Itchy to Collapse RRSPs

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
joeclarke
Contributor
Contributor
Posts: 11
Joined: 22 May 2010 18:06

Itchy to Collapse RRSPs

Post by joeclarke »

I haven't been paying much attention to this concept, but I'm thinking the time has come.

I live off non-registered investments and have about $850k in RRSPs and LIRAs.

I'm 55 years old, have no employment income and do not contemplate having any in the future.

I can manipulate my investment income (particularly for tax purposes) reasonably well to suit my cash needs.

But those pesky RRSPs continue to grow each year and it seems like I should be using these tax-efficient years to start shrinking them before CPP and OAS and that 71st birthday comes along.

I have 16 years till 71 and could simply start pulling out $50k per year or so and rolling that into my non-registered portfolio.

Any thoughts/advice?
OhGreatGuru
Veteran Contributor
Veteran Contributor
Posts: 1361
Joined: 27 Mar 2010 16:01

Re: Itchy to Collapse RRSPs

Post by OhGreatGuru »

You are not obliged to wait until 71 to start withdrawals from RRSP or to convert part or all of an RRSP to a RRIF. (There are limits on withdrawals from LIRAs.)

It is not an uncommon strategy to advise people in the bottom income bracket to withdraw their RRSP money early. But 50K/yr plus whatever taxable income you have on your non-registered investment is going to put you at least into a middle income bracket if not higher.

You also have to crunch some numbers on long-term cash flows from all sources to see whether you can sustain this withdrawal rate and still preserve sufficient retirement income. This could be complicated as you are looking at the benefits of growth in tax-deferred accounts vs. non-tax-deferred accounts.

PS: another factor is that after age 65 income from a RRIF is eligible for the $2000 pension income amount; and is eligible for pension-splitting with a spouse.
brucecohen
Veteran Contributor
Veteran Contributor
Posts: 13310
Joined: 20 Feb 2005 16:47

Re: Itchy to Collapse RRSPs

Post by brucecohen »

A minor point. While you have to "mature" your RRSP by the end of the year in which you turn 71, the first taxable withdrawal does not have to be made for one year -- the end of the year in which you turn 72.
User avatar
Peculiar_Investor
Administrator
Administrator
Posts: 13267
Joined: 01 Mar 2005 14:52
Location: Calgary
Contact:

Re: Itchy to Collapse RRSPs

Post by Peculiar_Investor »

Last edited by Peculiar_Investor on 07 Feb 2014 07:04, edited 1 time in total.
Reason: replace old domain name with www.financialwisdomforum.org to reflect new domain name effective 19-Jan-2014
Imagefiniki, the Canadian financial wiki New editors wanted and welcomed, please help collaborate and improve the wiki.

Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Itchy to Collapse RRSPs

Post by adrian2 »

joeclarke wrote:I live off non-registered investments and have about $850k in RRSPs and LIRAs.

[...]

But those pesky RRSPs continue to grow each year
Oh, the horror! How pesky of your investments to grow instead of shrink! :P
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
iluvnascar
Veteran Contributor
Veteran Contributor
Posts: 1141
Joined: 25 Apr 2005 08:21
Location: London, Ontario

Re: Itchy to Collapse RRSPs

Post by iluvnascar »

I wouldn't even think about it. It's great "insurance" to have it sitting there. As someone indicated, you can start regular withdrawals to keep the rate of growth down......but if you're thinking about some strategy that would allow you to "maybe" keep the OAS you will receive in 10 years or so, it's a bad move.

I have RRSP's and a RRIF.....and I started RRIF withdrawals at Age 57.......and my RRSP's are continuing to grow. Other than 2008 when my RRIF withdrawals marginally exceeded my growth in assets, my RRSP's have grown every year. I expect they will continue to do so.
User avatar
patriot1
Veteran Contributor
Veteran Contributor
Posts: 4883
Joined: 28 Feb 2005 03:53

Re: Itchy to Collapse RRSPs

Post by patriot1 »

If your investment income is all or mostly dividends you may be able to make a straight withdrawl from your RRSP and come out non-taxable due to the DTC.

Definitely requires some number crunching before the fact, but a tax-free withdrawl from an RRSP is always worth taking.
joeclarke
Contributor
Contributor
Posts: 11
Joined: 22 May 2010 18:06

Re: Itchy to Collapse RRSPs

Post by joeclarke »

patriot1 wrote:If your investment income is all or mostly dividends you may be able to make a straight withdrawl from your RRSP and come out non-taxable due to the DTC.

