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investor clinic

I want to file my taxes and get my refund, but I'm still waiting for tax slips for a few REITs and ETFs that I own. Shouldn't I have this information by now?

Not necessarily. Different types of tax slips have different mailing deadlines.

T5 slips – which report dividend and interest income – were supposed to be mailed out by the end of February, so you should have these by now.

But T3 slips – which report distributions from income trusts (including real estate investment trusts), exchange-traded funds and mutual funds – have a deadline of March 31. So it could be a week or more before they land in your mailbox. T3s for REITs and ETFs are sent by your broker, whereas T3s for mutual funds are mailed directly by the fund company.

Occasionally, tax slips are delayed, however.

My discount broker, BMO InvestorLine, says on its website that it will "make every effort to ensure that tax slips are mailed by the date indicated; however, in the event that an issuer does not supply us with the necessary information in time, tax slips will be processed on an individual security basis and mailed as soon as the information is made available."

I had a quick look on the websites of three ETF providers – iShares, BMO and Horizons – and the 2014 tax information has already been posted. I also checked the websites of three REITs – RioCan, Canadian REIT and Calloway – and they have also published the 2014 tax breakdowns for their distributions. So if you want to crunch the numbers yourself, you can. But to avoid mistakes on your return, you might want to wait until the official T3 slips arrive.

In the meantime, if you're using tax software, you can always complete the rest of your return and then spend a couple of minutes entering the information from your T3 slips when they arrive. That way you'll still get your return in long before the April 30 deadline.

In your recent Yield Hog column, you stated that at a 50-per-cent tax rate, $200,000 inside an RRSP is the same as $100,000 in a non-registered account. This doesn't seem right. Can you explain?

I don't want to spoil your weekend, but if you have $200,000 inside your registered retirement savings plan, you don't really have $200,000 to spend. You have $200,000 minus the tax you will eventually have to pay the government when you withdraw the money.

If you withdraw the $200,000 from your RRSP at a marginal tax rate of 50 per cent (most people's tax rates will be lower), you will pay the government $100,000 and keep $100,000. The $200,000 (inside your RRSP) is pretax dollars; the $100,000 that you keep (outside your RRSP) is after-tax dollars. As this example illustrates, at a 50-per-cent tax rate $200,000 pretax is equivalent to $100,000 after tax.

Now let's do it in reverse.

Say you start with $100,000 after tax outside your RRSP. You could borrow another $100,000 and contribute the entire $200,000 to your RRSP. At a tax rate of 50 per cent, this would generate a tax refund of $100,000. You could then use the $100,000 refund to immediately repay the $100,000 loan. The net result is that you would have $200,000 in your RRSP.

In other words, you have converted $100,000 in after-tax funds (outside your RRSP) into $200,000 of pretax funds (inside your RRSP). This is known as the RRSP gross-up strategy. True, there would be a small amount of interest to pay, but the essential point is that, at a 50-per-cent marginal rate, $200,000 pretax is effectively the same as $100,000 after tax.

What if your tax rate is, say, 40 per cent? Well, $100,000 pretax (inside the RRSP) would be equivalent to $60,000 after tax (after withdrawing the funds and paying 40-per-cent tax). Going in reverse, if you start with $60,000 after tax, you could borrow $40,000, contribute $100,000 to your RRSP and use the $40,000 refund to repay the loan, thereby converting $60,000 after-tax funds into $100,000 pretax.

I'm not necessarily recommending the RRSP gross-up strategy, although it certainly works for some people. I'm merely using it to illustrate the relationship between pretax and after-tax amounts.

Most people don't contribute $200,000 to an RRSP, of course, but the math works the same way if the amount is $20,000, $2,000, $200 or $20.

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