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RRSP


The most important way for you to reduce your tax burden today is by contributing to your RRSP.

RRSP Loan/Line of Credit - Borrowing to Save

An RRSP line of credit is an easy and low-cost way to contribute to an RRSP and take advantage of tax deduction and growth of capital in a tax-deferred environment. Most of all, RRSP's contribute to a higher retirement income.

If you are among the 58% of Canadians who do not make RRSP contributions each year, you may have thousands of dollars of unused RRSP contribution room that has been carried forward over the years. It may seem like a tremendous challenge to catch up on your RRSP. But the potential tax savings and refunds at stake certainly make the challenge worthwhile. Unless you have just walked into a windfall, or you have funds sitting in a non-registered account, a manageable way to catch up involves taking out an RRSP loan.

By making a contribution to your current and unused RRSP allowance, you will make a significant reduction in the amount of income tax that you are required to pay. In most cases, this will result in a tax refund. This refund is money that you would have otherwise given to the government. If for example your marginal tax rate is 50%, a $5,000 RRSP investment would result in a tax reduction of $2500.

A further $10,000 "catch-up" contribution to your RRSP investment would save you a further $5,000 in tax.

Although interest paid on an RRSP loan is not tax deductible, these loans are generally available at rates as low as prime. By borrowing money at such a low cost, you maximize your net earnings on your investment. It is advised that you structure your loan so that you can pay it off as soon as possible. By using your tax refund (that will now be larger because of your RRSP) to pay down your loan, you can shorten the payback period significantly.

Who should use the RRSP loan/line of credit

The RRSP line of credit is intended for two types of people: those who do not have the funds they need to make their annual RRSP contribution, and those who want to make a contribution with their unused RRSP contribution.

More about the RRSP line of credit

The RRSP loan/line of credit is a loan granted to make a contribution to an RRSP contract.

The RRSP loan/line of credit interest rate varies according to the amount of the line of credit or the monthly reimbursement ratio chosen. The interest is charged to the client's account at the end of each month.

The required minimum monthly repayment equals 4% of the initial balance of the RRSP line of credit. The repayment is adjusted following a lump-sum repayment or an increase in the line of credit.

Summary analyses of credit are available for all amounts over $5,000.
Proof of unused RRSP contributions may be required.
The minimum line of credit is $1,000
The maximum line of credit is $25,00

Advantages to the RRSP loan/line of credit

Possibility of deferring first payment by 120 days

Rapid and easy way to contribute to an RRSP without the required funds in hand

Monthly repayments can be adapted to your budget (minimum 4%)

Line of credit can be repaid at any time

Possibility of increasing the line of credit to make additional RRSP contributions

 

Availability

Contributions to investment funds must respect the following distribution:

Maximum of 75% in U.S. and international equity and specialty fund categories.

Minimum of 25% in others fund categories.

 

Using the RRSP line of credit



The line of credit can only be used to make a deposit into an individual RRSP (the borrower's RRSP or spouse's RRSP), regardless of the beneficiary's revocable or irrevocable status. For a borrower who wants to deposit part of their contribution into their own RRSP contract and the remainder into their spouse's contract, or to deposit only to their spouse's RRSP contract, the spouse's signature as co-borrower is required on the authorized RRSP line of credit.

120-day option

You can defer your first line of credit loan payment by 120 days. This option is only available to clients who already have a minimum of $500 accumulated in their RRSP. Interest will accrue during this period on the amount borrowed.

Interest Rates

Interest rates for RRSP loans/lines of credit are available on the weekly Interest Rate Schedule. Interest is charged at the end of each month.

For lines under $5,000

The interest rate corresponds to Prime + 1.5%. The minimum monthly repayment is equal to 4% of the amount borrowed through the line of credit.

For lines of $5,000 and over

The interest rate varies according to the monthly reimbursement ratio you choose on the amount borrowed through the line.

Ratio (reimbursement/line) interest rate

  • 4% to 5.99%: Prime + 0.5%

  • 6% and over: Prime

To receive a lump-sum reimbursement (minimum $500), to increase the line or to change the monthly repayment, the interest rate is adjusted according to the monthly reimbursement ratio on the balance of the line after the change.

Maxed out your RRSP's? There is a solution.

Few investment vehicles other than conventional RRSP's shelter your savings from income tax while maximizing returns. If you're already putting your maximum into RRSP's, or you cannot contribute more, universal life insurance offers another way to enjoy tax-deferral benefits while maintaining access to equity markets.