Over-contribution to RRSP

[SimpleTrades]

Should I use my 30K limit RRSP line of credit, which can only be used for contributions to an RRSP, to OVER contribute to my RRSP?

My goal is to increase cash available for day trading.

In Canada, we have two investing vehicles for deferring and avoiding taxes on investment growth(Tax Free Savings Account [TFSA], Registered Retirement Savings Plan [RRSP]). Of course, there are limits to what you're allowed to contribute to these vehicles, based on your income. The RRSP is a tax deferred vehicle where you pay taxes on withdrawals as if it were earned income. In exchange, all contributions to the RRSP are deducted from your taxable income except any over-contribution. All investment income is also tax deferred.

I am currently maxed out in both plans. This is money that is invested for the long term. Because its maxed out, any new contributions would involve a 1%/month penalty. Because any income that is generated and withdrawn is taxed as earned income, day trading in this vehicle would not be treated as self-employment income.

Summary: Maxed out on all tax deferred/tax free vehicles. 30K of additional day trading cash. No balance restrictions in Canada for day trading. 1%/month penalty on over-contribution. 3.7%/year to borrow 30K.

Is it worth it? You can assume that I have a reasonably good day trading plan, but we all know the risks ....

 

[Sig]

Should I use my 30K limit RRSP line of credit, which can only be used for contributions to an RRSP, to OVER contribute to my RRSP?

My goal is to increase cash available for day trading.

In Canada, we have two investing vehicles for deferring and avoiding taxes on investment growth(Tax Free Savings Account [TFSA], Registered Retirement Savings Plan [RRSP]). Of course, there are limits to what you're allowed to contribute to these vehicles, based on your income. The RRSP is a tax deferred vehicle where you pay taxes on withdrawals as if it were earned income. In exchange, all contributions to the RRSP are deducted from your taxable income except any over-contribution. All investment income is also tax deferred.

I am currently maxed out in both plans. This is money that is invested for the long term. Because its maxed out, any new contributions would involve a 1%/month penalty. Because any income that is generated and withdrawn is taxed as earned income, day trading in this vehicle would not be treated as self-employment income.

Summary: Maxed out on all tax deferred/tax free vehicles. 30K of additional day trading cash. No balance restrictions in Canada for day trading. 1%/month penalty on over-contribution. 3.7%/year to borrow 30K.

Is it worth it? You can assume that I have a reasonably good day trading plan, but we all know the risks ....

Not Canadian so excuse the dumb question, but what is your benefit of this plan? Avoiding self-employment taxes? How much are those, or if it's not that what is the quantifiable benefit?

 

[SimpleTrades]

Not Canadian so excuse the dumb question, but what is your benefit of this plan? Avoiding self-employment taxes? How much are those, or if it's not that what is the quantifiable benefit?

In order to exploit the tax-deferred/tax free vehicles, I have maxed everything out, and I have all of my cash invested for the long run. This leaves me with only about 10K of trading capital that I have pulled off a credit card ( this is allowed in Canada) that I have with Oanda ( I bounce it from one credit card to another to avoid interest). I am attempting to generate some day trading capital for equity trading. By over-loading my RRSP with this 30K line of credit, I can keep what I already have invested for the long run, while day trading the 30K. Servicing this loan would cost me $92.50/month. I would have to pay the government a penalty of $300/month ( 1% of 30K). This amount would be reduced by my self-employement income at a rate of 18% of my income, each year ( i.e over-contribution of 30K would only be 20K next year, if I earned 55K of self-employment income - I have a non-trading related business.) All trading income would be tax deferred, indefinitely, until I withdraw it.

 

[jj90]

Put it in the TFSA if you are going to over contribute. You are using after tax cash so no point with a RRSP. As for your RRSP LOC only going to your RRSP: depends on who your provider is. I have a RRSP LOC as well, but for practical purposes it's just a LOC. If you cannot transfer it out of your provider(BMO, TD, etc) then it's an RRSP for you and you'll have to eat it vs a TFSA.

I'm sure you realize that with the penalty and cost of servicing the loan you are looking at a 16% hurdle rate to breakeven annually. Good luck.

 

[SimpleTrades]

Put it in the TFSA if you are going to over contribute. You are using after tax cash so no point with a RRSP. As for your RRSP LOC only going to your RRSP: depends on who your provider is. I have a RRSP LOC as well, but for practical purposes it's just a LOC. If you cannot transfer it out of your provider(BMO, TD, etc) then it's an RRSP for you and you'll have to eat it vs a TFSA.

I'm sure you realize that with the penalty and cost of servicing the loan you are looking at a 16% hurdle rate to breakeven annually. Good luck.

I am "sort of" using after tax cash. It will take a little over two years to create new RRSP contribution enough to offset the over contribution. At that time I will be able to use the credit. Despite using the RRSP contribution room, I have been deferring use of the credit for a higher income year. 2016 was a low income year for me because I have been working on a personal project. Consequently, I expect my income over the next couple of years to rise substantially allowing me to use the credit in a high income year. This income comes from non trading related self-employment income.

