By Jeffrey R. Roy, CPA, CA
Soon all Canadians will be working on their 2018 personal income tax return. Many believe that tax planning is only available to high net worth families using advice from expensive accountants or to individuals that use the services of large wealth management companies.
Fortunately, there is one strategy that is easy to implement and available to most working people. For those that have available RSP contribution room, we advise clients to borrow and use the proceeds to contribute to an RSP, which may generate a tax refund.
This is a suitable strategy provided you:
- set up a loan repayment schedule that is no longer than 12-24 months,
- use the tax refund to immediately pay-down the loan and
- invest in known and stable securities that earn a return that is equal to or greater than your interest obligation and the current rate of inflation.
Adding household debt is a recommendation I rarely support, as many Canadians already have significant loans. But in this case, the debt is short-term and creates an asset. Over time, with capital appreciation and investment income, this small one-time sacrifice will yield benefits that can lay the foundation for a comfortable and possible early retirement.
There are important details that you must consider prior to implementing this strategy:
interest paid on the loan is not tax deductible.
- If you are on a limited budget, some expenditures will have to be avoided or delayed so that you can repay the interest and principal as soon as possible.
investments should be value oriented with stable dividend yields or interest
receipts and have opportunities for some capital appreciation.
- The current global stock market has many under-valued companies or instruments that match perfectly with the above strategy.
We regularly discuss this tax planning strategy with clients. Preparing an investment plan (with monthly or quarterly targets) gives clients comfort that their near-term sacrifices can yield significant long-term benefits for them and their family.
If you are considering this strategy, please feel free to contact Vulcan Investments for a personal consultation on how this planning can help you build retirement wealth. Please note that March 1, 2019 is the last day to contribute to your RSP and claim the deduction on your 2018 personal income tax return.