### Author Topic: Optimizing Taxes and discussion on RRSP deductions  (Read 2613 times)

#### Lews Therin

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##### Optimizing Taxes and discussion on RRSP deductions
« on: December 07, 2017, 06:03:30 AM »
Getting ready for the end of year tax planning:

Two parts to this: A) Capital Gains 2017 vs 2018 ; B) RRSP deductions - rational calculation of when to take them

Alright. Background info: I was deployed for 4 months this year, which cuts my income by 1/3 (not taxed on income while deployed) so for 2017, I have a very low income compared to 2018. I had to raid my TFSA for a downpayment on my new house in ottawa (old house in Qc hadn't sold at that time) and now the money made quite a nice amount in an open investment account. I'm thinking of selling enough to re-fill my TFSA (Sell open investments on the 28th of DEC, Buy in TFSA on the 1st of JAN) I'll be out of the market for a few days, but the capital gains will be in 2017.
Am I forgetting something? (I don't think I can transfer in Kind, as I can't fill the TFSA till JAN 1, and that would move the tax bill to 2018.

RRSP deductions: According to Simpletax calculator, my marginal taxes are around 33%, and my highest year income year will be 2021 at 43%. My question is: Is it worth delaying using the RRSP deductions? (Note, I'm military, so we're taking very small RRSP amounts, like 2k per year)
Mathematically, I'm thinking that even though I'm taxed higher in 2021, if I use all my accumulated deductions right away, the lost % will be regained by the money being in the market longer, rather than me waiting. Thoughts?

#### Novik

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##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #1 on: December 07, 2017, 10:05:01 AM »
Mathematically, I'm thinking that even though I'm taxed higher in 2021, if I use all my accumulated deductions right away, the lost % will be regained by the money being in the market longer, rather than me waiting. Thoughts?

Putting the money in the market and taking the deduction don't have to happen in the same year. I've seen arguments that too much gap between RRSP contribution and claim is bad (due to changing tax rates/inflation I believe) but I thought I'd mention it anyways. If you use all your "accumulated room" right away in 2017, you could wait to claim the deduction in 2018 or beyond, when you're not deployed at least.

#### Lews Therin

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• Used to be Canadian Ben
##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #2 on: December 07, 2017, 10:07:18 AM »
But that would mean that I don't get the tax return until 3 years in the future, while It could have also been put in the market.
That's the point for RRSP: Does the Tax return make more than simply waiting for the next higher income year?

Trying to find a solution to figure out how much the difference between using it in advance is worth more than waiting (some type of formula.) Doing it in Excel shows me that at 85000, I get 3500 from 10k deduction (estimate) but if I were taxed at 45%, I could get 4500. That would require 4 years of 7% return to be equal.
« Last Edit: December 07, 2017, 10:14:08 AM by Canadian Ben »

#### Prairie Stash

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##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #3 on: December 07, 2017, 11:36:56 AM »
I'll outline the third option you neglected first. I assume \$10,000 in cash to play with, 7% returns.

The choice becomes RRSP or taxable account. You can put the \$10,000 into your taxable account, it will grow 7%/year and reach approximately \$13,000 in 2021. In 2021 you sell and pay gains on \$3000 which is \$675, but since you put the entire amount into the RRSP, you actually receive a refund \$675 larger than expected. Gains are taxed at 50% but when you put money into RRSP its at 100%. This scenario yields a refund of \$5175 (the \$4500 plus \$675), meaning that initial \$10,000 will be \$18,175 inside your RRSP in 2021 assuming 7% gains.

Your scenario, you in and defer, means the same \$10,000 goes in and grows to the same \$13,000 (assume the same gains for fairness) but you get an additional \$4500 in refund, bringing the total to \$17,500 in 2021.

Third option is to put in \$10,000, claim and receive \$3500 immediately. In 2021 this is then worth \$17,700 roughly the same as the second option as you noted in your OP.

The first option assumes lots of RRSP room. If the money doesn't grow, or shrinks, it would have done the same inside your RRSP but you can claim the loss when its on taxable accounts.

#### Novik

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##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #4 on: December 07, 2017, 11:52:00 AM »
But that would mean that I don't get the tax return until 3 years in the future, while It could have also been put in the market.
That's the point for RRSP: Does the Tax return make more than simply waiting for the next higher income year?

Gotcha. That's the part I was forgetting. If you fill out the right forms with your employer, theoretically your income tax witholding can be reduced to account for the RRSP deduction, so you could deposit it now, send the forms in early 2018 and get the money back over 2018 (vs. early 2019 after doing taxes).

