Invesco Fundamentals – Page 29

December 31 & Spousal RRSPs: Why the big rush?

One of the most common strategies for reducing a couple’s tax bill in retirement is for a high income earner to have made contributions to a lower income spouse’s RRSP during working years. Then in retirement, a portion of the couple’s RRIF income may be shifted to the spouse’s presumed lower tax bracket at that time.

At the dawn of the new era of pension income splitting, the question may arise whether spousal RRSPs are still necessary. The pension splitting rules allow up to 50% of eligible pension income to be allocated from a pensioner to a spouse, simply by making a joint election in the tax return for the year the income is drawn. Still, there remain some clear benefits to continuing to contribute to spousal RRSPs, in particular:

For a pensioner under age 65, “eligible pension income” generally must originate from a registered pension plan. No minimum age applies to spousal RRSP/RRIF withdrawals.

The maximum annual amount that can be split is 50% of eligible pension income. There is no maximum withdrawal limit for a spousal RRSP/RRIF.

Indeed even prior to retirement, spousal RRSPs may serve a valuable strategic purpose in reducing a couple’s tax bill, though within certain limits.

In order to prevent an immediate current year shift of income from high to low tax rate spouse, an anti-abuse rule attributes withdrawals from a spousal RRSP back to the contributor spouse. The rule applies to withdrawals made within 3 calendar years of contribution. For example, if a contribution is made in 2008, the first year for non-attributable withdrawals will be 2011.

Now, here is where December 31 becomes a critical date ––

It is the actual date of contribution that is relevant, not the tax reporting year when the contribution is claimed and deducted by the contributor. Specifically, contributions made in the first 60 days of 2009 may be deductible in determining the contributor’s 2008 income, but will push the non-attribution withdrawal year out to 2012.

Before the clock strikes 12 for this taxation year, you may wish to contact appropriate spouse-Clients to see whether they want to make those contributions now, rather than waiting until the new year. For the sake of a few days now, they could be thanking you for allowing them to take tax-reduced income a full year earlier.

Time to pull the trigger? Making use of capital losses

In the midst of the current market turmoil you’ve continued to counsel your clients to stay invested for the long term because even these conditions will eventually pass.

Still you know, market downturns can provide planning opportunities to take advantage of losses and offset other capital gains.

As a result of fund distributions due to internal rebalancing or your client’s own decision to dispose of some investments, capital gains may have been realized in the current year. Those gains could be neutralized by making dispositions designed to crystallize sufficient offsetting capital losses, with any excess carried back to recover capital gains related taxes paid in the last three years, or perhaps set the stage to carry forward in anticipation of future gains.

But what happened to staying invested for the long term? So long as the business fundamentals underlying your portfolio construction remain valid, these broader market movements should not completely invalidate well considered past choices.

If you re-acquire those same funds within 30 days though, those capital losses cannot offset the gains due to the superficial loss rules. Particularly with the wild market swings we’ve experienced, stepping out of the market for 24 hours – let alone 30 days – may mean missing a large part of the recovery.

Part of the answer may be to employ fund switches not exposed to the superficial loss rules. Specifically, if you are disposing of mutual fund trust units, you could immediately acquire shares of a mutual fund corporation with the same or similar holdings. And it works the other way too if you want to dispose of fund shares to acquire fund units.

By the way, be ready to counsel your clients on what to do with the newfound cash recovered from those past paid taxes.

Stuck in the middle with … : Advising on joint accounts

You just picked up a voicemail message that an ill client is on the way to your office to add an adult child as joint owner of an investment account.

Your mind starts racing: What does the client intend, and will that intention be upheld should there be a later estate challenge?

The critical principle in the Supreme Court of Canada’s Pecore decision (May, 2007) is that there is a presumption in such circumstances that it is not a beneficial transfer, though the transferee is welcome to prove otherwise. But how?

Tarling is an Ontario case from this past July that applied the Pecore principle. At trial, the financial advisor was called to testify about his dealings with the deceased father, advising the court that the elderly Mr.Tarling stated specifically that he wanted his investments to pass to this chosen son. On all the facts, the judge determined that that was indeed the intention and result of the transaction.

Still, a joint ownership transfer may be easy to complete, but often not so simple in its results. Is your client aware of all the potential tax and legal implications? And beyond that, will your client enunciate in as clear a manner as Mr.Tarling, so that you too would be comfortable giving testimony in court should you be called upon?

In the post-Pecore era, you need to be vigilant with a written log of all client communications, ideally with client sign-off of the issues you raise, and possibly including a direction that the client may only obtain tax and legal advice from appropriate licensed professionals.

Your client just arrived. Are you ready?