# Trying to spread income over 2 years



## csplice (Jun 20, 2009)

Here is a scenario I would love to hear opinions on...

Lets say I made $100K in 2011 and am also fairly certain that my income for 2012 will be at or close to $0.

My thought is to deposit $50K into an RRSP account before the end of February. Then through out 2012 withdraw money from my RRSP account in increments of less than $5K as needed.

For the sake of argument lets say that half of the $50K RRSP contribution is financed at 3.50%

Have I just significantly reduce the taxes I would have to pay?


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## OhGreatGuru (May 24, 2009)

When do you propose to pay the $25k loan back?
How much do you need to withdraw to live on in 2012, over and above your loan repayments?
Don't forget you will be taxed on the withdrawals you to make the loan payments, so you have to withdraw more than the loan payment amount(s).

PS. This will sound harsh, but if you can't work this out on a spreadsheet on your own, you probably shouldn't be trying it. Relying on anonymous forum advice to do your tax planning is pretty risky.

PPS. What is the value/cost to you of the permanent loss of RRSP room for your future retirement plans?

PPPS: Is this a homework question?


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## csplice (Jun 20, 2009)

No offence taken.
The homework had already been done (I used an online tax calculator instead of creating a spreadsheet)
The origional scenario I posted is not exactly like my reality.
Most of the contributions have already been made through the year.
Only a small top up loan will be needed to reach the correct 50-50 income split.
The tax return will more than cover the loan with enough to live on for a while.
In reality the whole contribution amount will likely not need to be withdrawn in 2012.

I am aware that you should keep your withdrawals below 5k or 10K to limit the amount of taxes withheld.

I posted to get feed back on factors I might be missing (I guess I wasn't that clear on that point). This is where your "PPS" comment comes in, I did not consider the loss of contribution room. It will be added to the debate here at home.

Thanks for your reply.


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## csplice (Jun 20, 2009)

So the tax savings would be a little over $9K.

Some other factors as mentioned above are the loss of contribution room.

And the fact that if i have no income for 2012 I would become a dependant of my spouse which would generate certain tax savings as well.

At first glance the $9K in tax savings seemed like a good idea. I have not dismissed the idea totally yet but it is looking less and less appealing when you consider the long term and houshold factors into the equasion.


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## natalie_d (Nov 25, 2009)

Pretty sure the CRA will not allow you to do this, if they catch you.

This falls under general anti-avoidance rule (GAAR). You're using RRSP to shift taxable income from one year to another, which is not the intended use of RRSP.


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## Square Root (Jan 30, 2010)

natalie_d said:


> Pretty sure the CRA will not allow you to do this, if they catch you.
> 
> This falls under general anti-avoidance rule (GAAR). You're using RRSP to shift taxable income from one year to another, which is not the intended use of RRSP.


I'm pretty sure GAAR would not be used for this kind of thing.


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## MoneyGal (Apr 24, 2009)

People are making weird tax claims on this forum lately. The intention of RRSPs is precisely to shift taxable income from one year to another.


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## csplice (Jun 20, 2009)

I agree 100% MoneyGal.

I will be talking to an accountant at some point this week to run over all of the short an long term effects of my plan.

Thanks again to all posters


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## MoneyGal (Apr 24, 2009)

Example from my own life: I withdrew funds from my RRSP under the Home Buyer's Program. Those funds were contributed during high-income years and deferred tax at more than 40%. 

I stayed home with kids for a few years and had no income (this was before the advent of the UCCB). So I didn't pay back the required amount into RRSPs for those years, because (with no other income) the effects of the inclusion of that income meant I paid no tax on the withdrawals. 

This concept is known as tax arbitrage. RRSPs are intended to work as a form of tax arbitrage. They aren't necessarily "for retirement" - the RRSP just provides a way to remove income from taxation and defer taxation on growth in a tax-deferred bucket. 

RRSPs are *called* Registered Retirement Savings Accounts - but there's no requirement to use this mechanism to fund retirement. You can take out funds at any time (subject to specific rules if you are removing funds under a program like the HBP), and the tax rules for the withdrawn income are very clear. There's no avoidance transaction here.


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## csplice (Jun 20, 2009)

Yeah the only difference for me is I will not be using the HBP and there for I will be losing the contribution room forever.


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## Square Root (Jan 30, 2010)

totally agree with MG. I did some income shifting using RSP's when I was younger. No issues.


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> Example from my own life: I withdrew funds from my RRSP under the Home Buyer's Program. Those funds were contributed during high-income years and deferred tax at more than 40%.
> 
> I stayed home with kids for a few years and had no income (this was before the advent of the UCCB). So I didn't pay back the required amount into RRSPs for those years, because (with no other income) the effects of the inclusion of that income meant I paid no tax on the withdrawals.


My wife is doing the exact same thing except that the money was borrowed from the RRSP under the home buyers plan, not the LLP.


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## OhGreatGuru (May 24, 2009)

Imagine how unnecesary this would all be if CRA (and the government) would move into the real world and allow some form of income averaging.


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## natalie_d (Nov 25, 2009)

I was wondering the same question as the OP. I was trying to shift income because I had co-op terms (income) in one year, and the following year I was a full-time student. I asked a tax prof at my university and he said it would fall under GAAR.