#### Lews Therin

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##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #5 on: December 07, 2017, 12:00:06 PM »
I'll outline the third option you neglected first. I assume \$10,000 in cash to play with, 7% returns.

The choice becomes RRSP or taxable account. You can put the \$10,000 into your taxable account, it will grow 7%/year and reach approximately \$13,000 in 2021. In 2021 you sell and pay gains on \$3000 which is \$675, but since you put the entire amount into the RRSP, you actually receive a refund \$675 larger than expected. Gains are taxed at 50% but when you put money into RRSP its at 100%. This scenario yields a refund of \$5175 (the \$4500 plus \$675), meaning that initial \$10,000 will be \$18,175 inside your RRSP in 2021 assuming 7% gains.

Your scenario, you in and defer, means the same \$10,000 goes in and grows to the same \$13,000 (assume the same gains for fairness) but you get an additional \$4500 in refund, bringing the total to \$17,500 in 2021.

Third option is to put in \$10,000, claim and receive \$3500 immediately. In 2021 this is then worth \$17,700 roughly the same as the second option as you noted in your OP.

The first option assumes lots of RRSP room. If the money doesn't grow, or shrinks, it would have done the same inside your RRSP but you can claim the loss when its on taxable accounts.

I had not thought about the effects of the third scenario. But no matter what, I can fill RRSP room every year, so the extra gains that would go into RRSP are not applicable for me, since in every scenario I'm maxing the RRSP deductions. I'm also 27, so I can slowly sip from RRSP while remaining in extremely low brackets. The third option doesn't seem to change the calculation in my situation due to not need extra money for RRSP deductions. For others I can imagine it avoiding the RRSP growth could be helpful in the long term.

Scenario A) 10k in RRSP + 3500 in open investments (Immediate return) ; Scenario B)10k in open investments till 2021, then transfered to RRSP: Both come pretty equal at 7% gain.
Since I do have the option of simply leaving it alone (not getting Capital gains, or being able to captured losses) I think scenario B is more effective. I don't need to put it in RRSP since I will be getting a lump sum for 2021, so I won't be lacking in liquidity to fill it up. Thanks Prairie Stash!

#### bernieb

• Posts: 20
##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #6 on: December 07, 2017, 12:58:02 PM »
Revenue Canada sent me a friendly notice that I had not claimed the income from my unregistered ETFs for 2016.  I had wrongly assumed that dividends etc. were not taxable until you sold.  Surprise # 1.  Surprise # 2 is that for non registered accounts you had to track your ACB "Adjusted Cost Base" on the accounts for when you do sell.  Is there any information on how to simply track ACB and any other advise on handling non registered taxation would be great.

#### Prairie Stash

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##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #7 on: December 07, 2017, 01:15:54 PM »
My pleasure. Prior to the TFSA it was a very common debate; taxable or RRSP. Now everyone just assumes those are the only options, who could possibly max out both!

RRSP (immediate return)> taxable account>RRSP with delayed return

For Fun, this a way to calculate whether a delay is better in claiming the RRSP.
"The Penalty from a delayed deduction grows faster than the Penalty from an increased in tax rates. The maximum delay can be roughly calculated by ...'the percent increase in the tax rate divided by the investment's rate of return'.
E.g. ( 39% / 33% ) - 1 divided by 8% = 18.2% / 8% = 2.3 years maximum delay (when moving from 33% to 39% and earning an 8% return)." http://www.retailinvestor.org/rrsp.html#delay

The article also claims:
The RRSP delayed-deduction choice is NEVER the best choice. It is sometimes better than using the RRSP normally, but in all those situations using the Taxable account gives better outcomes than either.

#### Novik

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##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #8 on: December 07, 2017, 01:22:14 PM »
My pleasure. Prior to the TFSA it was a very common debate; taxable or RRSP. Now everyone just assumes those are the only options, who could possibly max out both!

RRSP (immediate return)> taxable account>RRSP with delayed return

For Fun, this a way to calculate whether a delay is better in claiming the RRSP.
"The Penalty from a delayed deduction grows faster than the Penalty from an increased in tax rates. The maximum delay can be roughly calculated by ...'the percent increase in the tax rate divided by the investment's rate of return'.
E.g. ( 39% / 33% ) - 1 divided by 8% = 18.2% / 8% = 2.3 years maximum delay (when moving from 33% to 39% and earning an 8% return)." http://www.retailinvestor.org/rrsp.html#delay

The article also claims:
The RRSP delayed-deduction choice is NEVER the best choice. It is sometimes better than using the RRSP normally, but in all those situations using the Taxable account gives better outcomes than either.

