Thanks to reader M.F. for providing this information.

First, you cannot borrow money from an RRSP except under two special programs: The Lifelong Learning Plan and the Home Buyers’ Plan. Any other withdrawal would be considered income in your hands and therefore taxable.

Second, an RRSP cannot be used as security for a loan. If this is done, the amount pledged as collateral is supposed to be included in your taxable income for the year. You don’t have to take the money out of the plan but for tax purposes it amounts to the same thing.

Perhaps you are referring to holding a mortgage within your RRSP, which is a perfectly legal practice as long as the terms are not more favourable than a conventional mortgage would offer. You would need a self-directed plan with a financial institution that accepts such mortgages. Note that there are extra costs involved in doing this, so I recommend that any such mortgage be for a minimum of $50,000. There is a full chapter on this subject in my 2003 Buyer’s Guide to RRSPs. – G.P.

Regardless of the actual amount, all Canada Pension Plan payments are taxable and must be included when you file your 2002 income tax return. The rate of tax you actually pay will be determined by your total income, the marginal tax bracket that puts you in, and your province of residence. In most provinces, you would need more than $30,000 in taxable income before you move into a 30% bracket (approximately).

No tax is normally deducted at source for CPP payments, however you can apply to have tax withheld voluntarily which will eliminate this type of unpleasant surprise in the future. You’ll find details on how to do this at http://www.ccra-adrc.gc.ca/newsroom/factsheets/2000/jan/sac_handout-e.html

As for payments already received, I’m afraid you have no choice but to pay Canada Customs and Revenue. – G.P.

Regarding trailer fees, some money market funds pay a small annual trailer (usually no more than a quarter-point), others pay nothing. By comparison, a typical bond fund pays a 0.5% trailer on a front-end load sale, and half that on a DSC purchase. An equity fund may pay a trailer of 1% on a front-end load sale and half that on a back-end load. However, these figures will vary from one company to another so if you want specifics, ask your broker.

If there is any conflict of interest potential, it would be for the broker to be pushing you out of the money fund and into equity funds that pay higher trailers. It certainly doesn’t seem like that’s the case here. – G.P.

Eligible tuition fees include a range of expenses that you might not normally think of as “tuition”, such as admission fees, charges for the use of laboratories and libraries, examination fees, etc. You will find a full list at the Canada Customs and Revenue website at http://www.ccra-adrc.gc.ca/E/pub/tg/p105/p105-e.html#P171_15344

The education tax credit is worth $400 a month for each month that the student is in full-time attendance at a recognized post-secondary institution.

There are some special forms required to claim these credits, or to transfer them. Consult the general tax guide for details. – G.P.

For example, claim a large enough deduction for the current year to reduce your taxable income to the lowest bracket (or to zero, if you prefer) and save the rest. If your total income is $65,000, let’s say you have taxable income of $55,000 after various credits and deductions. If you live in Ontario, your marginal tax rate is about 31%. By claiming enough of your RRSP contribution to bring your taxable income down to $31,677, you’ll reduce your marginal rate all the way to 22%. You may decide that’s good enough and keep the remainder of the deduction room for future years. – G.P.

On the larger issue of the wisdom of borrowing to invest, the technical term for this is “leveraging”. If done successfully, you can significantly enhance your returns because you’re using other people’s money to make profits. However, the risks are significant, as anyone will attest who borrowed heavily to invest back in the late 1990s when stock markets were riding high. Leveraged portfolios have probably incurred heavy losses since then, unless they were very skillfully managed and concentrated on a few high-performance areas such as gold and income trusts.

Anyone can make a strong numbers case for leveraging. However, your personal psychology must be taken into account. People who are uncomfortable with risk should not try this strategy. They are likely to bail out if their securities lose value, locking in their losses in the process. Only investors with a strong stomach, a lot of experience, and patience should consider this approach.

There’s a full chapter on this subject in my book Secrets of Successful Investing, which is now available in a trade paperback edition. It’s available at a discount of 20% off the suggested retail price. See details at Click Here – G.P.

There are two ways to approach bond fund investing. One is to buy units in an index fund, which would come closest to the type of fund you describe. Examples are the CIBC Canadian Short-Term Bond Index Fund and the TD Canadian Bond Index Fund. The CIBC fund has not lost money in any calendar year back to 1996. The TD fund had a small loss of about 2% in 1999. Both funds handily outperformed the average five-year GIC over the period to Jan. 31.

The other option is to choose an actively-managed fund with a low MER (management expense ratio). These are certainly not buy-and-hold funds, but a good manager can add a lot of value to a bond fund’s return. The Phillips, Hager & North Bond Fund receives a top rating in my 2003 Buyer’s Guide to Mutual Funds, but you need $25,000 to get in. The TD Canadian Bond Fund is a less pricey alternative. It shows a five-year average annual compound rate of return of 6.5% to Jan. 31. The average five-year GIC returned 4.6% over the same period.

We will be dealing with bond funds, as well as a wide range of other income-producing securities, in my new newsletter, The Income Investor, which will launch in April. For details on our 40% off charter member special, go to Click Here – G.P.

Being a landlord is more than a dollars and cents decision, however. You have to be psychologically equipped to handle tenant complaints, deal with problem payers, screen prospective tenants, and more. There’s certainly a lot more work involved than just owning a stock portfolio. – G.P.

That said, there are certain benefits. One, which you have identified, is that low-risk, interest-bearing securities like GICs will be slightly more attractive. Another is a stronger Canadian dollar. Exporters may not like it, but a stronger loonie should reduce the cost of goods imported into this country. If the savings are passed on, it could lead to somewhat lower prices for items like U.S. produce at the supermarket. We can hope so anyway. – G.P.