I just googled GAAR, and here's the application critieria (from a BDO website):

1. There must be a tax benefit from a transaction or series of transactions. Virtually all tax planning results in a tax benefit as any tax deduction is considered to be a benefit and as such, this is usually an easy requirement to meet.

2. The transaction, or any transactions in a series of transactions, is an avoidance transaction. A transaction is an avoidance transaction if the primary purpose of the transaction is to obtain a tax benefit. In most tax plans, which usually involve a number of transactions, it is common for at least one transaction to be an avoidance transaction, even if there is a good overall non-tax reason for undertaking the transactions.

3. There is abusive tax avoidance. What this means is that the tax benefit obtained by the taxpayer is not consistent with the object, spirit or purpose of the tax rules relied upon by the taxpayer to achieve the tax savings that the transactions yield. This requirement is proving to be a very difficult concept for the courts to apply. 


So I think OP's proposed transaction will not be allowed, if CRA finds out.


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## Potato (Apr 3, 2009)

#3 is where the RRSP income-averaging plan isn't avoidance: it's perfectly consistent with the purpose of the tax rules.

OP: one potential issue with the plan is it's only so good for so long. If you have a bunch of RRSP room accumulated (e.g., the $50k in your example) then you can do this little shuffle and shift some income. But then that contribution room is used up, and if you have another pair of on/off years, you'll only have the 18% of your income to shift.


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## MoneyGal (Apr 24, 2009)

What the esteemed potato said. 

There is no abusive tax avoidance. RRSPs were set up precisely to avoid tax in exactly the way the OP is proposing (albeit it is usually contemplated that people defer for longer than one year. At the same time, there is no restriction on making an RRSP contribution in the year before retirement, and then retiring with much lower income in an immediately following year - which is essentially what the OP is proposing exactly). 

What is it with the finger-wagging invoking GAAR? 

Here's the CRA information bulletin on GAAR. Note the kind of abusive transactions it contemplates - nothing to do with RRSPs. http://www.cra-arc.gc.ca/E/pub/tp/ic88-2s1/ic88-2s1-e.txt

And how many cases has CRA won under GAAR? Two. They've had nothing to do with RRSPs. http://www.taxpage.com/Articles/taxart19.htm


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## Four Pillars (Apr 5, 2009)

That said, I think it would be prudent to just avoid RRSPs and for that matter, TFSAs, RESPs (burn my book) and RRIFs just to be on the safe side.


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## csplice (Jun 20, 2009)

natalie_d,
thank you for defending your position (part of the reason this forum is great). It made me do a little more research into the subject than I would have. Unfortunately my conclusion is the same as the majority here.

Potato,
This is just a way to make the best of a very unique situation. It was never going to be a plan that would be repeated again a few years down the road (that would really eat up the room I worked hard to create)


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## natalie_d (Nov 25, 2009)

Potato said:


> #3 is where the RRSP income-averaging plan isn't avoidance: it's perfectly consistent with the purpose of the tax rules.
> 
> OP: one potential issue with the plan is it's only so good for so long. If you have a bunch of RRSP room accumulated (e.g., the $50k in your example) then you can do this little shuffle and shift some income. But then that contribution room is used up, and if you have another pair of on/off years, you'll only have the 18% of your income to shift.



I'd argue that the original intention of RRSP is for averaging out income during retirement...

Anyways, seems like everyone on the forum says this is okay.
I'll just say that my tax prof at university, who holds a PhD in tax and teaches tax at the ICAO, told me that the CRA will not like what the OP's trying to do.


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## MoneyGal (Apr 24, 2009)

natalie_d said:


> I'd argue that the original intention of RRSP is for averaging out income during retirement...


No, that is an _effect_ of an RRSP, and it does not always hold true.


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## csplice (Jun 20, 2009)

Just got off the phone with a CA (chartered accountant) and here is what he said:

What I am about to do is totally legal and the CRA has no issues when they see this going on.

Becoming a dependant of my spouse vs withdrawing from my RRSP:
I am a tax benefit to my spouse of $7986 at the lowest tax rate.
If I withdrew money I would have tax credits totaling $10,822 at the lowest tax rate.
This makes withdrawing money the better of the 2 options.

His summary was basicly this:
It is a good idea.
I should not lower my 2011 income below $42K
I should withdraw at least $11K in 2012.
I should think about withdrawing as much as I can but stay under the 31% tax rate and put this amount into a TSFA or back into an RRSP in higher income years.

Thanks again to all for your input.
It is definately going to be an interesting year.


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## MoneyGal (Apr 24, 2009)

Two thumbs up.


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## OhGreatGuru (May 24, 2009)

natalie_d said:


> I'd argue that the original intention of RRSP is for averaging out income during retirement...
> 
> Anyways, seems like everyone on the forum says this is okay.
> I'll just say that my tax prof at university, who holds a PhD in tax and teaches tax at the ICAO, told me that the CRA will not like what the OP's trying to do.


I don't believe CRA will object at this time - this is simply one of a number of legal loopholes in RRSPs. But RRSP stands for Registered Retirement Savings Plan - Not Registered Income Averaging Plan. The more people use it for something other than its intended, legislated, purpose, the sooner CRA & the Misnitery of Finance will change the rules.


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