dave@lsuc.uucp (David Sherman) (02/19/88)
Well, it's RRSP time again. This year, depending on your
point of view, the RRSP deadline is earlier than usual --
February 29 instead of March 1 (60 days after the end of the
year) for contributions which are deductible in 1987.
RRSPs are just about the best tax shelter around. If you
have any cash to spare, and/or you expect your income to be
lower in a future year, and/or you want to save for retirement,
and/or you want to reduce your 1987 tax bill... they're a good deal.
An RRSP doesn't necessarily have to have anything to do with retirement.
For 1987, as in 1986, you can contribute up to $7,500 or 20% of
your "earned income", whichever is less. Earned income is basically
things like salary, wages, and business income, and doesn't include
investment income (interest, dividends, rent). The $7,500 limitation
applies if you are not a member of a company pension plan. If you
are, your limit is $3,500 minus any contributions you make to the
pension plan (these may be taken off at source so you don't even
realize you're making them).
The amount you contribute is deductible against your 1987 income.
You can withdraw the funds at any time, and pay tax in the year
in which you withdraw them (a certain percentage will be withheld
by the financial institution when you withdraw, the rest will be
due with your tax return), at your marginal rate. You can also
contribute to a plan for your spouse, if you wish, and if none
of the funds contributed this way are withdrawn until the third
year following the year for which the contribution is made, it'll
be taxed in your spouse's hands when it's withdrawn. (Useful
for income-splitting.)
Marginal rates are easy now, by the way (effective 1988):
$0-$27,500 ~25%
$27,500-$55K ~39%
>$55K ~44%
The exact rate varies by province, and it's different for Quebec.
David Sherman
Tax Consultant
--
{ uunet!mnetor pyramid!utai decvax!utcsri ihnp4!utzoo } !lsuc!daveray@micomvax.UUCP (Ray Dunn) (03/02/88)
In article <1988Feb18.123536.23901@lsuc.uucp> dave@lsuc.uucp (David Sherman) writes: > >For 1987, as in 1986, you can contribute up to $7,500 or 20% of >your "earned income", whichever is less. It's interesting to note that the government reneged here - the amount was supposed to increase in 87 to, I believe, $9500. The increases have been defferred by 1 year. Also, what has happened to the promised carry forwardability of the unused portion of the allowed contribution? >... The $7,500 limitation >applies if you are not a member of a company pension plan. If you >are, your limit is $3,500 minus any contributions you make to the >pension plan How can anyone afford to be in a company pension plan? It has to be a bloody good plan before it is worthwhile relinquishing the $4000 extra RRSP contribution availability. >... You can also >contribute to a plan for your spouse, if you wish, and if none >of the funds contributed this way are withdrawn until the third >year following the year for which the contribution is made, it'll >be taxed in your spouse's hands when it's withdrawn. (Useful >for income-splitting.) Not quite true! There is a last-in first-out rule, so that you have to wait three years from the date of the *last* deposit to a spousal plan before the funds can be withdrawn as her/his income. >David Sherman >Tax Consultant Ray Dunn. Not a tax consultant, just a long-suffering tax payer!
dave@onfcanim.UUCP (Dave Martindale) (03/03/88)
In article <923@micomvax.UUCP> ray@micomvax.UUCP (Ray Dunn) writes: >>... The $7,500 limitation >>applies if you are not a member of a company pension plan. If you >>are, your limit is $3,500 minus any contributions you make to the >>pension plan > >How can anyone afford to be in a company pension plan? It has to be a >bloody good plan before it is worthwhile relinquishing the $4000 extra RRSP >contribution availability. Well, there is the employer's contribution to the plan, so it isn't as bad as it appears, but it's still not fair. It would be fair if the RRSP eligibility for people in a company pension plan was $7500 minus the sum of the employee and employer contributions - that way everybody lives under the same rules, and everybody can put a maximum of $7500 (or 20% of income) into tax-sheltered plans. Under the current rules, if I contribute $2000 to the pension plan I can put another $1500 into an RRSP. That plus the $2000 my employer contributed makes $5500, $2000 short of the $7500 I could have stashed away without the company plan. Is there any rationale for this inequality? And some of us have no choice about contributing to the "company" pension plan - we have to belong, and the level of contributions is fixed. (My "company" is the federal government.)
