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A year-end registered plan checklist

A couple of months ago, my four-year-old nephew Sammy was visiting from out west for two weeks. I got up and showered one morning as I was getting ready for work. While I was standing in the bathroom stark naked, the bathroom door swung open, and there was Sammy standing there staring at me.

All he could say was "Uncle Tim, you look so different without your glasses on!"

Talk about missing the obvious. But no harm done. Missing the obvious when it comes to your registered retirement savings plan or registered retirement income fund, however, could cost you plenty in taxes. We don't want that to happen, so consider this year-end checklist for your registered plan.

Contribute to your RRSP.

You don't have to make your 2003 contribution until March 1, 2004, but why wait? Avoid the rush in the new year, contribute today and get your money working.

Contribute to a spousal RRSP.

Contribute to a spousal RRSP before year-end to reduce the length of time before your spouse can make withdrawals without at least part of the withdrawal facing tax in your hands. If you contribute by year-end, your spouse can make a withdrawal of those dollars on Jan. 1, 2006, at the earliest without an amount being taxed in your hands. If you wait until January, 2004, to contribute, your spouse will have to wait until Jan. 1, 2007, before making a withdrawal without attribution back to you.

Make an advance contribution.

You've got to wind up your RRSP by year-end if you turned 69 in 2003. You may also have earned income in 2003, which will provide you with RRSP contribution room in 2004. Since you won't have an RRSP next year, consider making your 2004 contribution in December, 2003, before winding up your RRSP forever. You may face a small over-contribution penalty for the month of December, 2003, but you'll be entitled to a tax deduction in 2004 for the contribution made in December, 2003, and this will save you more tax dollars.

Withdraw funds if your income is low.

If you have little or no other income this year, you may be able to make a tax-free withdrawal from your RRSP before year-end. This works best if you need the money to meet your costs of living, or where you're willing to invest those dollars outside your RRSP.

Create 2004 contribution room.

Once your income reaches $86,111 this year, you'll be entitled to the maximum RRSP contribution room in 2004 of $15,500. Consider taking steps before year-end to increase your earned income this year to create that RRSP room. This is easiest where you own your business and can readily control your compensation.

Set up a RRIF before year-end.

You're entitled to a pension credit to offset the first $1,000 of pension income annually, which includes any withdrawals from a RRIF if you're 65 or older in the year. Consider setting up a RRIF to pay out just $1,000 annually if you haven't got other pension income. This amount will face no or low tax, thanks to the credit.

Base RRIF withdrawals on younger spouse.

If you set up a RRIF this year, be sure to base the mandatory RRIF withdrawals on the age of the younger spouse. This will reduce the required withdrawal annually and will allow you to defer tax longer. While you don't have to be 69 to set up a RRIF, reaching that age in 2003 likely means you'll be opting for a RRIF before year-end.

Sell non-qualified assets.

You're restricted as to the type of assets that can be held in your RRSP. When you purchase a non-qualifying asset inside your RRSP the value of the asset may be included in your income in the year of its purchase. You'll be entitled to a tax deduction (up to the amount included in income) when the asset is sold. If you acquired a non-qualifying asset in 2003, sell it by year-end to avoid being taxed in 2003 on its value.

Delay HBP withdrawals until after year-end.

If you make a withdrawal from your RRSP under the Home Buyer's Plan (HBP), the home must be purchased by Oct. 1 of the year following the year of withdrawal. Consider waiting until the new year to make a withdrawal in order to extend the time by one year within which you must buy a home, and within which you must start making repayments under the plan. Further, multiple withdrawals are allowed under the HBP, but you've got to make those withdrawals in one calendar year, so it may be best to wait until the new year to make any withdrawals.

Tim Cestnick, FCA, CFP, TEP is author of The Tax Freedom Zone and Winning the Tax Game 2003. He is managing director, National Tax Services, at AIC Ltd.

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