It’s RRSP season again, the annual rush to stash a bit more cash in retirement savings plans.
Most people don’t come anywhere close to maxing out their contributions and consequently have far too little in their RRSPs. But a select group of Canadians has the opposite problem: an embarrassment of RRSP riches.
They’re the uber-successful investors who have made such dizzying returns that they have too much money in the retirement tax shelter. They would have been better off, at least from a tax perspective, if they had their funds outside a plan.
The largest RRSP in the country is believed to be held by philanthropist and mining entrepreneur Seymour Schulich. One report estimated his RRSP might be as large as $250-million, although Mr. Schulich declined to comment. “People can speculate all they want. Nobody knows the exact number,” he said, elaborating that estimates of its size are “not even close.”
But an indication that Mr. Schulich’s RRSP is of substantial size comes from Ontario Securities Commission insider trading filings, which show that through his RRSP he bought about $29-million worth of shares in a mining company in 2008 and held $30-million in an oil exploration company the next year.
Another high roller in the RRSP sweepstakes is Michael Decter, a former Ontario deputy health minister who found a second career as a investment impresario and now runs a money management firm.
Mr. Decter wrote a book in the late 1990s about how he turned his $50,000 RRSP into more than $1-million through careful investing. He declined to identify the current amount, other than to say “it’s upwards of $10-million” and has “surpassed anything I would need some time ago.”
Most Canadians can only look on in awe. A survey conducted for Bank of Montreal in January found that about two-thirds of Canadians have under $100,000 in their RRSP and fewer than 1 per cent have more than $1-million.
While nobody knows the exact number of people in the RRSP stratosphere, they’re more common than you may think. “I certainly have, I would say, not hundreds, but probably dozens of clients who will face having an RRSP that’s larger than their needs when they retire,” Mr. Decter says.
Tax expert Tim Cestnick says he’s met two people with RRSPs larger than $30-million. “I suppose in many ways it’s a good problem to have.”
There appear to be two secrets to having a lofty RRSP balance. First, start a plan early in a career to establish a decent sized grubstake with which to start investing. Second, make concentrated bets within a self-managed plan, reaping large capital gains if the shares soar.
It’s a swing-for-the-fences strategy that involves considerable risk. Of course, most money managers advise the opposite, holding a diversified portfolio, although with this approach it’s hard to beat the market.
Mr. Schulich took the swing-for-the-fences route and added shares of Franco-Nevada Mining , which he helped found, to his RRSP early in his career. The stock ended up being one of the best performers of the 1990s, rising more than tenfold from 1990 to 1998. It was eventually acquired by a major mining company.
Mr. Decter made similar big, concentrated bets, although he currently favours a basket of stable dividend-paying stocks that include pipelines, real estate investment trusts and familiar brand names such as McDonald’s, Home Depot, ATT and Cineplex.
A super-sized RRSP isn’t all good fortune. In tax terms, it can be a curse because of the preferential treatment of capital gains, compared with ordinary income.
The top marginal tax rate in Canada is close to 50 per cent in most provinces, but under the tax code, only half of capital gains outside a tax-sheltered account are counted as income – the rest is tax free.
Top earners whose large RRSPs grew through capital gains end up giving close to half the value of their plans in taxes when they withdraw money from the plan. That is double what they would have paid had they faced only capital gains taxes.
Those with smaller RRSPs actually benefit from the tax code if they earn lower incomes in retirement than they did while working, which is typically the case for most Canadians.
To be sure, there are options to escape some of the large RRSP tax bite. One approach is to give the money away to registered charities. Mr. Schulich has a number of university schools named after him and has established a scholarship fund for science and engineering students modelled after the Rhodes scholar program.
For those who don’t want to give their money away, there is a radical tax-minimizing step: leave the country.
Although it hardly seems fair that Canadians who decamp should get preferential tax treatment, that’s the case when it comes to RRSPs. Those who become non-residents can collapse their plan and pay a 25-per cent tax, far better than the rates near 50 per cent they would pay if they remained in Canada.