September 1999

The Perfect
Complement to RRSPs

© Talbot Stevens

For many good reasons, RRSPs form the foundation of most Canadians' retirement savings. But like any investment strategy, they are not perfect. For many people, particularly those with good pension plans, the benefits of RRSPs are short-lived as they only have a few thousand dollars of contribution room available.

This leaves many Canadians asking what other tax-deduction investment opportunities exist beyond RRSPs.

Equity investments that produce mostly capital gains provide tax deferral benefits similar to RRSPs because tax is not due on capital gains until they are realized when you, or your fund manager, sell.

When it comes time to cash in, a dollar of unregistered equity investments will produce much more after-tax than $1 of RRSPs because RRSPs are 100% taxable. With unregistered capital gains, you only pay tax on 50% of the gains. In addition, many investors overlook the fact that you get your original investment, technically called the Adjusted Cost Base or ACB, back tax-free.

So unregistered equity funds deliver tax deferral that is almost as good as RRSPs, and face much less tax during withdrawal.

But let's be honest and admit that Canadians don't invest in RRSPs for the real benefit of tax deferral to increase our retirement savings. Living in one of the most taxed countries in the world, the number one reason we use RRSPs is to get the tax deduction to reduce taxes.

What if we could get the benefits of capital gains being taxed later and taxed less, and get a tax deduction in the process? Would the millions of Canadians looking for tax- saving investment opportunities beyond RRSPs be eager for such an alternative?

As more are learning everyday, getting a tax deduction with non-RRSP investments is generally possible if you simply borrow to buy the non-registered investment. As long as the investment has the potential to produce income, the interest expense is 100% tax deductible — the same as an RRSP contribution.

Those who have followed my research into conservative leverage over the last 5 years know that if understood and implemented properly, leverage would produce significantly more than RRSPs based on average historical returns.

Regardless of which strategy is better for any individual's unique situation, it is best to consider a combination RRSP and leverage plan, where leverage is a complement to RRSPs.

Investing in RRSPs and using the tax deductions to finance an investment loan, combines two of the most powerful and tax-efficient investment strategies available to produce a balanced plan that is diversified by asset class, geographically, and by strategy to protect against the political risk of governments changing the rules.

More on benefits of this and other combination plan strategies next month.

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