# More Deduction Room than Tax



## Hurdlerate (Dec 31, 2010)

Hi there, wondering if anybody can offer an educated opinion here. My wife and I have built up a substantial amount of RRSP deduction room - almost $144K for 2010 tax year - and we are considering our options. Obviously, one choice would be to borrow to take advantage the full amount, but I can't help but wonder if taking such a huge reduction to income in a single year doesn't come with 'strings' of some sort. Perhaps it's my natural paranoia around tax issues, but I just can't seem to find any examples on-line of folks building-up and then taking advantage of this amount of RRSP room in one fell swoop. Any opinions or advice would be greatly appreciated!


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## Cal (Jun 17, 2009)

I think it is relatively common for people to take out HELOC to invest in RRSP once they pay off their home to utilize RRSP contribution room.

Not sure if you are worried about Revenue Canada or .....

I would be more concerned about your ability to make the payments on such a loan...as you haven't really provided any other information about your personal financial situation.


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## OhGreatGuru (May 24, 2009)

DITTO. How do you propose to repay the loan, since the tax refund wll be only a fraction of the principal? Do you have that much surplus revenue? And if you do, why borrow instead of just making contributions from your existing surplus?


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## Square Root (Jan 30, 2010)

I wouldn't contribute if it reduces your taxable income below the maximum marginal tax rate bracket. Don't forget that the interest on the loan will not be deductible. Doing it all at once a little risky from a market timing point of view.


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## OptsyEagle (Nov 29, 2009)

You should also take a close look at each others personal tax brackets. It is rarely a good idea to take your taxes down to 0 in a given year. Better to take it down to the next bracket for each of 2 or maybe 3 years. It gets you more tax savings per contibuted dollar that way. I hope what I said makes sense since it definitely makes money.


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## Hurdlerate (Dec 31, 2010)

Thanks for replies everyone, especially OptsyEagly - that is an excellent option to consider for us. We already have a HELOC of $300K of which only $5K is used right now. Mortgage is paid off, but with 3 kids in daycare monthly payment on any loan is a concern; (#1 concern is around my initial thread of course. (ie. is there any small print around max. deduction in a given year)). 3 years ago, interest rate on HELOC was a negligible 2%, now it has nudged up to 4% - no longer an amount to scoff at in my opinion....
Hurdlerate


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## Eclectic12 (Oct 20, 2010)

Hurdlerate said:


> Thanks for replies everyone, especially OptsyEagly - that is an excellent option to consider for us. We already have a HELOC of $300K of which only $5K is used right now. Mortgage is paid off, but with 3 kids in daycare monthly payment on any loan is a concern; (#1 concern is around my initial thread of course. (ie. is there any small print around max. deduction in a given year)). 3 years ago, interest rate on HELOC was a negligible 2%, now it has nudged up to 4% - no longer an amount to scoff at in my opinion....
> Hurdlerate


It is important to keep the loan down to something manageable. This is probably one of several reasons that a lot of people don't contribute such large amounts in a single go.

The *fine print* that I can think if is that you have to have the room and zero income is as low as you can go. 

A couple of other reasons to consider spreading it out are:
a) with all the stimulus cash thrown around, taxes are likely to increase in the next several years so having RRSP room available may be a bigger benefit in future.
b) such an unusual amount *might* kick your name out of the computer for closer attention. I don't know this is true but with all the data mining etc. that is done today, this likely would stand out.
c) if you and your spouse have different income levels, RRSP income splitting might work well for you. Here are some links:
http://www.taxtips.ca/personaltax/incomesplitting.htm
http://www.taxpage.com/Articles/splitting.htm 

Cheers


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## MoneyGal (Apr 24, 2009)

It would be crazy to reduce your taxable income to zero, especially when you have big deductible expenses such as 3 kids in daycare. You'd lose any benefit from those deductions!

Think of the tax rates like a thermometer. And think of your thermometer measuring whether you have a high tax fever or not. 

You want to take your tax temperature down by reducing your taxable income by a few degrees: that's the most efficient use of a tax deduction. Once your "tax fever" is normal (i.e., all deductions are now decreasing your total tax payable at a lower rate than your highest, most feverish rate), you are getting less and less benefit from each dollar of tax deduction. 

You should absolutely run calculations using both your and your wife's income tax positions for the year - if you have three kids in daycare, and given that the childcare deductions must be taken of the lower-income-earning spouse's income, I suspect that there's probably very little current benefit to the lower income earning spouse in making an RRSP contribution.


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