Concept #3 – The Financial Planner’s Dream

The “Financial Planner’s Dream” – save for retirement, set up an education fund and pay down the mortgage.

With planning and proper timing of investments, it is possible to leverage government tax credits and government grants to maximize after-tax returns. Combining credits available to individual family members can further optimize after-tax returns.

Example: Assume a couple who are each in the top marginal tax bracket in Saskatchewan (45% in 2001), with one child, a mortgage and $5,000 available for investment purposes.

Step One: Husband contributes $5,000 to his RRSP, which purchases 32.5% tax credit eligible SaskWorks Venture Fund shares.

Step Two: Wife uses the husband’s tax savings of $4,000 to contribute to her RRSP, which purchases 32.5% tax credit eligible SaskWorks Venture Fund shares.

Step Three: Contribute $2,000 of the wife’s tax savings to a Registered Educational Savings Plan (RESP) for their child (or a grandchild). Contributions up to $2,000 per year are eligible for a 20% Canada Education Savings Grant (CESG) from the federal government. (RESP contributions are not tax-deductible.)

Step Four: Use the remainder of the wife’s tax savings of $1,200 ($3,200 – $2,000) to pay down the mortgage.

Assets Obtained with $5,000 Investment:

Net Improvement to Net Worth:$7,600

As you can see, there is nothing mystical about leveraging tax credits and government grants on tax savings. This family’s net worth has increased by $12,600 for a single $5,000 contribution (a net increase of $7,600 in less than 180 days on average).

In implementing such a plan it is important to note that:

1. SaskWorks Venture Fund tax credits are non-refundable credits and so there must be sufficient taxes payable in order to claim the tax credits.
2. There is a timing issue involved, as each successive contribution is dependent on tax savings from a prior-filed tax return – so more than $5,000 will be required until all tax credits/refunds are received.
3. Amounts withdrawn from an RRSP are taxable at the time of withdrawal.
4. CESG amounts may be repayable under certain circumstances.

Note: we have not specified where the RESP investment should go – it could be placed into a GIC, or SaskWorks Venture Fund shares if the child is young, however it is important to remember that from IFIC’s perspective an RESP is not an appropriate vehicle for a labour sponsored fund investment.

Investment in an LSIF is subject to certain restrictions on resale and redemption. An investment in an LSIF is speculative and may not be suitable for all investors. Income tax savings are only one aspect of an investment in an LSIF. The merits of the investment as a whole should be considered. LSIF shares are offered by prospectus only. Consult the applicable LSIF prospectus for full details of the offering.

Rewritten with permission, based on a series of original articles written by Allan Jacks, Vice-President, Sales, Crocus Investment Fund. Previously published in CAIFA Winnipeg IMPACT Magazine.