Tax Strategies

Special Report:

How to De-Register Your RRSPs
Without Getting a Huge Tax Hit

Paul has $100,000.00 in his RRSP account.
He is 59 years of age and is doing some long term planning - all the way to the time he starts cashing in his RRSPs. He knows that his RRSPs are a form of delayed tax obligation. He can wait until he reaches 69 and then roll his RRSPs into a RRIF. But, even then, the tax obligation doesn't disappear; it gets worse, because with an assumed growth rate of 7%, and assuming no additional contributions to his RRSP account, Paul's retirement savings plan will have doubled to $200,000.00 in ten years. As a consequence, the taxes owing on RRSP/RRIF de-registration will also have doubled.

Paul wonders if there is a way he can soften this future tax blow. His financial adviser suggested Paul may want to consider the following approach:

1. Paul de-registers $10,000.00 from his RRSPs per annum for the next ten years. Paul's marginal tax rate is 50%, so it will cost him $5,000.00 in income tax to de-register the $10,000.00. He invests the $5,000.00 he has left after the tax on the de-registered funds he has been paid every year for 10 years in non-registered segregated funds. This account will be $74,205.00 in 10 years, based on 7% annual growth.

2. Paul borrows $75,000.00 at a cost of 7% per annum (the cost of borrowing is deliberately set high because this is a long term plan). His annual tax deductible cost of servicing the loan is $5,200.00;

3. Paul invests the $75,000.00 in segregated funds. Segregated funds will give him creditor protection and he can also choose to buy a 100% guarantee on the money he invests. His investment realizes an annual long term yield of 7%. His $75,000.00 will grow to $150,000.00 in 10 years. When Paul starts to use his $75,000.00 investment profit, he is taxed on the growth only, and at a substantially lower rate than his RRSP withdrawals are taxed at. RRSP withdrawals, in Paul's case, are taxed at his 50% marginal tax rate, while investment income, in the way of capital gains, is taxed at less than half his marginal tax rate. Of course, Paul is very much aware of the fact that the $75,000.00 he borrowed is not his money to spend. He has to pay that amount back to the lender.

Paul is a businessperson and has always had a line of credit and mortgages on properties. He has experienced the power of "using other people's money" in business. Now, he's considering the use of this approach to his retirement planning.

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