dave@lsuc.uucp (David Sherman) (03/04/88)
In article <923@micomvax.UUCP>, ray@micomvax.UUCP (Ray Dunn) writes: > In article <1988Feb18.123536.23901@lsuc.uucp> dave@lsuc.uucp (David Sherman) writes: > > > >For 1987, as in 1986, you can contribute up to $7,500 or 20% of > >your "earned income", whichever is less. > > It's interesting to note that the government reneged here - the amount was > supposed to increase in 87 to, I believe, $9500. The increases have been > deferred by 1 year. Yes. That's part of the Tax Reform proposals. The increases to $15,500 were originally proposed in 1984 under a Liberal government, in fact, and have been delayed a few times. The principle on which the increases are based comes out of the Department of Finance and has been approved by both the Tories and the Liberals. > Also, what has happened to the promised carry forwardability of the unused > portion of the allowed contribution? That will happen, under the new system. My understanding is that it will first be usable for unused contributions from 1989. We won't know until the draft legislation for the tax reform proposals comes out (sometime in the next couple of months, we hope). > >... The $7,500 limitation > >applies if you are not a member of a company pension plan. If you > >are, your limit is $3,500 minus any contributions you make to the > >pension plan > > How can anyone afford to be in a company pension plan? It has to be a > bloody good plan before it is worthwhile relinquishing the $4000 extra RRSP > contribution availability. Actually, you have it backwards. The tax assistance provided to pension plans (taking the employer contribution into account), based on the most common defined-benefit plans, can only be equalled for taxpayers without access to a private pension plan by allowing tax-deferred RRSP savings of about $15,500 per year. That's where the increased RRSP limits are headed, though the timetable has been put off several times because of the immediate revenue effects on the treasury. The current schedule calls for it to become $15,500 in 1995. Don't think of it just as a deduction from tax. The principle of an RRSP is that income should be taxed when it's received rather than when it's earned. If it's salted away (whether by the employer or the taxpayer) and untouchable, there's some logic to saying it shouldn't be taxed. The $15,500 figure is indeed surprising. I was astonished when I first saw it in the 1984 budget documents. You have to read through the explanation of how pension plans actually work, and what pension benefits they actually pay, to see that RRSPs really are way behind. This is potentially a serious problem for self-employed individuals who otherwise may not be able to guarantee themselves a retirement income anywhere near what an equivalently-paid employee can obtain. > >... You can also > >contribute to a plan for your spouse, if you wish, and if none > >of the funds contributed this way are withdrawn until the third > >year following the year for which the contribution is made, it'll > >be taxed in your spouse's hands when it's withdrawn. (Useful > >for income-splitting.) > > Not quite true! There is a last-in first-out rule, so that you have to > wait three years from the date of the *last* deposit to a spousal plan > before the funds can be withdrawn as her/his income. I'm quite aware of that. That's why I worded it as "if none of the funds contributed this way..." above. I was trying to be correct without getting too far into the details. But since you've raised the matter, let me correct you: it's not three years from the date of the last deposit. If your last deposit was Feb 29/88 and you counted it as a deposit for 1987, any withdrawals up to the end of 1989 are attributed back to you. So you have to wait until Jan 1/90, which is a lot less than there years. (The trick is that you look at the year *for* which the deposit was made, not *in* which. That 1987 contribution might have been made on Jan 1/87 instead of Feb 1/88, in which case your "three years from the date" would be correct.) David Sherman -- { uunet!mnetor pyramid!utai decvax!utcsri ihnp4!utzoo } !lsuc!dave
dave@lsuc.uucp (David Sherman) (03/06/88)
dave@onfcanim.UUCP (Dave Martindale) writes: >It would be fair if the RRSP eligibility for people in a company pension >plan was $7500 minus the sum of the employee and employer contributions - >that way everybody lives under the same rules, and everybody can put >a maximum of $7500 (or 20% of income) into tax-sheltered plans. That's roughly what the system will be once the changes are complete (in 1995). However, you can't just subtract the employer contributions from $7500 when you're talking about a defined-benefit plan (although you can for a money-purchase plan, which is more like an RRSP). For a defined-benefit plan, which is what most plans are, there will be a complex formula that determines the equivalent value of current employer contributions which equals the future benefits. This number will be computed by Revenue Canada and mailed to each taxpayer so you will be able to know how much you can contribute for the following year. I believe this new system will be in place by 1990. David Sherman -- { uunet!mnetor pyramid!utai decvax!utcsri ihnp4!utzoo } !lsuc!dave
