Should you borrow to make RRSP deadline?
By Gordon Powers, Sympatico / MSN Finance
With interest rates low and likely headed lower, does it make sense to borrow for RRSP purposes? Maybe. It certainly gets more attractive as your tax bracket increases – here’s a simplified scenario.
Suppose, for example, that you’ve got about $62,000 in taxable income and you’re managing to put away $500 each month towards your RRSP. For the year, you can expect to get a RRSP receipt for that $6,000, which will trigger about a $2,000 tax refund, depending on the province you live in.
Instead, consider borrowing about $9,500 to fund your contribution, getting your receipt as quickly as possible. Some institutions are offering short-term RRSP loans with discounted rates right now, so shop around.
Then, contact the Canada Revenue Agency and ask them for a confirmation letter allowing your employer to reduce your source deductions to reflect this contribution. You can do this by filling out CRA’s Form T1213.
Depending on how quickly your employer reacts, this will translate into roughly an extra $300 per month in your pay cheque to help make the payment on your loan, which is going to be something like $800 per month. $500 of that will come from you as it would have anyway and the remainder will come from the boost you’ll get in take-home pay each month.
This way, instead of steadily putting $6,000 into an RRSP over the course of a year, you’ll actually have $9,500 working for you right from the beginning. Once you get started, the result is an extra year of tax-free compounding, without any significant out-of-pocket expense, assuming the RRSP return is within shouting distance of the loan rate.
Keep in mind though that a lower tax bracket will mean a smaller refund – and therefore higher interest costs – and that RRSP values can fluctuate, unless you stick with GICs.