Tax Credit – you can claim a $5000 amount for the purchase of buying a home, if neither of you have owned a home in the last 4 years. We’ve seen situations where 2 young individuals just got married, but one of the spouse actually owned a home previously either by inheritance or their parents thought it was a good idea to put their kid’s name on it, and now these two young people are married and buying a home for the first time. Sorry tough luck you don’t get to claim the $5000 amount now, neither of you.

7) Pension Splitting Election – You may split your eligible pension with your spouse. For example you may have a good pension and you’re elapsing into higher tax brackets, but under this election you could literally “give” part of that income to your spouse’s income tax return and be taxed at lower rates. There are many factors of consideration that go into optimizing your Pension splitting calculation, not just how much income you’re making. There are considerations for Old Age Security, your Age relative to RRIF’s, other tax credits only available to 1 spouse not the other, etc. I never recommend you try and accomplish this on your own, always have a professional accountant if you want the best optimization for your pension splitting.

These items here are just the tip of the iceberg for married couple’s taxes. My recommendation is you should never file separately. Always take it to the same Accountant or always use the same tax software together. As you can also see certain rules are fairly complicated and niche and your software may not even be able to pick it up. If you’re looking for Accountants in Calgary you know we’re here for you.

Where to put my money? RRSP? RESP? TSFA?

I am presenting this article because a lot of people don’t really understand the tax implication of each of RRSP, RESP, and TSFA contributions. If you truly understand the short term and long term tax implications for all these instruments then you can truly understand and make an informed decision on where to put your money if you had to choose one.

Therefore I am first explaining the tax implications in the most basic and short term first:

RRSP (registered retirement savings plans) contributions made by you into your account are deducted from your income in the tax year you made the contribution. Ok that’s not entirely true, you can actually go all the way 60 days into the next year, that’s besides the point.

RESP (registered education savings plans) contributions made by you do not do anything on your income tax return at all. Therefore, you are actually using after tax money to make the contribution.

TFSA (tax free savings account) contributions are just like RESP’s, such that they do nothing on your income tax return. Again, you are using after tax money to make the contribution.

For all three types of instruments there are rules governing the maximum amount you may contribute into each one, they each have their own rules and own limits but this article isn’t going to talk about what those rules are because that can be an article in itself. I’m only going to focus on where to park your money, and I mention the existance of these rules so that we’re all on the same page with the fact that each instrument is governed by a limit and the limit is different for each one.

In the long run – please read this article on what happens to RRSP’s http://www.wwongaccounting.com/knowledge/rrspissues.html – in general, you find that all income earned within the account through out time is not taxed so long as the money is still inside the account.

What about RESP’s and TFSA’s? The same rule applies, all the income that is earned within each account is not taxed so long as the money is still inside the account.

So what happens when you take the money out? Here lies drastic differences for all three instruments:

RRSP – all amounts are taxed as full income in the year of withdrawal.

RESP – as the withdrawal is likely for a child or beneficiary if this individual is not going to school with this money then generally speaking the same rules apply as in RRSP. For that matter, even if they are going to school, in my humble opinion the CRA simply provides the illusion that this money is withdrawn tax free but actually is being taxed but simply using up certain tax benefits available to students. Yeah I’m not a big fan of these as you can see.

TFSA – completely tax free withdrawals, but you should recall the above that after tax paid up income is being used to make these contributions.

Now we have a fair picture of what these 3 instruments do in the short term (when you contribute), during the lifetime of the account (medium term), and when you finally want to use the money (long term).

Given the above facts, it is always optimal to use this strategy:

1) Maximize RRSP’s first among the 3 types

2) Maximize TFSA’s second

3) Then use RESP’s if there are children or grandchildren

Why are RESP’s last? Because it yields no short term gain and double tax in the long term upon withdrawal. RESP’s are a special program that in the medium term the government will make a matching contribution up to a limit which is essentially free money from the government since the idea is for the benefit of someone going to school. However, look at what happens on withdrawal, the beneficiary going to school will end up being taxed for both the government portion and the original portion that was contributed using after tax money. So that’s essentially a double tax scenario.

