You will be able to put an extra $1,000 into your RRSP for 2009 if your earned income for 2008 is at least $116,667. Each January the maximum dollar limit goes up by $1,000 under a multi-year schedule that runs to 2010. After that, plans call for the top limit to be indexed to growth in the average national wage. The top limit for 2008 is $20,000 and $21,000 for 2009. This means those with earnings of about two and a half times the average wage can save for retirement on a fully tax-sheltered basis. The annual $1,000 increase only affects the RRSP ceiling. Your RRSP limit is still based on 18% of earned income for the prior year, minus the “pension adjustment” reported by your employer on your T4 tax slip if you belong to a pension plan or deferred profit sharing plan.

What Is Earned Income?

Earned income includes salary, employee profit-sharing income, business income, rental income and taxable alimony/maintenance payments. Disability pensions from the Canada Pension Plan or Quebec Pension Plan count too, but not regular CPP or QPP retirement benefits. Earned income for RRSP purposes is then reduced by business losses, rental losses, union dues, tax-deductible employment expenses and any deductible alimony/maintenance you’ve paid. If you contribute at the start of the year, see the RRSP Deduction Limit Worksheet in Canada Revenue Agency publication T4040, available at www.cra-arc.gc.ca. If you contribute later in the year or monthly, you can wait for the CRA to calculate your limit from the numbers on your 2008 tax return due by April 30. This will then be reported in the Notice of Assessment sent after your tax return has been processed. If you own an incorporated business, you might wish to have your accountant review how much compensation you take as salary and bonus, and how much as dividends. Salary and bonus create RRSP room; dividends do not.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca

Every adult Canadian now has one more tool available for sheltering assets from taxation as they grow: the TFSA, or Tax-Free Savings Account. With the RRSP deadline coming up fast, many investors are asking if they should continue to contribute to their RRSP as usual, or start using this new tax shelter instead.

There is no single answer to that question. Each individual’s situation and goals will determine how best to use one instrument or the other – or ideally, both. For example, if you already maximize your annual RRSP contribution and can still save more, you should invest any additional amounts in a TFSA, up to the $5,000 annual ceiling, to shelter more of your returns from taxation. Along the same lines, if you already contribute enough to your Registered Education Savings Plan (RESP) to receive the maximum government grants, you might want to use a TFSA for any additional contributions that you would normally have put into your RESP.

The TFSA will give you much more flexibility in how you use this part of your savings. Finally, since the TFSA is available to all Canadians 18 and over, regardless of income, it opens the door to new strategies for splitting income between spouses and transferring assets between generations. These are just a few of the possibilities but, based on your situation, there are likely to be countless other ways that you can put a TFSA to good use.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca

Convertible preferreds are convertible to another class of asset (e.g. common shares) at a specified date (generally 5 to 12 years after issue) and a specified price (10% to 15% over the common share price as determined at the time of issue). The conversion privilege generally expires at the maturity date. The premium serves to discourage early conversion. Demand for this type of preferred is related to the fact that its dividend is often lower than that of, say, a conventional preferred. Investors are attracted to convertible preferreds for their combination of income and potential for appreciation. Most convertibles are callable by the issuer before maturity, a right the issuer could exercise if the conversion value overtakes the par value. At the end of the convertibility period a convertible preferred becomes a simple conventional preferred. In summary, convertibles have the characteristics of preferreds plus an option for the holder to convert to common shares. In this they resemble convertible bonds.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca

Deferred preferred shares resemble strip bonds in many ways. They pay no dividends and the return is the difference between purchase price and price at maturity. The ratio of the two is known as the income premium. In contrast to a strip bond, the income premium is considered dividend income for tax purposes. Holders are not required to declare a dividend portion each year as they are with the interest portion of a stripped coupon. If the preferred is sold before maturity, the proceeds are normally deemed a capital gain. The advantage of a deferred preferred is deferral of income tax. It may be an attractive vehicle for a taxable account whose holder expects to be taxed at a lower rate at maturity of the preferred. On the other hand, investors must consider that it is very illiquid on the secondary market. This will be a consideration if the aim is to sell before maturity to maximize the tax advantage of turning the income premium into a capital gain. Very often the spread between bid and ask price will be wide enough that the holder will decide to keep the shares to maturity.

Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Investment Advisor
Associate Portfolio Manager
e-mail: mounir.el-ayari@nbf.ca