So, are you thinking about your taxes yet?
While tax planning may not be top of mind in the midst of holiday planning and gift shopping, now is a good time to give some thought to RRSP contributions, well in advance of the March 1 deadline.
If you're staring at an abundance of RRSP contribution room, but you're short on funds to invest in an RRSP, you may be considering getting a loan to take advantage of that room.
While borrowing to invest in an RRSP can be a wise choice for some people, it could be a wrong move for others, says Marc Lamontagne, a certified financial planner and founding partner at Ryan Lamontagne Inc. in Ottawa.
On the plus side, borrowing to invest in an RRSP is a way to ensure that money is saved instead of being spent, Mr. Lamontagne says. "So somebody who has trouble saving money would go out and borrow the money to make the RRSP [contribution,] use their tax refund to pay down the loan or pay off the loan over the next year, and it's kind of like forced savings."
As well, there are potential tax benefits – RRSPs can be a way to reduce income, particularly if one is in a high tax bracket, he says. However, before considering whether to take out a loan, it's important to consult a financial planner or accountant to get a sense of what your financial and tax situation is going to be, Mr. Lamontagne adds. For example, for individuals already carrying a lot of debt, it's probably not a good idea to borrow for an RRSP.
"I've seen situations where people will say, 'I've got a balance on my credit card that's [exposed to an interest charge of] 21 per cent, so I'll get a low-interest RRSP loan and I'll use the refund to pay my credit card,' " he said. "But then the credit card balance tends to creep back up, and you end up in a vicious cycle."
Allen Church, managing partner at MNP LLP, a Toronto-based tax and accounting services firm with offices across Canada, also advocates talking to an expert before taking out an RRSP loan, to see how it will affect your tax return.
"A lot of people think, 'If I make the contribution, I'm going to get a refund,' " Mr. Church says. "But if you have a situation where you're going to [owe money] come April, the RRSP contribution may reduce your payable, but you're not going to have the refund to pay down the loan."
Even if your contribution is going to earn a refund, that refund won't necessarily be enough to pay back the entire loan.
"For example, if I'm in the top tax bracket, say, roughly 50 per cent, if I put $10,000 in my RRSP, that will only get me at best a $5,000 refund, so I've still got to come up with that other $5,000 somewhere," Mr. Church says.
If you aren't able to pay off your loan immediately, an RRSP loan can be a good idea as long as you pay it off within the year, says Judith Cane, a money coach and financial planner based in Ottawa. Borrowing for an RRSP can also be a great move for people who have recently started earning a larger income, and can now take advantage of abundant contribution room.
"For someone who was in school for a long time but now has a job, it's a good time [to take out a loan]," she says. "I know people who have taken out $5,000 because they are now making really good money and we've got a plan in place so they can pay it back within a year."
What you don't want is to carry over an RRSP loan into the next tax season. "Then it defeats the purpose," Ms. Cane says. "If you do decide to take out a loan, make sure you talk to someone before you do so to make sure it fits within your financial budget and that you understand exactly what the ramifications of taking out this loan are."
Mr. Church also advocates a one-year repayment period when it comes to RRSP loans, particularly when a portion of the loan can be repaid with a refund. But temptation can be a factor, he warns. Come tax time, you need to be disciplined enough to use your refund to repay the loan, instead of putting your "windfall' toward something else.
"This is where the human nature side comes in," Mr. Church says. "People say, 'I'll borrow and pay it back out of my refund,' and then the refund comes and there's something else they would like to do, like that trip to Florida. Some people just don't have the discipline to stick with the plan and that's where these things go astray."
If it looks as though borrowing might not be the right solution for you, consider alternatives, Mr. Church says. If you have non-registered assets, for example, you could transfer those assets into an RRSP so you are making a contribution "in-kind." Or you could consider a monthly contribution plan so that instead of having to come up with a huge amount by March 1, you can add to your RRSP from each pay cheque.
"If you're a middle-class person who doesn't have an abundance of surplus money," Mr. Church says, "then being able to manage the cash flow, the timing, anything you can do to ease the burden of making that contribution would be helpful."