Is a limited partnership a good idea?

Q – What is your opinion of Limited Partnerships? Are they an effective means of sheltering tax?

It has been suggested that we consider moving a portion of our mutual funds out of RRSPs to non-RRSPs thus bumping up our income substantially. We would then borrow some cash, and buy shares in a Limited Partnership.

I understand Revenue Canada issues a special registration number to those projects it deems eligible to qualify for a tax break. The tax incentives would offset the increased income both this year and next. My husband is nearing 69 and this would help keep taxes down on his future RRIF withdrawals, since a good portion of his mutual funds would then be outside the RRSP.
We are a bit leery of this. If the investment doesn’t pan out, we would lose a decent sum of money, and I’m not sure the future tax benefits would cancel it out. What is your opinion of this strategy and these investments in general? J.H.

A – My opinion is that you have a perfect right to be leery of this approach. Also, you should look carefully at the reasons why this suggestion was made to you. Is it possible thathe person who made the recommendation stands to benefit financially if you agree to it? Ask yourself, and the advisor, that question.

Let’s look at this idea in more detail.

First, it is suggested that you move some of your mutual funds out of your RRSPs. It doesn’t sound like this is being done as a swap, so you would have to pay tax at the full marginal rate on all the assets you bring out of the plan. If the value of the fund units is significant, that could add up to a lot of tax liability.

The idea is apparently that you offset that tax liability by investing in some kind of limited partnership that will provide a deduction for you. That is a feasible tax strategy, but in all likelihood you will have to assume a high degree of risk. Most limited partnerships, by their nature, are high?risk ventures. Is this something you’re prepared to undertake at your age? More specifically, are you prepared to trade a (presumably) conservative RRSP fund portfolio for a risky limited partnership deal, because that is what it comes down to.

You speak of higher income. Is that income guaranteed? I would be very surprised if it was. If it is, who guarantees it? With what assets?

At the very least, I suggest you spend the money to get a second opinion on this proposal from a fee?for?service financial planner or an independent accountant that specializes in tax strategies.

Remember, these are your life’s savings. Treat them with caution. – G.P.