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I have a mountain of RRSP plan room and I've recently come into a big chunk of cash. Should I use up all my RRSP room at once, or space out the top-ups over several years to get the best value on my tax returns?
Without knowing the dollar amounts involved or your specific tax bracket, it's difficult to provide any definitive guidance. But here are some general considerations.
First, before you make an RRSP contribution, you may wish to explore other potential uses for the cash. If you have debt – particularly credit-card or other high-interest debt – paying that down first would be prudent. Also, if you have unused TFSA contribution room, taking advantage of that would be another option.
If you've decided to contribute to your RRSP, it's important to understand that you can make a large lump-sum contribution now – so that all of your money will start compounding tax-free – but that you don't necessarily have to claim the entire amount as a tax deduction this year. You can spread out the deductions in future years to maximize your tax savings.
For instance, say you've made a $50,000 lump-sum RRSP contribution and you expect to have $100,000 of taxable income for 2016, which would put you at a combined federal-provincial marginal tax rate of 43.41 per cent in Ontario. If you claim $9,000 of the RRSP contribution for 2016, you'll be getting the most bang for your buck because your marginal rate of 43.41-per-cent applies all the way down to income of $90,563 (below which it drops to 37.91 per cent). The problem with claiming the entire $50,000 deduction in one shot is that you'll be saving tax at progressively lower rates.
You'll have to look at the tax tables yourself (try TaxTips.ca) to determine how to maximize your tax savings and potential refund based on your income and province. There are also RRSP calculators on the Internet that can help. But generally, when a large sum of money is involved, spreading out your deductions can be a prudent strategy.
Several readers have asked about the tax consequences of investing in Brookfield Infrastructure Partners LP (BIP.UN-T) and Brookfield Renewable Partners LP (BEP.UN-T), so today I'll briefly explain the key points Canadian investors need to know.
First, BIP and BEP (as I'll refer to them) are both Bermuda-based limited partnerships whose distributions are taxed differently from dividend-paying corporations. Depending on which units you hold, the distributions could include Canadian eligible dividends or interest, foreign dividends or interest, capital gains or return of capital. If you hold the units in a non-registered (i.e. taxable) account, you will receive a form T5013 indicating the precise breakdown of the distributions for tax purposes. You would enter these amounts into your tax software, which shouldn't be too daunting for most people.
I prefer to hold both units in my RRSP because it eliminates the hassle of reporting the distributions (and avoids tax, of course). But given that both partnerships have operations outside Canada, readers have also asked if foreign withholding taxes would apply.
Historically, Canadian investors have not been subject to any withholding tax on BEP distributions, regardless of the account type in which the units are held, said Zev Korman, senior vice-president of investor relations for BEP. Although it's possible that withholding tax may apply at some point in the future, the partnership is not anticipating any such change, he said.
As for BIP, units that a Canadian investor holds in a retirement account – such as an RRSP or RRIF – should not be subject to U.S. withholding taxes provided the requisite Internal Revenue Service form (such as a W-8BEN) is on file with their broker, said Melissa Low, vice-president, investor relations and communications with BIP.
However, BIP units held in a TFSA, RESP or non-registered account will be subject to U.S. withholding tax – which is generally 15 per cent of the portion of the distribution that was funded by a dividend from a U.S. subsidiary, she said.
"As the sources of funding for quarterly distributions made by BIP may vary significantly from year to year, the effective withholding tax rate on distributions will also change each year. However, based on the sources of funding for BIP's 2015 distributions, the effective withholding tax rate on BIP distributions held in a TFSA, RESP or a non-registered account was approximately 0.13 per cent and for units held in an RRSP, LIRA or RRIF the effective withholding tax rate was 0 per cent," Ms. Low said.
"We encourage holders to submit the appropriate IRS form to their broker (or BIP's transfer agent in the case of registered unitholders) so … the most appropriate rates of withholding can be applied to distributions," Ms. Low added.
John Heinzl