It's RRSP time again and like many taxpayers, you may be feeling overwhelmed with the amount of information that's available. Here are some straightforward answers to some of the questions taxpayers frequently ask.

How much should I contribute?

Making a maximum contribution is probably the safest tax-sheltered investment available. The immediate benefits are two-fold: tax savings in the year of contribution and tax-deferral on the income earned by the RRSP investments until withdrawal, hopefully at the time when you retire. Earnings accumulate from the time you invest so, of course, your RRSP will grow more quickly if you make your RRSP contributions throughout the year.

Generally the maximum amount that is tax-deductible is 18% of your previous year's earned income to a maximum of $13,500. Earned income includes:

• salaries or wages net of employment expenses claimed;
• research grants;
• royalties;
• net income from self-employment;
• net rental income from real property;
• alimony and maintenance received, and
• supplementary unemployment benefit plan payments.

If you accrued benefits from a Registered Pension Plan or Deferred Profit Sharing Plan, that amount will reduce the tax-deductible amount of the contribution for the year.

If you have not fully contributed in the past, you can catch up. Remember that the maximum contribution is not $13,500 for the year but rather your contribution room.

As there is a tax penalty for contributions in excess of your limit, you should refer to the amount indicated on your Notice of Assessment that the Canada Customs and Revenue Agency ("CCRA" formerly Revenue Canada) sent after you filed last year's income tax return. The Notice will also include any amounts you can contribute because of under-contributions in prior years.

CCRA does allow an extra one-time $2,000 contribution to your RRSP without penalty. However, if you use this cushion up, you will have no margin for error in future years.

Should I invest in my RRSP or pay down my mortgage?

This is a difficult question and should be discussed with Logan Katz LLP Chartered Accountants. The decision rests, in part, on where you believe interest rates are headed both for mortgages and investments. Looking strictly at the mathematics, assume that interest rates for the mortgage and the RRSP are identical and that your tax bracket remains the same during contribution times and withdrawal times. In this instance, it would be better to pay off the mortgage first. However, if your mortgage is locked in at 6% interest for five years, and the additional RRSP investment will provide a return of 11%, it would be better to invest in the RRSP.

However, beyond this basic math there are other important factors to consider. Do you want to place all of your worth in your home or diversify your investments? If you only invest in the mortgage, will you be able to catch up on the missed RRSP contributions in future years? If you invest in your RRSP, your mortgage will be repaid over its normal term anyway. Perhaps the best strategy is to find a balance. Paying off your mortgage and saving for your retirement are both important components of your financial planning.

Should I borrow money for my RRSP contribution?

Interest on money borrowed to make an RRSP contribution is not deductible for tax purposes. However, it may still make sense to borrow, on a short-term basis, to contribute to your RRSP. If you can borrow at a rate that will be less than the amount earned within the RRSP, then borrowing is a good strategy. You should first determine your ability to repay the loan, the anticipated amount of your tax refund and the term within which the loan is to be repaid. If the RRSP contribution will result in a tax refund, this will allow you to pay off the loan more quickly and reduce the non-deductible interest expense. Generally, the longer the repayment term, the less benefit derived from borrowing. When considering whether to borrow to pay down a mortgage or maximize RRSP contribution room, many taxpayers only look at the front-end gains. This approach supports the decision to borrow to contribute to an RRSP because it does not take into consideration the tax impact when the funds are withdrawn from the fund. Since future earnings and withdrawals cannot be accurately predicted, it is difficult to develop a specific financial model to determine the tax implications. However, you should not abandon an investment strategy based on overall return versus tax savings.

What is a self-directed RRSP?

A self-directed RRSP is still invested through a financial institution. However, you are in charge of how your RRSP will invest its money. In other words, you choose from a variety of available investment vehicles, as long as they are "qualified", such as GICs, mutual funds and corporate shares. The plan's administrator or broker buys and sells the investments as directed by you and charges appropriate brokerage and annual administration fees for these services. These fees are not deductible for tax purposes. The self-directed plan must be registered and approved by CCRA.

If you are investment-wise, there are advantages to having a self- directed RRSP. However, you should talk to Logan Katz LLP Chartered Accountants before setting one up.

What are qualified investments?

"Qualified" investments include a wide range of investments such as GICs, cash deposits, shares of companies listed on a Canadian stock exchange, shares listed on most foreign stock exchanges, shares or units of Canadian mutual funds that are certified as eligible by the CCRA, labour-sponsored venture capital corporations and mortgages. You should be sure that your RRSP investments are qualified. If an RRSP investment is considered ineligible, its value will be included in your taxable income.

How much can I invest in foreign assets?

Your RRSP cannot have foreign assets that exceed 30% of the total cost of the RRSP assets. The concept of "cost" is important. If the rule were not based on original cost, but rather on market value, many RRSP investors would be over the foreign content limits at certain times due solely to fluctuations in the value of their foreign investments. You should monitor the 30% limit carefully. If your foreign content exceeds the limit, you will be charged 1% per month tax on your excess foreign investments. There are ways you can increase foreign content while still remaining within the foreign content limit. Talk to Logan Katz LLP Chartered Accountants.

Should I consider a spousal RRSP?

Contributing to a spousal RRSP is advantageous in certain situations. If you have available RRSP contribution room, you can contribute to your own RRSP or to an RRSP for your spouse. The contribution will qualify as a tax deduction for you as long as your total contributions to both plans do not exceed your contribution limit for the year. At retirement, the spousal RRSP becomes a means to income split since withdrawals are included in your spouse's income. At retirement if you carefully structure withdrawals so that both of you stay within the lowest tax base available, you may be able to minimize your income taxes.

Another advantage is that an older spouse, who is over age 69, can contribute to the younger spouse's RRSP until the younger spouse is 69 years old and thereby take advantage of tax deductions for a longer period of time. The year in which an RRSP investor turns 69, he or she must collapse the RRSP and pay tax on the assets, purchase an annuity or transfer the RRSP to an RRIF. No taxes are payable on the conversion to an annuity or an RRIF.

Please keep in mind that effectively the spouse owns the RRSP and the contributor loses control over the funds.

A Strategic Investment

An RRSP allows you to save money for the future, receive an immediate tax benefit, and accrue tax-deferred earnings on your RRSP investments. These advantages, combined with the comfort of knowing that retirement funds will be available when you need them, make RRSPs a strategic investment for most Canadians.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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