Weekly Tax Tips
Should I borrow to make my RRSP contribution?
Date: 22 Oct 2010
Interest on money borrowed to make your RRSP contribution is not deductible for tax purposes. Therefore, whenever possible, you should use cash to make your RRSP contribution and borrow to make other investments where the interest paid will be deductible.
In some cases, however, it can make sense to borrow to contribute to your RRSP. Remember that the income earned on an RRSP investment accumulates on a tax deferred basis. If you can pay off your loan quickly, particularly if you are getting a tax refund, the non-deductible interest expense can be minimized.
For example, let's assume that you want to make a $10,000 RRSP contribution for 2010 by the deadline of March 1, 2011. Assuming a top marginal rate of 45% and that you will be otherwise receiving a refund, this will generate a tax refund of about $4,500 for you. If you borrow the $10,000 to make the contribution, you will be able to pay back 45% of the loan as soon as you get your refund.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 22 Oct 2010.
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