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tax matters

Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.

Over the past 15 years, I have paid hundreds of dollars to have my home phone number unlisted.

It has never made sense to me that I should have to pay every month to keep my phone number private. I can only imagine the monthly charge if I took it a step further and cancelled my phone altogether. I don't think we'll ever be able to move if it means getting rid of the phone. I'd go broke.

Some things just don't make financial sense. When it comes to registered retirement savings plans (RRSPs), Canadians are notorious for hurting themselves by doing things that don't make sense. Last week, I shared three RRSP mistakes to avoid. Today, I'd like to share four more.

Mistake No. 4

Grace might just claim her RRSP deduction in the wrong year. You see, when you make an RRSP contribution you're entitled to a tax deduction for the amount contributed within your contribution limit, but you don't have to claim the deduction in that year. You can claim it in any future year if you'd like.

Grace expects her income to be higher next year such that she'll be in a higher tax bracket, so she'll save more tax by deferring her deduction until next year. It could make sense to postpone the deduction for even a couple of years if she expects her income to be that much higher in the future.

Mistake No. 5

Walter is hoping to transfer highly taxed interest-bearing investments to his RRSP and withdraw equities of equal value. This would shelter the interest income from tax and would transfer equities, expected to earn capital gains (which are taxed at lower rates than interest), outside his RRSP.

In the past, if assets of equal value were swapped, it would not be considered a contribution to, or a withdrawal from, the RRSP. Things have changed. The 2011 federal budget eliminated the opportunity to swap assets with an RRSP without tax. Today, Walter shouldn't make the mistake of undertaking a swap and incur a hefty tax bill.

Mistake No. 6

If you're going through a separation or divorce, don't forget to consider your RRSP and RRSP contribution room.

Jake and Jane have been married for 10 years and are now divorcing. They each worked and accumulated $100,000 of RRSP contribution room over that time. Jane made $100,000 of contributions over those years. Jake, on the other hand, didn't make any contributions since he was paying down their mortgage.

They plan to split 50/50 the $100,000 of assets in Jane's RRSP, along with the value of their home, which they will sell.

But there's something else of value here: Jake's $100,000 of RRSP contribution room. Once they split up, Jane will have an RRSP worth $50,000 and half the home value, as will Jake, but he'll have the ability to contribute another $100,000 to his RRSP and she won't. Now, Jake can't simply give Jane half of his contribution room.

The solution? If possible, they could come up with the cash to make a $50,000 contribution to Jake's RRSP (using up half of his contribution room). These assets could then be transferred to Jane's RRSP when they split the assets. Jake would get the tax deduction, but Jane's RRSP would be increased when dividing the assets.

Finally, if you separate or divorce, your RRSP beneficiaries are not revoked. If you don't want your ex to inherit your RRSP (or RRIF or TFSA) assets, you should revise your beneficiaries.

Mistake No. 7

Max has $10,000 of debt he'd like to pay off. His loan is at 5 per cent, and there are five years left on the loan. If he pays off his debt, he'll effectively earn a 5 per cent after-tax return on what would have been the outstanding loan balance over the five-year period. He's considering making a withdrawal from his RRSP to pay off the debt.

Truthfully, this doesn't make sense in most cases, particularly if it's short-term debt. Max will pay more in tax on his withdrawal than he'll save in interest costs. He will also have wasted valuable RRSP contribution room since he won't get that room back again when he makes the withdrawal. He'd have to use up new contribution room to replace those RRSP dollars. TFSA assets could be withdrawn and used to pay down the debt more effectively.

Finally, I made a mistake of my own. Last week I suggested that the RRSP contribution deadline for 2013 is March 1, 2014. The correct date is March 3, 2014 (since March 1 falls on a weekend this year).