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  • richardmkiernicki

The Unconventional Conventional, Part IX

Updated: Aug 6, 2019

After last weeks column, which strayed away from the RSP bashing of previous weeks and even offered a mild touch of support, it is time to return to the game of slandering our famous Canadian retirement scheme, which I must say, I really do enjoy. Thanks for your comments to date and please, keep them coming in. Before I begin though, and in all honesty, I thought that there would have been a little rise from my readers this past week when I mentioned increasing the tax benefit of RSP write-offs for the financially challenged and decreasing the tax benefit for those who are in a better position to make sizeable contributions. Instead of the wealthy contributor being allowed the tax savings based on their marginal tax rate, I would suggest that the tax saving be reduced to 10% of the contribution. On the other side of the equation, we could also lobby the government to increase the tax savings to let’s say 90% for those who are struggling to save for their future.

I mean really, the system is set up to help those who can afford to make an RSP deposit and not to assist those that cannot. If you receive a 50% refund of your contribution because you have a significant income, it only costs you half of your deposit to make the full RSP contribution. The lower income earner pays much more net income to save for an RSP as his tax savings may only be 17% of the amount contributed. The out of pocket cost is 83% of the total contribution which is 33% more than his affluent counterpart. The lower income earner has to set aside more net dollars to save for retirement. If the lower tax payer received a higher tax refund, it may encourage them to save more money for their retirement and become less dependant. At the end of the day, it is the high income earners taxes that pay for most government social services anyway. Think about that for a moment.

And I just have to bring to your attention last Thursday’s article by David Hodges in MoneySense magazine which features comments made by Talbot Stevens who “specializes in the innovation and delivery of valuable financial strategies and behavioural solutions that benefit the financial industry and its clients” goes on to do a little RSP bashing himself in an

article titled “Surprising Truths About Your RRSP”. Talbot points out the misconceptions that Canadians have regarding the taxation of RSP’s and is a must read. I strongly agree.

RSP’s can defer taxes for years according to Stevens, which does not mean avoiding taxes forever. Sooner or later, you will pay the tax on your mandatory withdrawals. And no matter what investments you hold in your RSP, you will be taxed on each dollar as if it was ordinary income. You may have invested for capital growth and/or for Canadian dividend income, which if held outside your RSP would provide a preferential income tax treatment, however any and all types of income from an RSP is 100% fully taxable.

Copyright 2013 Richard M. Kiernicki. All Rights Reserved.

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