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ONLINE EXTRA: More RRSP insight
By Gigi Suhanic
Excerpt from Financial Post Online
Friday, February 20, 2004
The following RRSP questions were answered online in the RRSP Clinic by Adrian Mastracci, of KCM Wealth Management Inc.
Question: Debt or RRSP? Without making an RRSP deposit, I’ll get a $2,400 tax return. A $3,300 RRSP deposit (and loan) will net me a $3,300 return. The catch is that I have tons of student loans, with a top interest rate of 9%. So, is it better to take a $3,300 RRSP loan, invest the money and pay the loan with the return, or should I just pay down the student loans with the $2,400 return?
-- Ranjan, Toronto
Answer: There will never be only one answer to the debate of whether it’s better to make RRSP contributions or accelerate the beloved loan repayment. However, the choice does not necessarily have to be made on the math of which course of action is better. One of the pillars of financial planning is to pay yourself first.
Thankfully, both the RRSP deposits and loan acceleration qualify as paying yourself first. It is hard to find fault with pursuing one or the other as the preferred strategy. However, if the opportunity exists, pursue a combination of both strategies. I ask every client a simple question: What is important about your finances to you? The many and different answers begin to shape the strategy to be pursued. Consider refinancing the higher-rate loans (at 9%) to lower rates. Then apply the savings to the repayment of the highest-rate loan first.
You may also be able to renegotiate the lower rate loans to interest only while your savings capacity repays the higher-rate loans. You should be comfortable with the overall loan levels you carry, so don’t feel you have to incur more loans. It’s more important to be able to carry through with your chosen approach than to pursue the “best” scenario.
The good thing about the unused RRSP room is that it can be carried forward until capital is available for the deposit. The trade-off is, you won’t earn income on the RRSP deposits until they are made.
Question: My wife and I have about $60,000 in an RRSP and I’ve heard that you can take out $20,000 per spouse to buy a home without penalty. We already own a home, which we didn’t use any RRSP money to buy, and we want to buy an investment property. Is it possible to take $40,000 out of the RRSP to buy that house? Also, is it worth taking money from RRSP to buy? Since we would have to pay it back, we won’t be able to contribute as much as before. We are 34 years old, we have been contributing $10,000 a year on average and we would like to retire by age 55.
-- Young Kim, West Vancouver
Answer: Generally, before you can withdraw funds from your RRSPs to buy or build a home that qualifies under the plan, you have to meet the first-time home buyer’s criteria. You are not considered a first-time home buyer if, at any time during the period beginning Jan. 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal, you, your spouse or your common-law partner owned a home that you occupied as your principal place of residence.
You must meet that condition at the time you withdraw from your RRSPs under the Home Buyers Plan. If you are not considered a first-time home buyer at that time, the withdrawn amount will have to be included in your income and will be taxed accordingly.
It does not appear that you meet the qualifications for the withdrawal. Hence, make sure you read the informative HBP brochure published by the CCRA before you venture into this area.
For those who are able to use RRSP funds for buying or building a home, it’s wise to repay the HBP sum owed to the RRSP. The belief is that the RRSP funds are more valuable during the retirement phase to provide part of the retirement income stream.
As for retirement at age 55, consider accumulating as much as you can in your RRSPs and outside of them. Yes, you will pay tax when the RRSP money comes out. It will be a nice problem to have!
Question: I hold American Depository Receipts for shares of Nokia Corp., based in Finland, in my RRSP. These ADRs trade on the NYSE. I received dividends on these receipts net of a non-resident withholding tax in each of the last two years. The tax withheld was levied at a rate of 29% of the gross dividends. The dividends were declared by Nokia in Eurocents per share, but were converted to U.S. dollars and then to Canadian dollars before being credited to my RRSP. Is the non-resident tax withheld on these dividends recoverable and, if so, how do I file this claim?
-- John, Mississauga, Ont.
Answer: Canada has tax treaties with many countries. A tax treaty is typically designed to avoid double taxation for people who would otherwise pay tax on the same income in two countries. Generally, a tax treaty determines how much each country can tax income such as pensions, wages, salaries and investment income. You can view the treaty information on the CCRA Web site at www.fin.gc.ca/treaties/treatystatus_e.html
In many cases, tax withheld by one jurisdiction is not credited or recoverable in the other, especially for registered accounts. For example, RRSPs are treated differently in the U.S. and Canada.
Start by asking your RRSP trustee. My understanding is that tax withheld on ADRs is likely not recoverable. Hence, there may be little, if anything, that you can do. Your trustee can find out the tax rules on your particular ADR. If any part of the withholding tax is recoverable, the trustee would have to initiate the paperwork.
To minimize the tax withheld, consider US-listed securities instead of ADRs for your RRSP. Of course, be aware of the foreign content limits.
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