That's the article I read! Wonderfully detailed.

I admit I immediately ignored it and filled my RRSP but delayed claiming RRSP deductions by a year, so I probably shouldn't give advice on this (1. because my income was going to double 2. because RRSP is the only place for me to hold Canadian stock ETFs directly [thanks IRS] and I wanted to do that sooner 3. easiest things tax wise since nothing to report until withdrawal).

#### Lews Therin

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• Posts: 2004
• Age: 28
• Location: Ottawa
• Used to be Canadian Ben
##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #9 on: December 07, 2017, 01:30:02 PM »
I have to do RRSP delay for 2.5k (military nitty gritty when moving, you can either be taxed immediately on the money, or put immediately in RRSP and avoid it) The site gives an excellent way to calculate when I should take it! Cheers.

#### RichMoose

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• Location: Alberta
##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #10 on: December 08, 2017, 11:21:28 AM »
How much is the taxable portion of the capital gain (50% of total gain) in the NR account? Will this amount move you to a higher marginal tax rate in 2018?

The reason I'm asking is it may be better to realize the capital gain in Jan 2018 so you defer the tax bill until April 2019. You will still be able to fund your TFSA in January and it will only be a few days later at most.

Also, there's no benefit to transfer in-kind to a TFSA. Either way it's a realized gain. And never transfer if there's a loss as you won't be able to claim the loss and carry it forward.

#### Lews Therin

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• Posts: 2004
• Age: 28
• Location: Ottawa
• Used to be Canadian Ben
##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #11 on: December 08, 2017, 12:05:37 PM »
I have 4 months less income in 2017. For tax purposes, I have 2\3 of my normal salary in 2017 compared to the full normal year in 2018. Pretty sure it'll be a lower bracket this year!

#### Lews Therin

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• Used to be Canadian Ben
##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #12 on: December 15, 2017, 11:15:35 AM »

I will take my gains for the amount needed to refill the TFSA (Claim them in 2017 for the lower tax rate); and I will leave the money for the RRSP in my unregistered account until I know exactly how much I will make in 2018, and then do the math calculation of the pros/cons of deducting in 2018, since it will have to be better than the return for my high income year in 2021.

(With this calculation)
"The Penalty from a delayed deduction grows faster than the Penalty from an increased in tax rates. The maximum delay can be roughly calculated by ...'the percent increase in the tax rate divided by the investment's rate of return'.
E.g. ( 39% / 33% ) - 1 divided by 8% = 18.2% / 8% = 2.3 years maximum delay (when moving from 33% to 39% and earning an 8% return)." http://www.retailinvestor.org/rrsp.html#delay

Chances are that it ''Might'' be better to take some, but probably not all the deductions, I'll end up sprinkling some in 2018-2019 for the highest tax bracket income, and keep the rest for 2021.

#### FIRE Artist

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• Location: YEG
##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #13 on: December 20, 2017, 08:23:48 AM »
Revenue Canada sent me a friendly notice that I had not claimed the income from my unregistered ETFs for 2016.  I had wrongly assumed that dividends etc. were not taxable until you sold.  Surprise # 1.  Surprise # 2 is that for non registered accounts you had to track your ACB "Adjusted Cost Base" on the accounts for when you do sell.  Is there any information on how to simply track ACB and any other advise on handling non registered taxation would be great.

Yes, there is a white paper that you can find through Canadian Couch Potato website on how to calculate and track ACB.

#### Missy B

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• Posts: 156
##### Re: Optimizing Taxes and discussion on RRSP deductions
« Reply #14 on: April 16, 2018, 04:45:25 PM »
Revenue Canada sent me a friendly notice that I had not claimed the income from my unregistered ETFs for 2016.  I had wrongly assumed that dividends etc. were not taxable until you sold.  Surprise # 1.  Surprise # 2 is that for non registered accounts you had to track your ACB "Adjusted Cost Base" on the accounts for when you do sell.  Is there any information on how to simply track ACB and any other advise on handling non registered taxation would be great.

Yes, there is a white paper that you can find through Canadian Couch Potato website on how to calculate and track ACB.

Your brokerage tracks this and sends you a summary when you sell. As long as you aren't carrying the same stock in multiple accounts, their number for ACB will be correct.