Can You Divert RRSP Contibution to Create a Non-Registered Asset And Still Receive the Tax Deduction?
Many Canadian’s have spent years accumulating assets within their RRSPs. While this is an excellent strategy for many people, as balances increase concerns arise regarding the taxation on liquidating the RRSP during retirement as well as the affect on government programs such as Old Age Security.
Investor’s may be asking themselves some important questions, such as:
1. How could I divert my RRSP contributions to create non-registered wealth and still receive annual tax deductions in the process?
2. How could I put my RRSP to work now to build some non-registered wealth for myself for the future?
3. What can I do with my registered plan holdings now, to increase the after tax value of my legacy?
There are options available to these investors. You can use an investment loan to create a deductible interest payment, which can be paid either from the income, which is normally directed into RRSPs, or you can use withdrawals from the RRSPs themselves, or a combination of the two.
If an investor chooses to fund the investment loan from their RRSP, for every dollar of registered plan income there is now a dollar of interest expense that offsets thereby alleviating the high rates of taxation from the registered plan withdrawals. The non-registered loan portfolio should be structured tax efficiently using the preferable tax treatment of dividends and capital gains to defer, as much as possible, taxation on income and gains.
Using this strategy an investor can create a RRSP freeze, a meltdown, or a slowdown, depending on the investors situation. An RRSP freeze maintains the current value of the RRSP, diverting RRSP deposits and growth within the RRSP to a deductible interest payment. An RRSP meltdown is for an individual who would like to reduce the amount of registered assets they have, the interest payment would be a combination of RRSP deposits, growth within the RRSP and capital within the RRSP. The final option being the RRSP slowdown allows for the RRSP to continue growing while growing a non-registered investment to supplement your retirement income. Solely new deposits, leaving the RRSP growth in the plan, would fund this interest payment. It’s important to remember that while leverage investing can increase gains it can also magnify losses. Using leverage is not for all investors. It is important to sit with a professional to decide if this is appropriate for you before implementing it into your financial plan.