By Gigi Suhanic
National Post
FP Money
Saturday, January 18, 2003

FP Money puts financial experts at your disposal for the journey through RRSP season. Send questions to investing@nationalpost.com and we'll ask the pros what they think.

Question: Is it possible to use funds from a self-directed RRSP, without paying tax or penalties, to finance a home-based business?

Answer: Some ways of withdrawing money from an RRSP include the Home Buyers Plan, and the Lifelong Learning Plan. However, it is unlikely that either of these will be of assistance even if all the qualifications are met, says Adrian Mastracci of KCM Wealth Management in Vancouver.

It is also highly unlikely that a home-based business could issue qualifying investments suitable for an RRSP.

A consideration is for the RRSP to hold a mortgage secured by your home. However, the set up fees will be quite onerous. Moreover, not all RRSP trustees allow this investment.

The more important question is whether the RRSP funds should be utilized at all, even if one could. The RRSP is supposed to be a vehicle to fund retirement income.

In many cases, the RRSP is a replacement for a pension plan. Therefore, tinkering with it for a venture that may fail is not a wise idea.

I would suggest that investigating business financing from a lending institution is more appropriate. Many lenders have specific business loan programs for a variety of purposes.

The granting of a business loan depends on the credit worthiness of the borrower. Often, these loans are granted on the strength of personal guarantees. They are repayable without penalty at any time.

If the business venture is not successful, at least the RRSP is still intact. If it is successful, the loan can be repaid from the business cash flows.

Question: If I withdraw $5,000 from my RRSP how much would I actually get? How much would I be taxed for?

Answer: You would receive $4,500 as the issuer of the RRSP would withhold 10% for income tax, says Cheryl Bauer Hyde, a financial advisor.

However, you would be taxed for the full $5,000 as taxable income in the year of withdrawal. This amount is added to any other taxable income that you had for the year. So, if you are taxed on this RRSP withdrawal at a marginal tax rate of 30%, the actual tax on this $5,000 would be $1,500. When you file your income tax return, the income tax payable would be $1,500 less $500 withholding tax for an additional income tax payment of $1,000.

Question: While everything I have seen points to March 1 as the deadline for a contribution to be eligible for 2002, I have recently seen something indicating March 3 would be the extended deadline as March 1 is on a Saturday. Do you know whether this is correct?

Answer: Canada Customs and Revenue Agency confirmed that March 3, 2003, is the deadline for RRSP contributions to qualify for the 2002 tax year, says Ms. Bauer Hyde.

Contributions must be made to RRSPs within 60 days after the end of the year to qualify for the previous tax year. As the reader suggests, if the 60-day deadline falls on a weekend, the deadline is extended to the next working day (Monday) which in this case is March 3, 2003.

Question: I am planning on retiring in two or three years and I understand that I cannot contribute to an RRSP (spousal or my own) for three years if we plan on taking out spousal RRSPs at my spouse's tax rate and not my rate.

Is this true?

Answer: The three-year contribution rules apply specifically to spousal contributions, says Don Nilson, a certified management accountant.

Thus, any contributions you make to your wife's account that are withdrawn in the three-year period would be put back on your tax return, not hers.

Note that the three years are measured by the years of contribution, not the years of deduction. In other words, a contribution that you make in January, 2003, and deduct on your 2002 tax return blacks out the ensuing years for withdrawal until Jan. 1, 2006.

The three-year rule does not preclude you from making contributions to your own RRSP.

If you plan to withdraw retirement funds in three years from your wife's RRSP, you had better start the three-year contribution blackout period now.

Note that this begs bigger questions about how you will organize your retirement cash flow.

Work pensions, RRSPs, Registered Retirement Income Funds, Old Age Security and the Canada Pension Plan need to be considered, not to mention any other investment capital.

These income sources ought to be balanced as much as possible between the two of you to manage each of your marginal tax brackets.

For instance, you could in fact continue to contribute to your wife's RRSP for these next three years if she then converts her RRSP to a RRIF in the year before she takes money out. In this case, none of her withdrawal will come back on your return as long as she takes out only the minimum.

You might do well to have a consultation with a professional financial planner to lay out a smart plan. Then, "enjoy retirement."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.