Definitely requires some number crunching before the fact, but a tax-free withdrawl from an RRSP is always worth taking.
This seems right. I was playing around with Turbo Tax and its impossible to make a tax free withdrawal but even with my dividend income I can still make smaller withdrawals and stay around a 20% marginal rate.

Can't get to a $50k withdrawal without pushing the marginal into the 30s, but this will definitely call for some number playing before the end of the year.

Thanks for the comments.
User avatar
optionable68
Veteran Contributor
Veteran Contributor
Posts: 1919
Joined: 19 Feb 2005 18:47
Location: GTA

Re: Itchy to Collapse RRSPs

Post by optionable68 »

A great strategy.

Most people retiring early might consider tapping into their RSPs to reduce the effective tax they would otherwise pay holding a large sum when forced into a RIF. You'll need to make several calculations and estimate of where your cash flows will be coming from a) pre-65 and b)/ post 65, so find the appropriate solution that works best for your particular circumstances and puts you in the optimal tax brackets for every stage of your retirement with key ages for adjustment being 65, 67, and 71.

All the best.
3-time winner of FWF Annual Stock Market Predictions contest
User avatar
Springbok
Veteran Contributor
Veteran Contributor
Posts: 5438
Joined: 22 Mar 2005 16:47

Re: Itchy to Collapse RRSPs

Post by Springbok »

optionable68 wrote:A great strategy.
We converted some RRSP money to RRIFs early in the period between retirement and compulsory RRIF conversion.

During this period, our taxable income was low, so we each withdrew from RRIFs an amount that put us into a middle tax bracket. It wasn't $50 k though. More like $10k to $20k and it really didn't make much of a dent in the RRSPs. But still saved us a little in future taxes.

I would do it again.
Thorn
Contributor
Contributor
Posts: 49
Joined: 07 Aug 2011 15:55

Re: Itchy to Collapse RRSPs

Post by Thorn »

joeclarke, for those preparing to retire or already retired, Daryl Diamond's (Canadian) book "Your Retirement Income Blueprint" helps you plan your future income streams, and as well as bringing up a zillion other issues, explains why moving money from registered to non-registered holdings may make sense as you move into and through retirement.
fundamental
Contributor
Contributor
Posts: 511
Joined: 30 Aug 2005 11:26

Re: Itchy to Collapse RRSPs

Post by fundamental »

Springbok wrote:
optionable68 wrote:A great strategy.
We converted some RRSP money to RRIFs early in the period between retirement and compulsory RRIF conversion.

During this period, our taxable income was low, so we each withdrew from RRIFs an amount that put us into a middle tax bracket. It wasn't $50 k though. More like $10k to $20k and it really didn't make much of a dent in the RRSPs. But still saved us a little in future taxes.

I would do it again.
+1 :D
“Courage is what it takes to stand up and speak. Courage is also what it takes to sit down and listen.” - Winston Churchill
User avatar
freedom_2008
Contributor
Contributor
Posts: 841
Joined: 16 Nov 2010 17:46
Location: Victoria

Re: Itchy to Collapse RRSPs

Post by freedom_2008 »

We (mid 50s, retired) have been doing this for the past few years as well. Before age 65, withdrawal from either RRSP or RRIF is fine, if you don't need to pay RRSP withdrawal fee. Once 65, use RRIF is better (2K pension tax credit + pension income split).
squid
Contributor
Contributor
Posts: 323
Joined: 18 Jun 2008 14:31

Re: Itchy to Collapse RRSPs

Post by squid »

Total speculation on my part, but I think we will see higher marginal tax rates in many jurisdictions in the future, making RSP/RIF income even less beneficial.
User avatar
optionable68
Veteran Contributor
Veteran Contributor
Posts: 1919
Joined: 19 Feb 2005 18:47
Location: GTA

Re: Itchy to Collapse RRSPs

Post by optionable68 »

IIRC, I thought I read somewhere that CRA will treat all investment gains (including cap gains and dividends) as income for tax purposes if there is no employment income.

