1. The bigger bang RRSP strategy Tax Managed Strategy #24
Name, DESIGNATION
Business title Company name
Reviewed: September 2017

2. The scenario
Determine amount of RRSP contribution to be made in order to reach retirement goals
Cash on hand is less than the amount of contribution to reach goals
Decide to contribute available amount now and invest the tax refund when it is received
For many Canadians, as the calendar year winds down, it comes time to think about making their annual contribution to their Registered Retirement Savings Plan (“RRSP”). Whether RRSP contributions are made regularly throughout the year, a single lump-sum payment or additional “top-up” payment closer to the RRSP deadline,1 there is a strategy to consider.
The typical scenario
A typical scenario may involve working with an advisor to determine the amount of the RRSP contribution to be made in order to help reach their retirement goals. However, it is not uncommon that they may have less cash on hand than the amount of the RRSP contribution they would like to make. So, they commit the amount of funds they can afford now with the promise to invest the tax refund when it is received.
1 The RRSP deadline is 60 days following the end of the year. 2

3. The numbers Available $7,000 in cash Marginal tax rate is 40%
$7,000 contribution in the first 60 days of 2018 can be claimed as a deduction on 2017 tax return
Tax refund will be $2,800 ($7,000 x 40%)
The Numbers
Take for example an individual who has $7,000 in cash and a marginal tax rate of 40%. If they were to contribute this amount in the first 60 days of 2018 a deduction can be claimed on their 2017 tax return. This will result in a tax refund of $2,800 ($7,000 x 40%) which can be contributed to their RRSP when it is received and a corresponding deduction claimed on their 2018 tax return.
For illustration purposes only 3

4. The result 2017 RRSP contribution $7,0001
+ Tax refund invested $2,8002
Total RRSP contribution $9,800
Although the contribution of the tax refund of $2,800 cannot be claimed until filing their 2018 tax return they have increased their total RRSP contribution to $9,800. While this is a better strategy than simply spending the refund, there is an alternative that can allow an increase in the RRSP contribution in the current year with very little cost.
1 $7,000 contributed in first 60 days of 2018 and claimed on 2017 tax return.
2 Tax refund invested in RRSP and claimed on 2018 tax return.
For illustration purposes only. 4

5. The bigger bang strategy1
Acquire an RRSP loan2 in the amount of estimated tax refund in first 60 days of calendar year
Use tax refund to pay off loan
Results:
Larger RRSP contribution
Can claim deduction in current year
More money working sooner in tax sheltered investment
The Bigger Bang Strategy1
The strategy works by acquiring an RRSP loan in the amount of the estimated tax refund in the first 60 days of the calendar year and then using the tax refund to pay off the loan when it is received. The bigger bang RRSP strategy results in a larger RRSP contribution while allowing a claim for the deduction in the current year. It also means more money working sooner in a tax sheltered investment.
1The strategy assumes that there are no other factors that would impact the total tax refund.
1 The strategy assumes that there are no other factors that would impact the total tax refund.
2 Borrowing to invest in an RRSP may not be appropriate for everyone. You will need the financial means to meet your loan obligations in full. Talk to your advisor to find out more about the advantages and obligations of borrowing to invest.

6. The formula OR (Cash on hand x marginal tax rate)
= $4,667 loan
60%
The Formula
Here’s how to calculate the amount of the loan that may be obtained so that when the tax refund is received, the loan can be paid off completely:
(Cash on hand x marginal tax rate)
(1 – Marginal tax rate)
Using our example of $7,000 cash on hand with a 40% marginal tax rate you can see that up to $4,667 can be borrowed:
($7,000 x 40%) = $4,667 loan
60%
For illustration purposes only.
For illustration purposes only 6

7. The bigger bang Total RRSP Contribution Borrow1 Reinvest Refund
Cash (2017) $7,000
Refund (2018) $2,800
Total $9,800
Borrow1
Cash (2017) $7,000
Loan (2017) $4,667
Total $11,667
The Bigger Bang
By borrowing an additional $4,667 the overall RRSP contribution is increased by $1,867 ($11,667 versus $9,800 as seen below) and the full amount can be used as a deduction in 2017.
Let’s look at how the two scenarios compare:
Total RRSP Contribution
Reinvest Refund ($) Borrow ($)
Cash (2017) 7,000 Cash (2017) 7,000
Refund (2018) 2,800 Loan (2017) 4,667
Total 9,800 Total 11,667
For illustration purposes only.
1 Full $11,667 contributed in first 60 days of 2018 and claimed on 2017 tax return.
For illustration purposes only. Years in brackets represent year of the tax return. 7

8. The cost Refund $11,667 x 40% $4,667 Loan ($4,667)
Interest for 90 Days ($ )*
Not covered by refund $
The Cost
In looking at what this strategy will cost to implement, you will see it is minimal:
Implementation Cost ($)
Refund $11,667 x 40% 4,667
Loan (4,667)
Interest for 90 Days (40)*
Not covered by refund
* An interest rate of 3.50% is used in this illustration for the purpose of an RRSP loan.
For illustration purposes only.
*An interest rate of 3.50% is used in this illustration for the purpose of an RRSP loan.
For illustration purposes only 8

9. The cost
Tax refund should take no longer than 8 to 10 weeks to be received
Canada Revenue Agency often processes electronically filed returns within 10 days
Even if it took 90 days to receive refund and loan was paid off immediately cost would only be $40
Depending on when and how the tax return is filed, the refund should take no longer than 8 to 10 weeks to be received. Tax returns that are filed early using electronic filing methods are often processed by the Canada Revenue Agency within 10 days. As the example shows, even if it is assumed that it took 90 days to receive the refund and the loan was paid off immediately, the costs not covered by the refund would only be $40. 9

10. What to look for in a RRSP Loan
Competitive interest rate
Deferred payment option
Full repayment anytime without penalty
What to Look for in an RRSP Loan
Many institutions offer RRSP loans at very competitive interest rates and some will defer the payments long enough so that there is plenty of time to receive the refund before making the first installment. Interest accrues on the outstanding balance but the loan can be paid in full without penalty at any time. 10

11. Ideal candidates Bigger bang RRSP strategy best suited for those:
Looking to make RRSP contribution in first 60 days of calendar year
Who have less cash on hand than the amount of RRSP contribution they would like to make
Who have sufficient RRSP contribution room
Ideal Candidates
The bigger bang RRSP strategy is best suited for those:
■ Looking to make an RRSP contribution in the first 60 days of the calendar year
■ Who have less cash on hand than the amount of RRSP contribution they would like to make
■ Who have sufficient RRSP contribution room 11

12. Take action To take advantage of the bigger bang RRSP strategy:
Determine the RRSP loan amount* that will equal the estimated tax refund for the year and then take out a loan in that amount (or less)
Use the tax refund to pay off the RRSP loan
Take Action
To take advantage of the bigger bang RRSP strategy:
■ Determine the RRSP loan amount that will equal the estimated tax refund for the year and then take out a loan in that amount (or less)
■ Use the tax refund to pay off the RRSP loan
Manulife Bank has the RRSP loan Optimizer calculator which calculates the loan amount automatically.
FYI: There’s a link between the calculator and the TREPS Tax Managed Strategy #24 – The Bigger Bang Strategy on Repsource.
*Use the formula on slide 6 to calculate the RRSP loan amount or visit 12

13. Disclaimer
The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Borrowing to invest in an RRSP may not be appropriate for everyone. You will need the financial means to meet your loan obligations in full. Talk to your advisor to find out more about the advantages and obligations of borrowing to invest. Manulife and the Block Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

14. Thank you