jim@bnr-rsc.UUCP (Jim Somerville) (03/08/88)
I have heard of something called "overcontributing" to your RRSP. Let's say that your contribution limit is $3500. You can still put $5500 in your RRSP, but you are only allowed the $3500 deduction. So you end up paying tax on the extra $2000 TWICE. Once this year, and once when you withdraw it from the RRSP. But if you allow that $2000 to grow tax-free for approx. 15+ years, the tax free growth makes the extra taxation on the $2000 negligible. The only catch is that you have to leave it in for 10-15 years (somewhere in that time frame depending on your rate of return) for the overcontributing to be worth it. Would somebody in the know please comment on this. Is this scheme legitimate? Does anyone out there actually do this? -- Jim Somerville (bnr-vpa!bnr-rsc!jim) Phone: (613) 763-4497 Bell-Northern Research Usenet:utgpu!bnr-vpa!bnr-rsc!jim P.O. Box 3511, Station C, Ottawa, Ontario, Canada, K1Y 4H7
ray@micomvax.UUCP (Ray Dunn) (03/08/88)
In article <1988Mar4.010232.3244@lsuc.uucp> dave@lsuc.uucp (David Sherman)
responds to my comments about his tax article:
DS ... The $7,500 limitation
DS applies if you are not a member of a company pension plan. If you
DS are, your limit is $3,500 minus any contributions you make to the
DS pension plan
ME How can anyone afford to be in a company pension plan? It has to be a
ME bloody good plan before it is worthwhile relinquishing the $4000 extra RRSP
ME contribution availability.
DS Actually, you have it backwards. The tax assistance provided to
DS pension plans (taking the employer contribution into account), based
DS on the most common defined-benefit plans, can only be equalled for
DS taxpayers without access to a private pension plan by allowing
DS tax-deferred RRSP savings of about $15,500 per year. That's where
DS the increased RRSP limits are headed, though the timetable has been
DS put off several times because of the immediate revenue effects on
DS the treasury. The current schedule calls for it to become $15,500
DS in 1995.
DS etc.....
David. Lets have some numbers! Its very easy and not too useful to post
these generalizations. These we can read in the advertising bumph of any
bank or trust company. Can we have some examples of break even points in
company/employee contributions to a pension plan, and a maximum contribution
to an RRSP. There are also of course some intangibles which make the
decision more complex. e.g. how long are you tied to the company to have
full vested interest in the company's contributions - how much FULL control
of your investment is worth to you - how much faith you have in your
compny's pension officers - whether you can believe that the conditions will
not be changed under you at some later date etc etc, but there presumably ARE
some basic ball park algorithms that can be used.
Ifyou don't feel able/willing to share this information, can you point us to
the relevant information documents, if any?
Ray Dunn. ..{mnetor, musocs, philabs}!micomvax!raydave@lsuc.uucp (David Sherman) (03/10/88)
In article <927@micomvax.UUCP>, ray@micomvax.UUCP (Ray Dunn) writes: > DS Actually, you have it backwards. The tax assistance provided to > DS pension plans (taking the employer contribution into account), based > DS on the most common defined-benefit plans, can only be equalled for > DS taxpayers without access to a private pension plan by allowing > DS tax-deferred RRSP savings of about $15,500 per year. > > David. Lets have some numbers! Its very easy and not too useful to post > these generalizations. These we can read in the advertising bumph of any > bank or trust company. > ... > If you don't feel able/willing to share this information, can you point us to > the relevant information documents, if any? I don't have time to dig it all up and type it in. The most recent comprehensive analysis of this stuff was published by the Dept. of Finance in October 1986 along with the proposals for reform of the pension plan and RRSP system. (The issues of vesting and entitlement to pension are dealt with in the same proposals, so you won't be locked to a company for as long, and so on.) A similar detailed analysis came out with the 1984 budget documents from the Dept. of Finance. I would think the 1986 materials are still available from Finance. They should also be findable in any decent law or accounting library. David Sherman -- { uunet!mnetor pyramid!utai decvax!utcsri ihnp4!utzoo } !lsuc!dave