So, say the OP retires at 55, draws from and exhausts his RSP until 67 where he begins CPP/OAS and then tops it up with his-non registered portfolio's dividend income. Would his non-reg portfolio's dividend income and cap gains lose their tax effectiveness?
3-time winner of FWF Annual Stock Market Predictions contest
User avatar
newguy
Veteran Contributor
Veteran Contributor
Posts: 8088
Joined: 10 May 2009 18:24
Location: Montreal

Re: Itchy to Collapse RRSPs

Post by newguy »

optionable68 wrote:IIRC, I thought I read somewhere that CRA will treat all investment gains (including cap gains and dividends) as income for tax purposes if there is no employment income.
No they have a whole list of things they consider. You're safe if it's otherwise normal, and probably safe even if you trade quite a bit.

newguy
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Itchy to Collapse RRSPs

Post by adrian2 »

optionable68 wrote:IIRC, I thought I read somewhere that CRA will treat all investment gains (including cap gains and dividends) as income for tax purposes if there is no employment income.
I believe you're mistaken, and would welcome to debunk any reference to the above.
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
User avatar
optionable68
Veteran Contributor
Veteran Contributor
Posts: 1919
Joined: 19 Feb 2005 18:47
Location: GTA

Re: Itchy to Collapse RRSPs

Post by optionable68 »

adrian2 wrote:
optionable68 wrote:IIRC, I thought I read somewhere that CRA will treat all investment gains (including cap gains and dividends) as income for tax purposes if there is no employment income.
I believe you're mistaken, and would welcome to debunk any reference to the above.
I hope you are right, adrian2. I will look for the reference (if it exists) and post it here if found.
3-time winner of FWF Annual Stock Market Predictions contest
User avatar
Serdic
Contributor
Contributor
Posts: 185
Joined: 25 Nov 2008 21:39
Location: Neither here nor there.

Re: Itchy to Collapse RRSPs

Post by Serdic »

The CRA applies a number of tests based on the fact situation which are laid out in IT-479R:Transactions in Securities. Being employed elsewhere is not specifically one of the tests as laid out in Para 10 or 11.
10. Where the whole course of conduct indicates that

(a) in security transactions the taxpayer is disposing of securities in a way capable of producing gains and with that object in view, and

(b) the transactions are of the same kind and carried on in the same way as those of a trader or dealer in securities. the proceeds of sale will normally be considered to be income from a business and, therefore, on income account.

11. Some of the factors to be considered in ascertaining whether the taxpayer's course of conduct indicates the carrying on of a business are as follows:

(a) frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties,

(b) period of ownership - securities are usually owned only for a short period of time,

(c) knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets,

(d) security transactions form a part of a taxpayer's ordinary business,

(e) time spent - a substantial part of the taxpayer's time is spent studying the securities markets and investigating potential purchases,

(f) financing - security purchases are financed primarily on margin or by some other form of debt,

(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and

(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type.
They'll be able to determine part of your history from the T5008 which is filed with the CRA by your broker. In and of itself, that won't lead to the inclusion of gains on trading in your income, but it will probably raise eyebrows if you have 2,000 trades in a year as opposed to 100. Even a high number of trades and short periods of ownership could be explained as part of rebalancing strategy.

As to whether it's part of your normal business, it would depend on what else you were doing with your time, and how you supported yourself. The CRA would take a look at all forms of income and their sources, which ties into how the purchases are finananced.

One item to note is that gains/losses on shorting are considered to be on account of income as listed in Para 18.
18. The gain or loss on the "short sale" of shares is considered to be on income account.
So, if you're holding long positions in a cash based account, probably be able to show a pattern of facts which leads to income being the result of capital gains, rather than being taxed as business income. If you're shorting stocks, regardless of employment, and the CRA takes an interest in you, you'll have a harder time showing that your investment activities are not "Adventure or Concern in the Nature of Trade" as laid out in IT-459.

edit to add:

Dividends are always dividends, and they are always taxed as income, but you get the benefit of the dividend tax credit to help out with their tax effectiveness. In the case of using the sale of securities to top up your CPP/OAS income, you're probably a long history of stock holding at that point, and could show a pattern of facts that supports the income being on account of capital.

