December 23, 2008 10:00 ET

Macatax: Tax Refund is Costly RRSP Option

WINNIPEG, MANITOBA--(Marketwire - Dec. 23, 2008) - New information about RRSP discloses a hidden cost equal to the refund. "Electing the tax refund option is a costly choice " says Harvey McIntyre, retired financial advisor.

"With the tax refund option taxable income needed to contribute savings is greater than the savings contributed. Income should be contributed directly, resulting in tax reduction. The tax benefits are equivalent, but the extra income used for the refund option results in extra cost equal to the refund.

Form T1213 available from employer or internet (Google-- search T1213) is required for the income option. It should be submitted well before contribution deadline since approval takes several weeks."

McIntyre explains with an example: in a 33.33% tax bracket, earning $100 results in only $66.67 disposable income-- the "tax factor" is (100/66.67) 1.5. This means $1,500 income is used for each $1000 savings contributed to RRSP. Form T1213 converts the contribution to $1,000 income. In this example, $500 extra income used for the refund option results in $333.33 hidden extra cost.

Extra business from invested refunds may be the lure for failing to disclose the extra cost of that option, McIntyre charges, "the industry may rue that decision".


Contact Information