Unfortunately, there is no way to use the RRSP line of credit for anything other than a contribution to my RRSP. Yes, it is true that I am not required to keep it in the same institution, but removing it from the same institution will jump the interest rate. I would still need to show that the money is going in to my RRSP, as far as I know.

The other reason for not using the TFSA is the treatment by the Canada Revenue Agency. The CRA considers active trading within your TFSA to be equivalent to operating a business. In other words, you can lose the tax free status if they catch you trading excessively. Apparently, this same thing doesn't happen in your RRSP because all withdrawals are treated like earned income for tax purposes. They would be very happy if I grew my RRSP in a significant way since this would increase my income tax contribution.

Anyhow, if this LOC were available to use for something other than an RRSP contribution, I wouldn't bother with the 1% penalty. I'd throw it all in a margin account and pay the taxes each year. However, there would be some risk that the CRA would consider this a business too. In that case, all capital gains would be taxed rather than the current 50%.

 

[jj90]

I am "sort of" using after tax cash. It will take a little over two years to create new RRSP contribution enough to offset the over contribution. At that time I will be able to use the credit. Despite using the RRSP contribution room, I have been deferring use of the credit for a higher income year.

True, but unless you know for a fact that your income will absolutely be significantly higher and you want to minimize your tax burden from your T4 income.

Unfortunately, there is no way to use the RRSP line of credit for anything other than a contribution to my RRSP. Yes, it is true that I am not required to keep it in the same institution, but removing it from the same institution will jump the interest rate. I would still need to show that the money is going in to my RRSP, as far as I know.

You can get a TFSA LOC, ask around. Also ask if it's possible to use an RRSP LOC in a TFSA account at the same institution. You'd be surprised.

The other reason for not using the TFSA is the treatment by the Canada Revenue Agency. The CRA considers active trading within your TFSA to be equivalent to operating a business. In other words, you can lose the tax free status if they catch you trading excessively. Apparently, this same thing doesn't happen in your RRSP because all withdrawals are treated like earned income for tax purposes. They would be very happy if I grew my RRSP in a significant way since this would increase my income tax contribution.

While true, there's a lot of if's. Weigh the probabilities and your actual trade frequency.

Anyhow, if this LOC were available to use for something other than an RRSP contribution, I wouldn't bother with the 1% penalty. I'd throw it all in a margin account and pay the taxes each year. However, there would be some risk that the CRA would consider this a business too. In that case, all capital gains would be taxed rather than the current 50%.

Like I said, ask around and frame your questions correctly. Just because it's called an RRSP LOC doesn't mean the product has to go into an RRSP.

I have gotten accounting and legal opinions on this and unless you are making an absurd amount of trades or making actual decent money, AND you elect to be treated as a trader by some means, CRA isn't going to rule that. What's the means test? I don't know for certain but have heard along the magnitude of >50 trades a day.

A lot of what you are saying has merit, but from my experience it's a worst case scenario. In the worse case scenario, just pay the taxes. Realistically you have a 16% hurdle rate to overcome 1st. That's your biggest issue, not taxation.

 

[SimpleTrades]

Thanks for your thoughts jj90. You make some good points, and it gives me something to think about.

 

[whiskers]

1. Pretty sure you cannot day trade inside a RRSP or TFSA. Look it up, some people have been penalized heavily for doing so by the CRA. Your investments become business income at some point.

2. You cannot have a margin account inside a RRSP, which means even if you could do it your capital would be extremely limited, so I don't see the point.

You can incorporate yourself if you are serious about it. Your trading will be considered active business income and you will be treated to the small business tax deduction. Advantageous if you make in the six figures and do not live in Quebec.

Good luck

 

[SimpleTrades]

1. Pretty sure you cannot day trade inside a RRSP or TFSA. Look it up, some people have been penalized heavily for doing so by the CRA. Your investments become business income at some point.

2. You cannot have a margin account inside a RRSP, which means even if you could do it your capital would be extremely limited, so I don't see the point.

You can incorporate yourself if you are serious about it. Your trading will be considered active business income and you will be treated to the small business tax deduction. Advantageous if you make in the six figures and do not live in Quebec.

Good luck

Yes, I understand the margin account issue. I was simply making the point that if I could use my LOC for anything, I would simply put it in the margin account. As it is, I believe I'm forced to use the LOC only for my RRSP, however jj90 suggests alternatives.

I've already researched the CRA/RRSP issue. There are a couple of court cases that demonstrate that you CAN trade within your RRSP. However, trading heavily within your TFSA, will get you nailed. The reason you CAN in the RRSP is because all income and gains when withdrawn are treated like earned income for tax purposes. Therefore, there is no way to dodge taxes within your RRSP as there is with TFSA.

 

[Statistical Trader]

I've already researched the CRA/RRSP issue. There are a couple of court cases that demonstrate that you CAN trade within your RRSP. However, trading heavily within your TFSA, will get you nailed. The reason you CAN in the RRSP is because all income and gains when withdrawn are treated like earned income for tax purposes. Therefore, there is no way to dodge taxes within your RRSP as there is with TFSA.

Could you please name the court cases you read that suggest you can trade within an RRSP, as you put it? I would like to read them. Thank-you kindly.