Cheers,
-Serdic
End Transmission.
User avatar
Bylo Selhi
Veteran Contributor
Veteran Contributor
Posts: 29493
Joined: 16 Feb 2005 10:36
Location: Waterloo, ON
Contact:

Re: Itchy to Collapse RRSPs

Post by Bylo Selhi »

optionable68 wrote:IIRC, I thought I read somewhere that CRA will treat all investment gains (including cap gains and dividends) as income for tax purposes if there is no employment income.
A simple thought experiment: Why is it, if that criterion alone was enough to trigger the loss of CG deductions and DTC credits, that there aren't 100s of 1,000s of retirees marching in the streets in protest? :lol:
Sedulously eschew obfuscatory hyperverbosity and prolixity.
User avatar
patriot1
Veteran Contributor
Veteran Contributor
Posts: 4883
Joined: 28 Feb 2005 03:53

Re: Itchy to Collapse RRSPs

Post by patriot1 »

optionable68 wrote:IIRC, I thought I read somewhere that CRA will treat all investment gains (including cap gains and dividends) as income for tax purposes if there is no employment income.
They sure haven't for me.

Certainly if you appear to be a professional trader they may treat cap gains as income. But dividends are always dividends.
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Itchy to Collapse RRSPs

Post by adrian2 »

Serdic wrote:One item to note is that gains/losses on shorting are considered to be on account of income as listed in Para 18.
18. The gain or loss on the "short sale" of shares is considered to be on income account.
Except for short sales of Canadian securities after you've taken the election under subsection 39(4) mentioned in the same link you've quoted.
CRA wrote:2. Where a taxpayer has disposed of a Canadian security (see 6 below) in a taxation year, subsection 39(4) provides that the taxpayer may elect in the return of income for that year that

(a) every Canadian security owned by the taxpayer in that year or any subsequent year is deemed to be capital property owned in those years, and

(b) every disposition of every Canadian security owned by the taxpayer in that and any subsequent year is deemed to be a disposition of a capital property.

The effect of such an election is that all Canadian security dispositions in the year of election and all subsequent years, subject to the comments in 3 and 4 below, must be given capital gain or loss treatment and the election cannot be rescinded.

[...]

6. The election under subsection 39(4) is applicable only to "Canadian securities". This term is defined in subsection 39(6) as a security (other than a prescribed security) that is a share of the capital stock of a corporation resident in Canada, a unit of a mutual fund trust (applicable to 1979 and subsequent taxation years) or a bond, debenture, bill, note, mortgage, hypothec or a similar obligation issued by a person resident in Canada. A Canadian security includes such a security that is sold short. The term "a prescribed security" is defined by section 6200 of the Regulations.
I don't see any a priori downside in taking the election.
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
User avatar
eezee
Veteran Contributor
Veteran Contributor
Posts: 2082
Joined: 28 Feb 2005 09:44
Location: BURLINGTON , ON

Re: Itchy to Collapse RRSPs

Post by eezee »

Bylo Selhi wrote:
optionable68 wrote:IIRC, I thought I read somewhere that CRA will treat all investment gains (including cap gains and dividends) as income for tax purposes if there is no employment income.
A simple thought experiment: Why is it, if that criterion alone was enough to trigger the loss of CG deductions and DTC credits, that there aren't 100s of 1,000s of retirees marching in the streets in protest? :lol:
There is no room on the streets, it's full of 'idle no mores' :evil:
I am going to live forever .... so far so good.
User avatar
Serdic
Contributor
Contributor
Posts: 185
Joined: 25 Nov 2008 21:39
Location: Neither here nor there.

Re: Itchy to Collapse RRSPs

Post by Serdic »

adrian2 wrote:Except for short sales of Canadian securities after you've taken the election under subsection 39(4) mentioned in the same link you've quoted.
Right. I missed that part.

Cheers,
-Serdic
End Transmission.
User avatar
optionable68
Veteran Contributor
Veteran Contributor
Posts: 1919
Joined: 19 Feb 2005 18:47
Location: GTA

Re: Itchy to Collapse RRSPs

Post by optionable68 »

Bylo Selhi wrote:
optionable68 wrote:IIRC, I thought I read somewhere that CRA will treat all investment gains (including cap gains and dividends) as income for tax purposes if there is no employment income.
A simple thought experiment: Why is it, if that criterion alone was enough to trigger the loss of CG deductions and DTC credits, that there aren't 100s of 1,000s of retirees marching in the streets in protest? :lol:
Understood Bylo. Perhaps if investment gains exceed all pension income, CPP, OAS, etc combined (i.e. investment gains represent > 50% of total income) could be the determining factor. I suspect most retirees don't fall into that camp. Regardless, I clearly have to do some more research on this.
3-time winner of FWF Annual Stock Market Predictions contest
Post Reply