Living in Canada

Today we get to see where our city ranks in terms of living. Money Sense has released the best places to live in Canada for the year 2007. Ottawa/Gatineau has ranked number 1.....and for good reason?

I moved to Ottawa a year ago from London (no.8) and have taken the time to learn about my new local demographic. Aside from financial reasons (highest average income, strong job stability, stable real estate values) you also get a beautiful city to go along with it. One thing to consider is that all the Canadian tax dollars go to Ottawa. Therefore it isn't surprising that many places you might go to are postcard worthy. Not only that, but in any direction you can be quickly out of the city and to somewhere beautiful where one can enjoy the landscape.

For the most part the largest employer is the government. Some of the features that government employees benefit from are above average incomes, job stability, and a nice pension to look forward to. Commonly you may see a household with two income earners in this position. In 2005 the average Canadian income for a household of two income earners or more was in the area of $65,000 per year. A place like Ottawa obviously has many people living above that standard.

A household like that would obviously be paying a lot of tax and likely they would be using RRSP contributions as a vehicle to offset this. This got me thinking about an article that I read a few years ago titled 'Cashing Out RRSP Might Make Sense' that I found in the Toronto Star.

The article applied more to a middle income earner that would not have a pension in retirement saying that RRSPs may not be advisable to a contributor that will be receiving a pension due to the fact that they would be subject to clawbacks of the Guaranteed Income Supplement and/or Old Age Security. The article stated that it might be wise to 'cash out' RRSPs prior to 65.

This leads one to think about the purposes of the RRSP.

For many Canadians this is the one forced savings plan that they have. Some Canadians would never have saved a dime if it were not for this vehicle. The incentive: tax deductions for every dollar that is put into the plan. Not only that but to sweeten the deal the contributions can grow on a tax deferred basis until the money is withdrawn.

For savvy Canadian investors this is elementary.

However, are RRSPs for everyone? It is a good question and it leads me to analyze the negatives that surround Canada's most prominent savings vehicle.

RRSPs have no collateral value. In the bank's eyes an RRSP is not an asset for the purpose of net worth. Therefore you can rarely borrow against the value of an RRSP. RRSPs have limits. You are capped on the amount that you can deposit each year. This poses a problem for the higher income earners.

The Toronto Star article highlights a big point. Every dollar that is taken out of an RRSP is taken into account when calculating income. Income is treated the poorest for the purpose of tax. Not only that, but it can increase your retirement income to higher tax brackets and/or clawbacks.

So, are RRSPs for everyone? Yes, in a way. All Canadians want to save tax and are limited in manner by which they can. Also, it provides the discipline that many may not have in order to save on a year to year basis. However, Canadians need to be aware of proper exit strategies.

This leads me back to Ottawa government employees. With such high pensions does it make sense for these Canadians to invest in RRSPs. My answer is yes. It promotes savings and it saves tax. However, exit strategies need to be examined prior to retirement. Cashing out RRSPs does make sense for some.

You just have to know how to do it right.