With the exception of Registered Retirement Savings Plan (RRSP) contributions, you have probably missed any significant tax planning tips for the tax year 2005. You have until March 1, 2006 to make your last minute contributions and apply those tax deductions to your 2005 tax return.

Suppose you do want to supplement your retirement savings and obtain a tax refund on your 2005 tax return. The first step is to determine how much you are eligible to contribute. Look on your Notice of Assessment from your 2004 tax return to find your limit. Then determine your best strategy to cash in on the tax refund bonanza that many other Canadians enjoy each year.

Writing a cheque is the best way to make your contribution, but if you don’t have the money, there are other options. Many institutions offer preferred rate loans for RRSP contributions. Yes, interest rates are rising but often your tax refund can be used to pay down much of the loan and limit your interest cost when applying this strategy.

You can also sell other investments to come up with the cash to make your contribution. This strategy may have other tax consequences. If your investment has increased in value you will have taxable capital gains to report in 2006. On the other hand if your investment has declined in value you will have a capital loss to report. Capital losses can only be written off against capital gains. Tread this strategy carefully to make sure you are completely informed of all tax consequences.

Another strategy is to transfer other investments “In Kind” to make your RRSP contribution. This strategy involves transferring an investment; say a stock or mutual fund, into your RRSP account. Many institutions allow this type of transaction. Again beware of the other possible tax consequences of this action. Capital losses on this type of transaction are permanently denied by the Canada Revenue Agency (CRA). This strategy is complicated and may be better discussed with your financial advisor.

The new RRSP contribution limit for 2006 is the lesser of 18% of 2005 earned income or $18,000. Now is the best time to start planning your tax strategies for your 2006 taxes. Don’t wait until January or February 2007. This only limits your options. Start now and make regular monthly contributions so that you will not have to be creative with your tax planning strategies.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.