It was supposed to be a disastrous RRSP season, but results from a study conducted by Investors Group suggest while not great, RRSP contributions weren’t too far off from last year.
Investors Group’s third annual RRSP exit poll of more than 1,000 Canadian adults, reveals a decline of six percentage points in the number who made RRSP contributions for the 2008 tax year. But like previous years, RRSP contributors remain a committed minority of Canadian taxpayers.
Nearly a third (31%) of Canadians made RRSP contributions, of which 83% contributed the same or more than they did last year.
“Most people recognize the RRSP is one of the greatest tax shelters available to them in good times and bad,” notes Debbie Ammeter, vice president, advanced financial planning support for Investors Group.
The average contribution, for those who did contribute, was a fairly strong $7,400. Surprisingly, few contributors chose to “park” their money, opting instead for traditional investments.
According to Ammeter, only 16% of those surveyed said they chose to park their RRSP contributions — almost the same as last year’s 14%.
Of course, the tax free savings account (TFSA) offered an alternative this RRSP season, but the general uptake on TFSAs has so far remained low. Only 17% of those surveyed made a TFSA contribution, and those who did, tended to contribute more than half the $5,000 limit.
“I know that the TFSA is really valuable in many different ways to many Canadians. Maybe it’s not that low a number of users since this is the very first year and it’s only been available for about 2 months to put your money in,” Ammeter added.
If you talk to advisors, the ones who had a reasonably successful RRSP season tended to have RRSP contributions built into the fundamental part of their tax plan.
“Even though clients are not more comfortable investing money into the markets, they are still making an RRSP contribution and leaving it in cash,” says Frank Wiginton, a CFP with TriDelta Financial Partners. “When we build a financial plan, the bulk of it is built around tax planning and the RRSP plays a critical role in that.
Wiginton saw little to no decline in RRSP contributions. “There were a few people who, after we talked to them, still didn’t feel comfortable putting money into RRSPs. We were counselling them the whole time that contributions have nothing to do with the markets, they have more to do with earnings reported on tax-returns.”
Even though the tax savings aspect is core to the RRSP, Wiginton says advisors can lose sight of it when talking to clients, particularly when the RRSP season is used as a de facto income drive to get clients to top up on fee-earning assets.
“Given the difficult economy, it wasn’t like they had to come up with $10,000 to $15,000. For some of our clients who had investments outside of registered accounts, we just sold them and rolled them over into the RRSP to trigger a capital loss. We’ll get the tax deduction on future capital gains,” he said. “[Advisors] don’t get paid if they put [money] in a savings account, they get paid if they put it in a bunch of mutual funds. Again, it’s sort of shooting at the wrong net.”
Wiginton says advisors may have to take an income hit to ensure they maintain strong client relationships. “Advisors need to be rerunning the financial plan right now and making sure they stay close to their clients. This is a time when everybody is talking to everybody about the markets. This is a time when you go out and get a lot of new clients, but it’s also a time where you can lose a lot of clients to other brokers and advisors.”
A big part Wiginton’s recession planning includes counselling clients who haven’t lost their jobs and still have their plans. “We’re setting them up for the possibility or eventuality of a long-term downturn of the economy and the possibility they may lose their jobs.”
According to Wiginton this opens up a range of possibilities in other income streams, such as selling insurance benefits to clients worried about losing group coverage and securing lines of credit while they are still employed.
For investment advisors who rely on commission-based assets, it’s been admittedly tough, says Jonathan Rivard, an advisor with Edward Jones.
“Clients, who were normally making contributions, held off this year and are willing to carry it forward into unused contribution room. They are uncertain about the whole economy and the banking system. That’s concerning,” Rivard says. “TFSAs have offset things. I logged over 60 in the month of January. People are still interested in investing and getting some tax breaks. Bonds are very popular investments in those accounts right now.”
Rivard adds, “A lot of our new business is coming in from referrals from accountants and lawyers who sat down with clients who are not acting, but are sitting on a lot of money market investments, and [could] get access to great bonds in this environment.”
Drew Abbott, vice-president and investment advisor with TD Waterhouse Private Investment Advice, is discovering there’s merit in moving income-generating investments, particularly preferred shares and corporate bonds.
“If a client is already invested in the market, I lower his or her exposure to the market. For pure equity investors, you want to look at putting them in assets a risk level below that — preferred shares or even some high-yield bonds,” Abbott says. “If they are bond investors, we’re looking at putting money in short-term money market funds or maybe even GICs until there’s more clarity in the market.”
Abbott says he’s had success with “paid to wait” strategies, using the latest preferred shares offered by Canadian financial institutions.
“There are these new bank resets offering between 6% to 6.5% — that’s basically a five-year preferred share because they are made to be called after that term. That’s the interest equivalent of 9% on a bond. That’s a good alternative to not doing anything in the market,” he notes. “There are two ways I can help people make money, one is to help them invest, the other is to pay less tax. If you’re just putting into money market or into an RRSP, you’re reducing your taxable income and that should never change.”