Ok – it is still free money from the government and we can’t turn it away. Just because it will end up being taxable money doesn’t mean we turn away from this program altogether. From a total short-medium-long-term perspective however, you should seek the maximize the 3 instruments in the order I present above. If you have the money you invest in all 3 of course. That would be your ultimate goal is my opinion on this matter.

Should you have any further questions do not hesitate to email me or call me at the office.

RRSP Pitfalls that CRA does not tell you

If you are like most Canadians then you are banking a portion of your retirement plan with your Registered Retirement Savings Plan (RRSP). Before I get into the details of this article, I want to first qualify that I think everyone should have some RRSP regardless of what I have to say about them herein. We all will retire one day and the RRSP should be factored into all our equations.

The features of the RRSP is that when you are young(er) you will make a deposit to your RRSP and in turn you get to deduct that amount off the top of your net income that is used for calculating your taxes. When you are old(er) you will start to draw on that RRSP and it becomes part of your income to you in that future. When you turn 71 you have no choice but to start taking a minimum of 7% of the balance in your RRSP each year into your taxable income. With the above features the idea is you don’t pay tax today but you pay at a later day and the growth you get within your RRSP is also tax free.

The RRSP is designed by some really intelligent people as on the surface it looks like its a great tool to defer your taxes but if you consider statistics and forecasting into the equation then you realize that the RRSP actually isn’t in your favour in the long run.

When you are in your early working years you will earn a lower income and that’s just the way it is, as you obtain promotions and salary increases you will gain more income in later years than you did in your early years of working. As a result you will save income taxes in your early years at lower tax brackets. If you are retiring with a company pension or you have calculated that in your retirement years you don’t expect to be making a whole lot less income than you did in your working years then the RRSP becomes a negative tax benefit. You are making a lot more income in your retirement years than you did in your younger working years and that means when you draw on your RRSP you are being taxed at a higher tax bracket than when you saved money in the lower tax bracket. Even if say you’re not going to get a promotion or a company pension, by virtue of inflation you will be making more in the future than you are in the early years. Almost always true then is that you will pay more taxes in the future than the savings you gained in the early years from your RRSP.

Another item of interest about the RRSP relates to the Old Age Security pension in Canada (OAS). As of writing this article the OAS is a pension available to individuals who have been residents of Canada and are aged 65 and over. Individuals who make more than $67,668 of total income will start to see their OAS being “clawedback” to be repaid as an additional tax in their personal taxes. If you have a company pension or some other source of significant retirement income other than your RRSP, receiving CPP benefits, and receiving the OAS then your RRSP at age 71 will become a problem. Consider that age 71 you must withdraw 7% at minimum of your RRSP. Also consider that in the long run, your RRSP is going to appreciate in value. I know most of us have seen our portfolios taking a big hit over the last few years but in the long run the S&P500 index performs at 11% a year over the last hundred years and if the world isn’t ending tomorrow then that statistic is probably going to hold true for the general population who has a bundle of investments. What you may find then is that you may suffer from the clawback of your OAS at age 71 because that 7% minimum withdrawal may just trigger your income to be over the $67,668 threshold and is likely something you did not plan for or could plan for. After all you can’t plan for what 7% is going to look like because you don’t know how big that portfolio may grow to become in that future year. The RRSP here will effectively disqualify you for the OAS without you knowing about it.

This is some scary stuff I’m talking about in regards to the RRSP. Please do not misunderstand me and stop contributing to your RRSP. What I tend to think is that retirement is a very fragile planning process between yourself and your accountant. All of us must contribute to our RRSP in some way or form if you are to have a reliable retirement plan. My recommendation is that you plan for your retirement early in age, even if you are taking small steps. I also recommend that you review that plan with your accountant and financial planner once every few years, and practically every year in those final years leading to retirement.