Don't let a minor detail like the fact you don't have cash prevent you from contributing to an RRSP. There are ways to get around that.
If your poor cash flow is just a temporary problem, you can always borrow money by taking out an RRSP loan. Most banks, credit unions and other financial institutions offer preferred rates and flexible terms to people wanting to top up their RRSPs. Loans are widely available at the prime rate of 4.5 per cent, and some institutions will knock a quarter of a percentage point or more off that if you negotiate.
Moreover, they'll also wait up to 90 days before you have to start paying the money back, says Andrea Bumstead, associate vice-president of personal lending at TD Canada Trust.
This is to give people time to collect the income tax refund that the RRSP contribution will generate. A smart strategy is to use that refund to pay off, or reduce, the amount borrowed. "This gets the loan out of the way and also reduces the cost of borrowing."
But not everyone is eager to go into debt, even if borrowing for a worthy cause. And many are unwilling to invest borrowed money in equities that might drop further in value. But if you already own stocks or bonds outside your RRSP, you can use them to contribute.
The easiest way is to sell the investment and contribute the proceeds to the RRSP. But if you want to hang on to the stock, you can transfer the shares into a self-directed RRSP as a goods-in-kind contribution.
Any stocks, bonds, guaranteed investment certificates, savings bonds or similar investments held outside your RRSP that meet Revenue Canada eligibility rules can be transferred into your RRSP and claimed as a contribution.
"Virtually any kind of portfolio investment can be put into an RRSP" as long as it meets the criteria, says Ancaster, Ont., tax adviser Karen Yull, a principal with management consultant Grant Thornton LLP. "In return, you receive a RRSP contribution credit for the value of the investment going in."
If you're moving shares, their value is deemed to be whatever they were worth at the time they were transferred. So if they went up in value before you moved them into the RRSP, you'll have to declare a capital gain for income-tax purposes, Ms. Yull says.
But fixed-income products like Canada Savings Bonds and GICs don't generate capital gains and will produce tax-sheltered income inside the RRSP, she says.
Sandra Hrvacanin, an investment adviser with RBC Dominion Securities Inc. in Richmond, B.C., says "we've actually done a fair amount of that [goods-in-kind contributions) this year."
The challenge when deciding what to move into an RRSP is to trade off investments that have lost money against shares that have experienced a capital gain, she says.
She cites the example of someone who paid $10,000 five years ago for an investment that is now worth $13,000. The person moves the shares into an RRSP and claims the $3,000 capital gain. Then he or she looks at another $10,000 investment made 10 months ago that is now worth $7,000. The person sells it, claims the loss and the paperwork offsets the $3,000 capital-gains claim.
In rare circumstances, mortgages can also be held in a self-directed RRSP, but it's not commonly done because the cost of the extensive paperwork involved tends to negate potential tax savings, Ms. Hrvacanin says.
© The Globe and Mail
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