Archive for March, 2007

Lump Sum RESP Contributions

March 22, 2007

1 comment

Rob Carrick discussed the implications of the removal of RESP contribution limits in a recent column in The Globe and Mail. Does it make sense to make a big contribution to the RESP even if you don’t get the 20% matching grant? While this is not an issue that most people will face, it poses an interesting question: Is the RESP an attractive option if all it offers is tax-sheltered growth without the benefit of a grant?

I don’t have the numbers to back it up but I think there might be far better options than contributing a lump sum to the RESP, such as investing in a taxable account in a tax-efficient manner or gifting the money to the child to invest (though income and dividends will be attributed back to you). Personally, we put just enough money into the RESP to get the maximum match and like most people, we also have other priorities that need funding like retirement accounts and a mortgage.

Reader Question about RRSP

March 20, 2007


Michael from Gatineau asked the following question about RRSPs:

Is there any benefit to them [RRSPs], if you are not going to wait until your retirement (or until you are in a lower tax bracket) to use them?

Say, if I’m putting money in some index funds for 5 years, and in 5 years I’ll probably be in a higher tax bracket than now. Would it be better to put that money in non-RSP funds so as to pay the tax now and now in 5 years?

I’ll assume that you need the money you are going to contribute to your RRSP in 5 years or so, for some specific reason. There are two parts to your question: (1) Should I put the money in an index fund? (2) Should I park the investment inside a RRSP?

In my opinion, any money you’ll need at a specific time in the short term should be invested such that your principal is guaranteed. Index funds fail this test because even if you invest in a bond fund, which has a low risk profile, there is no assurance that you will get your principal back. The only options that are left are bonds or GICs. You can either buy a 5-year bond or GIC whose maturity date matches your time frame or you could construct a bond ladder.

I think you are better off holding the bond or GIC in a taxable account. Your short time frame and the fact that you are likely to be in a higher tax bracket negate the advantages of a RRSP. A fixed income investment in a taxable account will be taxed at your marginal rate and your principal will barely keep up with inflation. Unfortunately, it appears to me that it is the best option for your situation.

Federal Budget: Who Wins?

March 19, 2007


Despite the spin you are likely to hear from the Tories as well the opposition (assuming the budget is passed in Parliament), there are only three significant tax benefits for most Canadians in the budget:

  • For each child under 18 in your household, you will get a tax break of $310 (15.5% of $2,000 child tax credit) for 2007.
  • If are a one-income household, the increase in the spousal amount will net you $209 in tax savings in 2007 and more in future years.
  • If you purchase one of the eligible fuel-efficient vehicles on or after March 20, 2007, you could get a rebate of $1,000 to $2,000 depending on the vehicle.

That’s it! There is no general tax relief or reduction in the capital gains tax as rumoured in the media leading up to the budget. On the bright side, it isn’t as complicated to figure out how much you will gain, as was the last federal budget.