| a { c ‘Business TheReview Wednesday, January 30, 1991 C9 Forget the seven-year limit of the new RRSP carry-forward rule. Ottawa has already changed the limit. That means many people will be able to take as long as they want to make up any RRSP contri- butions they miss. The new rule, part of the recent pension and registered retirement savings plan reform, takes effect for this year (for the 1991 tax year). “Originally, you would have had to keep track each year when you didn’t use your contribution room — that is, when you didn’t put into your RRSP the amount you could have,” said Don Smith, senior vice-president of The Alexander Consulting Group, who acted as a @Pnsuliant to the federal govern- | PTE MOF fase | | o | ment on the pension and RRSP reform. “After seven years, 1f you didn’t make the catch-up contribution for year one, you lost it, and so on.” But now you may be able to camy forward unused RRSP con- tribution room for more than seven years, depending on your RRSP contributions and whether you belong to a pension plan. The seven-year limit comes into effect only if during the seven years you make no RRSP contr- butions, don’t belong to a pension plan and have relatively high eamed income. “Each year, Revenue Canada will accumulate your unused RRSP room — that is, the contri- butions you could have made that year but didn’t,” said Smith. “Starting in 1998, Revenue Canada will calculate 18 per cent of your earnings over the past seven years and the maximum RRSP contributions limits for those same years. “As long as your unused RRSP contribution room is less than those maximums, you may carry forward that amount indefinitely, and make catchup contributions any time in the future.” Smith said young people, for example, could make no RRSP contributions and instead, direct their savings toward buying a home or paying off a mortgage. People in middle age could then Start making regular RRSP contri- butions, using excess savings to pay children’s education costs or buy a summer place, for example. Once these expenses ended, then people could make their cat- chup RRSP contributions. “At that point in their lives they would probably be in the top tax bracket and so save the most tax,” Smith said. However, he warned, “you must also look at the tax-sheltered inv- estment growth you lose if you build up your RRSP later rather than earlier.” The book Pensions and Retire- ment Income Planning 90-91, by Peat Marwick Stevenson & Kel- logg (CCH Canadian, $26.95), points Out you can also use the carry-forward rule in other ways. “The taxpayer. could, for exam- ple, make an RRSP contribution in 1991 (for the 1991 tax year) but Grenby answers his reader’s mail el_et me start the New Year right @. dig in to the pile of reader mail on my desk to dig out answers to questions on capital gains, pension income credit, severance pay, RRSPs, RESPs ... “1 have a capital loss on one of my investments. How do J use it?” — DG. : You may claim a el loss only against capital gains. You may no longer claim up to $2,000 of the loss against other income as you could before 1985. If you have no capital gains in the current tax year against which ___ to claim the loss, you may go back @) to three tax years to apply the loss against capital gains you real- ized in those years. If that still doesn’t use up the loss, then you may carry forward the loss indefinitely, to apply against capital gains in future - years. “Tf you have the option of claiming either the capital gains >—exemption or applying net capital : “loss carry-forwards 1o eliminate or reduce realized net capital gains, consider claiming the exemption, since the loss carry-forward rules may outlive the exemption,” advises Emst & Young, chartered accountants, in Managing Your @ersonal Taxes — An Ongoing Process. Working for you____ 4452A West Saanich Rd (Royal Oak Shopping Centre) | Please call 479-6777 In other words, use up your capital gains exemption while it’s sull around. “What do you need to do to take advantage of the pension income credit?” — J.O, You may claim this credit on the first $1,000 of private pension income — typically the monthly pension you receive from a former employer (but not CPP or OAS). If you have no private pension, Starting at age 65 you may create your Own private pension income: (a) convert enough of your RRSP to an annuity or RRIF to produce $1,000 income a year, or (b) use non-RRSP funds to buy a qualify- ing annuity whose interest income provides the $1,000 you need. Most life insurance companies and many other financial institutions offer such qualifying annuities. Look into creating this pension income as early as possible in the year you turn 65. “When I was laid off work, I took legal action which resulted in a larger severance package. Can I claim my legal fees as a tax deduction?” — R.N. Yes but only against the taxable part of the severance pay. You mentioned in your letter that you were advised to roll over all your severance pay to your RRSP. That means while you will TERRY HUBERTS MLA SAANICH & THE ISLANDS declare the severance pay on one part of your retum, you will then claim an offsetting deduction for your RRSP rollover contribution, leaving no taxable severance pay. In this case, you would have no taxable severance pay against which to claim your legal expenses. So, for example, if you received $45,000 severance pay and had $5,000 legal expenses, you should roll over only $40,000 to your RRSP even if you were eligible to roll over all $45,000. Then you would claim the $5,000 legal expenses against the remaining $5,000 taxable severance pay. not claim the deduction on the 1991 tax return. So the RRSP contribution room carried forward into 1992 would remain intact. “This feature is beneficial to individuals who have a low taxable income in a particular year but have enough casii to make an RRSP contribution.” In other words, if you are in the lowest tax bracket now and have the money, contribute as soon as possible — but delay claiming the deduction if you expect to be in a higher tax bracket in the future when the. deduction will save you more tax. However, first check if claiming the deduction now would lower your net income and give you higher federal tax credits. ’ Also, warns the book, there are other potential disadvantages to this strategy: There is no guarantee you will be in a higher tax bracket in the future. What happens if you become disabled or unemployed, for example? You might be hit by the Alterna- tive Minimum Tax. You must add back all RRSP deductions for the AMT calculation, and if you have to pay the AMT, that could negate any other tax savings. If a past service pension adjust- ment arises before you claim the RRSP deduction, that could use up all the RRSP contribution room so you wouldn’t be able to claim the un-deducted RRSP contribution made earlier. : Also make sure you don’t inad- vertently end up over-contributing above the $8,000 limit and so incur a penalty. Carry forward unused RRSP contributions to next year Here’s another tip: If you have less than $7,000 of private pension income a year and plan to use the special $6,000-a-year spousal RRSP rollover rule in effect through 1994, consider leaving out $1,000 a year once you turn 60 so you can claim the $1,000 pension income credit which will save you about $270 tax. A limited amount of tickets remain available for Mike Grenby’s Money Magic Show ai Sanscha Hall Feb. II. Call The Review at 656-1151 to reserve now and avoid disappointment. 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