Path: utzoo!mnetor!lsuc!dave
From: dave@lsuc.uucp (David Sherman)
Newsgroups: can.general
Subject: Re: income tax tips #13: RRSPs
Message-ID: <1988Mar4.010232.3244@lsuc.uucp>
Date: 4 Mar 88 06:02:29 GMT
References: <1988Feb18.123536.23901@lsuc.uucp> <923@micomvax.UUCP>
Distribution: can
Organization: Law Society of Upper Canada, Toronto
Lines: 85
Summary: RRSP tax assistance is way behind pension plan assistance

In article <923@micomvax.UUCP>, ray@micomvax.UUCP (Ray Dunn) writes:
> In article <1988Feb18.123536.23901@lsuc.uucp> dave@lsuc.uucp (David Sherman) writes:
> >
> >For 1987, as in 1986, you can contribute up to $7,500 or 20% of
> >your "earned income", whichever is less.
> 
> It's interesting to note that the government reneged here - the amount was
> supposed to increase in 87 to, I believe, $9500.  The increases have been
> deferred by 1 year.

Yes. That's part of the Tax Reform proposals.  The increases to $15,500
were originally proposed in 1984 under a Liberal government, in fact,
and have been delayed a few times.  The principle on which the
increases are based comes out of the Department of Finance and
has been approved by both the Tories and the Liberals.

> Also, what has happened to the promised carry forwardability of the unused
> portion of the allowed contribution?

That will happen, under the new system.  My understanding is that
it will first be usable for unused contributions from 1989.  We
won't know until the draft legislation for the tax reform proposals
comes out (sometime in the next couple of months, we hope).

> >...  The $7,500 limitation
> >applies if you are not a member of a company pension plan.  If you
> >are, your limit is $3,500 minus any contributions you make to the
> >pension plan
> 
> How can anyone afford to be in a company pension plan?  It has to be a
> bloody good plan before it is worthwhile relinquishing the $4000 extra RRSP
> contribution availability.

Actually, you have it backwards.  The tax assistance provided to
pension plans (taking the employer contribution into account), based
on the most common defined-benefit plans, can only be equalled for
taxpayers without access to a private pension plan by allowing
tax-deferred RRSP savings of about $15,500 per year.  That's where
the increased RRSP limits are headed, though the timetable has been
put off several times because of the immediate revenue effects on
the treasury.  The current schedule calls for it to become $15,500
in 1995.

Don't think of it just as a deduction from tax.  The principle
of an RRSP is that income should be taxed when it's received
rather than when it's earned.  If it's salted away (whether by
the employer or the taxpayer) and untouchable, there's some logic
to saying it shouldn't be taxed.

The $15,500 figure is indeed surprising.  I was astonished
when I first saw it in the 1984 budget documents. You have
to read through the explanation of how pension plans actually
work, and what pension benefits they actually pay, to see that
RRSPs really are way behind.  This is potentially a serious
problem for self-employed individuals who otherwise may not
be able to guarantee themselves a retirement income anywhere
near what an equivalently-paid employee can obtain.

> >... You can also
> >contribute to a plan for your spouse, if you wish, and if none
> >of the funds contributed this way are withdrawn until the third
> >year following the year for which the contribution is made, it'll
> >be taxed in your spouse's hands when it's withdrawn. (Useful
> >for income-splitting.)
> 
> Not quite true!   There is a last-in first-out rule, so that you have to
> wait three years from the date of the *last* deposit to a spousal plan
> before the funds can be withdrawn as her/his income.

I'm quite aware of that.  That's why I worded it as "if none
of the funds contributed this way..." above.  I was trying to be
correct without getting too far into the details.  But since you've
raised the matter, let me correct you: it's not three years from
the date of the last deposit. If your last deposit was Feb 29/88
and you counted it as a deposit for 1987, any withdrawals up to
the end of 1989 are attributed back to you. So you have to wait
until Jan 1/90, which is a lot less than there years.  (The trick
is that you look at the year *for* which the deposit was made, not
*in* which. That 1987 contribution might have been made on Jan 1/87
instead of Feb 1/88, in which case your "three years from the date"
would be correct.)

David Sherman
-- 
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