Over the last 20 plus years I have purchased RRSPs and also I have withdrawn money from them. Please tell me the total amount that I can contribute to my RRSPs in a lifetime. I am in the 30% - 40% tax bracket and I am 53 years old. – Terry D.
 

There is no lifetime maximum amount for RRSP contributions. It depends entirely on your earned income. Your basic annual RRSP limit is 18% of the previous year's earned income, less adjustments if you are a pension plan member. Unused contribution room can be carried forward but you get no additional room when money is withdrawn from a plan. To find out your current RRSP contribution room, check the latest Notice of Assessment that you received from the Canada Revenue Agency. There is a special section on the form that deals with RRSPs. – G.P.
 

We are hearing more about deflation lately. Can you advise how deflation might impact investments and suggest areas for investments in a deflating economy? I am particularly concerned for capital and income protection as I am on a defined pension plus income from my personal investments. – Dan Y., Burlington ON
 

Deflation is certainly a possibility. The January numbers from Statistics Canada show that the inflation rate is down to 1.1% and that we have experienced four consecutive months of price declines, the first time that has happened since the 1930s. In some ways, deflation works in favour of pensioners because it means the cost of living actually declines. So people who are on a fixed income can buy more with the same amount of money.

As for investments, cash is king during deflationary periods. Government bonds also tend to do well in that situation, as we saw in 2008. Stocks and real estate are about the worst places to be. – G.P. 
 

Generally speaking, given the fact that GICs are presently outperforming mutual funds, is it advisable to switch from mutual funds to GICs and then switch back to mutual funds when the markets improve? I can understand not touching money inside my RRSP because of taxes, but what about the money outside of the RRSP? It hurts to watch my future pension money dwindle away like water from a leaky bucket. It seems to me that this would help lessen the losses. My financial planner still believes in 'buy and hold' and I am looking for your opinion. – Steve L.
 

GICs guarantee a specific rate of return and they are covered by federal deposit insurance up to $100,000 (more in the case of some provincial deposit insurance plans). Some financial institutions are offering five-year rates at 4.5%, which looks pretty good in these conditions.

But here's the problem. Three years from now, a 4% return may look pretty skimpy and you may regret having locked in for so long. Many economists are already warning that inflation may come roaring back sooner rather than later, fed by the trillions of dollars of government stimulus that is being poured into the world economy and the rapid increase in the money supply in an effort to restore liquidity to the financial sector. Unless the central banks are extraordinarily dextrous in walking the tightrope, we could see inflation back in the 3%+ range within a year.

Your question is phrased in a way that makes it appear you regard GICs and mutual funds as an either/or decision. In fact, both could be held in a portfolio if desired. Moreover, you seem to equate mutual funds with the stock market. There are several types of mutual funds that don't invest in equities at all (e.g. bond funds, money market funds) and others that limit their equity exposure (e.g. balanced funds). So it would be possible to reduce or eliminate stock market risk simply by shifting some of your assets into different funds. – G.P.
 

Could you confirm my understanding of dividends? Using TransCanada Corp. (TSX, NYSE: TRP) as an example, if the dividend yield is 1.52 that means $1.52 is paid annually for each common share (38c quarterly). So if 100 shares of TRP are purchased for $30 per share, a total of $152 would be paid annually in dividends and that would be approximately 5% of the original share purchase price (the numbers would vary if the dividend and/or share price changed). Is that like saying you would be obtaining 5% yearly interest on an investment of $3,000? It seems like a no-brainer for a fairly safe way to grow an investment over a long term, as long as the dividend does not drop significantly and/or the share price plummet. – Scott W.
 

Your last line says it all: "...as long as the dividend does not drop significantly and/or the share price plummets". Unfortunately, we have seen both happen all too frequently in the past few months. Several companies have cut their dividends and stocks that were thought to be extremely safe have dropped dramatically in price. So this is not a no-brainer by any stretch of the imagination. There is risk involved and you need to assess it carefully before investing.

To use the example you cited, the dividends of TransCanada appear safe for now but there was a point several years ago when the company was forced to cut its payout. So dividends should never be taken for granted.

One big advantage in receiving dividends is that they get better tax treatment than interest income thanks to the dividend tax credit. But that only applies if the stock is held outside a registered plan.

One small correction: TRP's annual payout of $1.52 a share is not called the "yield". That is calculated by dividing the dividend by the share price. As of the close of trading on Feb. 20, the yield on TRP was 4.75% ($1.52/$31.97). – G.P.

