A registered retirement savings plan (RRSP) is one of the most secure tax shelters available to Canadians. An RRSP loan allows you to top up your current RRSP contribution or to catch up on unused deductions from previous years.
How It Works
Let us assume you have $10,000 of unused RRSP contribution. If your marginal tax rate is 30% you would have had to pay $3,000 in taxes on this amount. By using an RRSP loan to invest the $10,000 you would receive a tax refund of $3,000.
At a 3.00% interest rate, if you paid the loan off in one year the maximum interest charge you would pay in the year is $300. If you use the tax refund to pay down the initial loan, you would have $7,000 outstanding, which would decrease your total loan payment for the year to less than $210.
The $10,000 that you would invest in an RRSP eligible investment could be making you money through the benefit of compounding or capital appreciation, depending on the type of investment you choose.
Plan Ahead and Automate your Contributions
Rather than having to take out a loan for next tax season, talk to your branch about initiating an automatic payroll deposit. This way, you will not have to take out an RRSP Loan next year; after all, it is a loan which you pay interest on.