Tax

Your RRSP deduction was a loan. Did anyone read you the terms?

A deduction does not save the tax. It moves it, to a rate neither of you has seen yet.

You have contributed most years. The bank set it up, the deduction went on the return, and somebody picked the funds inside it.

Nobody has ever shown you what the withdrawal looks like. Not because anyone was careless. Because the withdrawal is thirty years away and it lands on somebody else's desk.

You deduct at the rate you are in when the money goes in. You pay at the rate you are in when it comes out. Two different numbers, set decades apart, by two different governments.

What it comes to

4.5 years

Of retirement income it takes to hand the deferral back, at every bracket

Not four and a half years at the bottom and twenty at the top. Four and a half, every rung. Then you keep paying, every year after that, and whatever is left in the RRIF is added to income on your final return.

What did the deferral actually buy you?

We put the arithmetic on a slide a while back because clients kept asking. Ten thousand a year for thirty-five years, growing at seven and a half percent. That gets you to $1,542,516.

Take five percent a year and leave the capital alone and you have roughly $77,126 of income.

Now pick the bracket you contributed in. At fifteen percent you deferred about $52,500 of tax across those thirty-five years. At BC's top combined rate you deferred $187,250. Big gap. Here is the part that is not.

$52,500 to $187,250

The tax deferred across 35 years, bottom rung to top

The 7.50% growth assumption is carried from an older illustration and is not a projection. 53.50% is BC's top combined marginal rate on income over roughly $265,545. The other rungs are illustrative, not BC brackets.

Why does the payback take the same four and a half years at every rung?

Because the thing that grew is the thing that pays. A larger deferral bought a larger balance, and a larger balance produces a larger income to hand it back out of. The two move together.

So the gap that looked decisive at the contribution end has closed by the withdrawal end. At every bracket on that slide, handing it back takes four and a half years of retirement income.

Then you keep paying. Every year after that. And when you are gone, whatever is left in the RRIF gets added to income on the final return, so your estate pays too.

The final return is where the RRIF meets the deemed disposition of everything else you own. Same page, same year, same rates, and nobody is left to spread it across two years.

Which sentence is your retirement plan actually built on?

Almost every retirement plan we have read is built on one. Your bracket will be lower in retirement.

Sometimes it is. If you are drawing modestly and your income drops, the plan works exactly as sold, and a good number of the plans we read do exactly that.

Then run the list of people we actually sit with. A physician with a corporation, a paid-off house, a rental, a RRIF that has to start paying at seventy-one whether they want it or not, CPP, OAS, and a spouse with their own accounts. Add it up, and the lower bracket is doing a lot of quiet work in that plan.

And that is before the harder question, which is whether rates themselves stay where they are. We do not know. Neither does anyone selling you a projection that assumes they do.

Why has nobody mentioned this?

Picture building a house where the plumber never speaks to the electrician. The painter has never met the flooring guy. And not one of them has seen what the architect drew.

Every trade does good work. Every invoice is fair. You still end up with a house nobody would choose to live in.

The bank sold you the RRSP, and their job was the contribution. Your accountant claimed the deduction, and their job was this year's return. Your advisor picked the funds inside it, and their job was the growth rate. Three people, three jobs, all done properly. Nobody's job was the withdrawal.

That gap is not a failure of anybody's work. It is a gap in whose desk the question sits on, and it is where most of the money goes.

The arithmetic

Ten thousand a year, contributed at each year end for thirty-five years. Illustrative.
The slide, line by line	Figure
Contributed at each year end	$10,000
After 35 years at 7.50%, tax deferred	$1,542,516
Retirement income at 5.00%, capital left intact	$77,126
Tax deferred if you contributed at a 15% bracket	about $52,500
Tax deferred at BC's top combined 53.50%	$187,250
Years of that income to hand it back, at every rung	4.5
Marginal bracket held flat through both the contribution years and the withdrawal years. The 7.50% growth assumption comes from an older illustration and is not a projection, a recommendation, or a statement of any result. Rungs other than 53.50% are illustrative rather than BC brackets.

This week

None of them needs us, and none of them needs an appointment.

The numbers to pull out this week

Find your notice of assessment and look at the bracket you actually deducted at. Not the top rate you assume. The real one on the return.

Take what your RRSP is likely to be worth at seventy-one and multiply it by the RRIF minimum factor for that age. That is forced income arriving whether you spend it or not.

Then list what else lands in the same years. CPP, OAS, a pension, rent, a corporation you are drawing from. If those numbers stacked together put you back near the bracket you started in, the deferral did not do what you thought.

When this is not your problem

None of this makes an RRSP a bad instrument. It is still the right answer for plenty of people, and if your bracket really will drop it does exactly what it says on the label. On a fair number of the files we read, the deferral is working and the correct advice is to keep contributing and change nothing. What the deferral is not is automatic. It is a bet on a future rate, and the only real complaint on this page is that nobody told you that you had made one. That is worth finding out at fifty-five and not at seventy-two.

Is this one actually happening on your file?

Fifteen minutes on the phone is usually enough to tell. You describe the structure, we ask questions, and nothing is presented at you. There is nothing to send in advance and nothing arrives afterwards unless you ask for it.

Book fifteen minutesWe will look at the withdrawal rather than the contribution. If the deferral is working, that is a short call.

Or call (604) 537-5444

Which year's income is your OAS deposit actually reading?

The clawback is already reading a return you filed two years ago, which sounds like a nuisance and is the most useful thing about it.

Retirement

Why does your RRSP shelter less of your income every year you succeed?

RRSP room is eighteen percent of earned income up to a dollar cap, and the cap does not move with you.

The article

Are you planning your retirement, or the CRA’s?

An RRSP deduction isn't a tax saving. It's a deferral, and almost nobody has been shown the repayment terms.

The rest of them, from the top

Sources and cautions

Assumptions behind the figures. $10,000 contributed at each year end for 35 years; 7.50% growth, tax deferred, giving $1,542,516 after 35 years; retirement income of 5.00% of capital, being $77,126 a year with capital left intact; marginal bracket held flat through both the contribution and the withdrawal years. 53.50% is BC's top combined marginal rate on income over roughly $265,545, and the other rungs are illustrative rather than BC brackets. Illustrative only, not a projection, not a recommendation, and not a statement of any result. RRIF minimum withdrawal factors are prescribed under the Income Tax Act (Canada). Rates, brackets and limits change every year, so confirm current CRA and BC figures before acting on any of this. This is general information, not tax advice. Prabhjit Virk is not a Canadian CPA. Life insurance licences are held in British Columbia, Alberta and Ontario; Quebec is pending. Provincial rates and rules quoted here are British Columbia figures unless stated. Alberta and Ontario differ.