My husband has recently retired and has an RRSP contribution limit for 2008 in the amount of $20,000. He will no longer have any earned income so this will be the last amount he will be able to contribute. He only needs to contribute about $11,500.00 before March 1 in order to reduce his income tax owing for 2008 to zero. Should he contribute the full amount even if it can't be all used this year? - Sharon R.
 

As long as he is under 71 and can have an RRSP, he can carry forward any unused RRSP contribution room and use it whenever he wishes. The fact he will have no more earned income simply means he will not accumulate any more contribution room.

If the money is available, he can put the full $20,000 in the plan now and claim a deduction for part or all of it in future years. The advantage of this is that it puts the money to work in a tax-sheltered plan immediately. - G.P.
 

I have $5,000 in ING's Tax-Free Savings Account (TFSA) but I would now like to switch from a high interest savings account to having some U.S. dividend paying stocks in the account. Is it as simple as closing/withdrawing the ING funds and setting up another TFSA or are there special rules/penalties surrounding this sort of change? – Evan M., Victoria BC
 

You need to be careful here. You have already made your maximum TFSA contribution for this year. If you withdraw the money from the ING account, you will not be able to recontribute it until Jan. 1 2010. At that time, the $5,000 withdrawal will be added to your 2010 contribution allowance of $5,000, giving you a $10,000 limit.

You could try switching the money into a different type of TFSA, however ING does not offer a self-directed plan that would allow you to invest directly in U.S. stocks. You would need to set up a plan with a brokerage firm and arrange to have the ING assets transferred directly to it. You will need to talk to ING about any fee that might be involved.

But here's the big question: are you sure you really want to do this? Gena Katz, Executive Director, Taxation at the accounting firm of Ernst & Young, says that the U.S. does not recognize TFSAs as registered plans when it comes to withholding tax on dividends. That means that 15% of all U.S. stock dividends paid into a TFSA will be withheld at source. (RRSPs and RRIFs are exempted from this withholding under the Canada-U.S. Tax Treaty).

Maybe you should think this through again. – G.P.
 

I'm in the process of preparing our 2008 tax return. My husband has a small income from a life income fund (LIF) of about $5,500 a year. We were told that this could be split as pension even though neither one of us is yet 65. I'm having a hard time getting the QuickTax program to recognize it as LIF income. 

We have been told by a financial advisor that once we show it as LIF income on the tax return, we can split it but the program is recognizing it as RRIF income and therefore (because of our age), it's not allowing us to split it. Do you know for sure whether LIF income can be split when the persons are both under 65? We've been told that RRIF payments cannot be split, but LIF can! – Brenda M.
 

Whoever gave you that information needs a refresher course in pension splitting. The website of the Canada Revenue Agency clearly states that LIF income cannot be split unless "the pensioner is age 65 or older at the end of the year". You can check it out at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/xmpl-eng.html  - G.P.
 

If I have losses from my bank mutual funds can I claim them on my income tax? Or do I have to sell the funds? – George N.
 

You can't claim a capital loss until you dispose of the units. As long as you own them, you have what is known as an "unrealized capital loss". Unrealized losses should not be declared on your return. Hopefully, they'll turn into profits over time. – G.P.
 

My wife started a spousal RRSP at our bank in 2008. I am the contributor and she is the annuitant. She withdrew an amount before the end of 2008.

She received a T4RSP which shows the withdrawal amount and taxes withheld for that amount. Both she and I work. I have the higher income.
 
Who reports the amount withdrawn as income? Who claims the taxes that were withdrawn? Are there any special forms to fill out? – Baxter H.
 

It seems to me that neither of you paid any attention to the rules governing spousal plans. They are quite specific: any withdrawals made within three years of a contribution are attributed back to the contributing spouse for tax purposes. In this case, that's you. However, since the contribution was made in 2008, you will be able to claim a deduction for the amount you put into the plan when you file your return. Assuming your wife did not withdraw the full amount, you'll still come out ahead.

Since you have to show the withdrawal as income on your personal return (line 129), you can also claim the tax that was withheld at source. – G.P.
 

My daughter had a contract position in which she was responsible for payment (among other things) for the CPP premium. She did not pay that premium and she has now received a bill from Revenue Canada for $3,000. It is my understanding that she is not required to pay that tax; however, if she does not it could have an effect on her CPP pension. Could you give me your interpretation? - Frank G.
 

You can't opt out of the Canada Pension Plan, which is what your daughter seems to want to do. It's compulsory. Employees pay half the annual premium and the employer picks up the other half. It appears your daughter is self-employed so she is responsible for both the employer and employee contributions. The amount she has to contribute is calculated on her net business income for the year. - G.P.