basic financial planning #8: know the tax codes

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Blog entry by BigTiny posted 03-11-2011 07:18 AM 3401 reads 1 time favorited 3 comments Add to Favorites Watch
« Part 7: A place for everything Part 8 of basic financial planning series Part 9: A little exercise/ »

Hi everybody.

Here’s an example of how you can make the tax laws work for you for a change, and therefore the importance of knowing them, (or at least knowing someone else who does).

Here in Canada, we have what is called a registered retirement savings plan (RRSP). It is a tax deferred way for people to save for their retirements.

For this example we will look at someone who has both an RRSP and a mortgage. First, let’s look at some background information.

As you are most likely aware, mortgage rates are normally about 2 percentage points or so above term deposit rates for the same period. This is a fact we will take advantage of in our example.

Our taxpayer wants to set up a “self managed” RRSP. As long as certain terms are met, this is perfectly legal.

Why you ask?

I’ll tell you.

By opening such a plan, he can put his mortgage into the plan, and thus pay himself!

The advantage? A mortgage earns (as an example for this exercise only) 5% interest on a five year term, while a term deposit earns only 3%. By buying his mortgage into his retirement plan, he earns an additional 2% on his money, which can be a considerable difference on the amounts involved and over a number of years. If we assume he has a $100,000 mortgage in the plan, that’s about $2,000 a year more he has in his retirement fund.

Not too shabby, eh?

Now this has been simplified for purposes of illustration, but the idea is valid and is in common use here.

Other countries have their own plans and rules (of course), but the idea of learning how to use the tax codes to your best advantage remains the same no matter where you live.

Have a great today and a better tomorrow.

No go out there and make a buck!


-- The nicer the nice, the higher the price!

3 comments so far

View fernandoindia's profile


1081 posts in 2361 days

#1 posted 03-11-2011 08:19 AM

OK Tiny, you convinced me.

I will give out wood working and dedicate to finance then, :)

Take care

-- Back home. Fernando

View BigTiny's profile


1676 posts in 2306 days

#2 posted 03-11-2011 10:56 AM

Hey, if you really have the calling, it’s a growing field and there’s good money to be made in it.

Of course, the training takes a number of years.

Whatever you decide to do, do t with style! :)

-- The nicer the nice, the higher the price!

View BigTiny's profile


1676 posts in 2306 days

#3 posted 03-12-2011 10:57 AM

Hi Barry.

As I said right in the title of this episode, ”Know the tax codes”. I also pointed out that this was a Canadian example. My point is that a good knowledge of the codes can be put to use to your advantage. It isn’t necessarily a retirement plan that will fit your particular situation, but there are many other parts of the various tax codes in the varying countries our members live in that can be utilized in such a way as to reduce the taxes paid while remaining legal. In no way would I ever advise anyone to break the law, or even to bend it. Not even a little bit.

I appreciate the feedback. It shows that people are reading this blog and taking enough interest to think about it and to see if anything I’ve posted would help in their own situations. This is great, as it shows I am achieving what I wanted; getting people understanding that running a business in wood working involves much more than making things out of wood.

I see from your user name you are a fellow Cessna pilot. Remember the comment from ground school: “When you want to become a pilot, one of the things you should learn along the way is how to fly an airplane.”? It meant there were many other aspects in getting your ticket. Meteorology, theory of flight, aero engines, radio, navigation, air regulations and so on. The physical act of actually flying the aircraft was only one small part of the complete course. You probably had only about 20 hours or so of dual instruction in the aircraft (I’m guessing a Cessna 150, due to my size I had to use a 172) compared to about 50 or more hours in the classroom. Here, I’m sort of like a ground school instructor, showing our members here a few ideas that, on their own, won’t help them that much, but if successful will get them thinking about paying more attention to another very important part of their business, the financial part. If they learn the importance of good record keeping, of keeping their personal and business finances separate, and that a good tax adviser can save them some serious money, I’ve done what I set out to do.

Thanks for taking enough interest in the topic to point out one difference between American and Canadian tax law.

So, you getting much Cessna time in these days? Sadly, my ticket is history since I had a couple of heart attacks a few years back. These days I do my flying with an eight foot span scale model of a deHaviland Turbo Beaver, which I started constructing recently. It ain’t the same, but it’s better than nothing. (sigh)


-- The nicer the nice, the higher the price!

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