Canadians need to take better advantage of tax-free investments

Need to "stop procrastinating and just contribute" to RRSPs and TFSAs

TORONTO, Feb. 23 /CNW/ - IBC (TSX: CM) (NYSE: CM) - With the recent debate about the relative merits of Tax-Free Savings Accounts versus Registered Retirement Savings Plans, CIBC tax expert Jamie Golombek says it's important not to lose sight of the fact that both plans offer a key benefit - tax-free accumulation of investment income.

And while Canadians readily acknowledge that investment income inside a TFSA is tax-free, far fewer will say the same about RRSPs, viewing them instead as "tax deferred", says Mr. Golombek, CIBC's Managing Director of tax and estate planning. "This is simply incorrect. No matter which plan you choose, you have the ability to earn tax-free investment income for life - an opportunity that no one should pass up. With the 2010 Registered Retirement Savings Plan (RRSP) contribution deadline fast approaching, Canadians need to stop procrastinating and just contribute."

In his report entitled, Just do it: The case for tax-free investing, Mr. Golombek details a number of scenarios for investors that show how growth inside an RRSP is indeed tax free. He uses an example of an individual with a 33 per cent marginal effective tax rate (METR) who can afford to invest $2,000 in an RRSP. Mr. Golombek argues that investor should actually contribute $3,000 to an RRSP, borrowing the extra $1,000 if necessary. At a 33 per cent METR, that $3,000 will generate a tax refund of $1,000, netting him the $2,000 he has budgeted for retirement savings.

Investing that $3,000 at five per cent for one year will see the RRSP grow to $3,150. If the investor cashes in the RRSP the following year, based on that same 33 per cent tax bracket, he or she will pay $1,050 in tax. That leaves a balance of $2,100 - a five per cent tax free return on the $2,000 investment.

The report also shows that should the investor leave the money in his or her RRSP for 40 years, the $3,000 RRSP investment would grow to more than $21,000. Assuming at retirement the investor is still in the same 33 per cent tax bracket, the after-tax value would be $14,080. If he or she elected instead to invest $2,000 in a non-registered account at the same rate of return for 40 years, it would grow to $14,080 and then be subject to capital gain tax. This would reduce the after tax value to $12,067 - over $2,000 less than if the money was put into an RRSP. 

"Clearly, the RRSP beats the non-registered account when (the tax rate) stays the same upon ultimate withdrawal, due to the tax-free investment income earned in the RRSP," says Mr. Golombek. "The RRSP account would show an even greater advantage over the non-registered account if the non-registered account assumption was more realistic in that annual interest or dividend income was earned and taxed annually or gains were realized occasionally during the accumulation phase and taxed throughout the period rather than merely at the end.

"It goes without saying that if (the tax rate) was lower upon retirement than it was upon contribution, the relative advantage of the RRSP over non-registered savings would be that much greater. Income and growth inside an RRSP (or its successor, a RRIF) is indeed completely tax free."

Mr. Golombek also notes that for many Canadians, investing in your RRSP is the wise thing to do even when your METR is expected to be greater upon retirement than while contributing.

"Depending on the rate of return assumption, the number of years of tax-free compounding available as well as the types of investment income you might otherwise earn by saving an equivalent amount in a non-registered account, the benefits of the tax-free compounding can actually outweigh the additional tax cost of a higher withdrawal METR."

In his modeling, he found that if that same investor saw his METR increase by a full 10 per cent from 33 to 43 per cent upon retirement, it would take 23 years for the after-tax value of the RRSP to beat out the non-registered account based on a five per cent return over time and a pure deferral of tax on the non-registered side. Should the rate of return be greater than five per cent, the break-even point at which the return on registered plan investing beats non-registered investing comes earlier. The model also found that contributing to a Tax Free Savings Account (TFSA) provides higher after-tax values throughout the entire period.

Mr. Golombek says that for Canadians expected to have a similar or lower METR upon retirement, there is no doubt that RRSP investing beats non-registered investing, no matter the type of income earned and the rate of return assumption.

"For those savings for retirement who expect to face a higher retirement METR, depending on the time horizon, rate of return assumption and investment mix (i.e. interest, dividends or capital gains), the benefit of tax-free accumulation of investment income inside an RRSP can still outweigh non-registered investing, once the TFSA is maximized.

"In other words, in nearly all cases, no matter your tax rate now or in the future, RRSP or TFSA investing should be an integral part of your retirement plan. Just do it!"

CIBC is a leading North American financial institution with nearly 11 million personal banking and business clients. CIBC offers a full range of products and services through its comprehensive electronic banking network, branches and offices across Canada, in the United States and around the world. You can find other news releases and information about CIBC in our Press Centre on our corporate website at


For further information:

Kevin Dove, Senior Director, Communications and Public Affairs, 416-980-8835 or


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