microFIT VS RRSP

I’ll be direct. The point of this three part article is to simply make you consider alternative uses of money you might otherwise commit to a solar panel PV installation under the Ontario microFIT program.

I am not for or against the microFIT program. As someone who is pro-energy conservation, I am glad there is some financial assistance for renewable energy generation.

I am first and foremost for my family’s own financial well being, as you should be for yours.

As I haven’t yet seen a detailed analysis comparing net total return under a microFIT contract vs contributing the same funds to a Registered Retirement Savings Plan (whether or not a Spousal plan); the comparison should be made as RRSP’s and SRSP’s are available to those with employment income.

And, remember every individual’s own current and future income tax situation is unique. For the less knowledgeable, I do recommend you seek the analysis of a qualified financial specialist, income tax specialist, etc. based on your own situation.

Now, to illustrate such a comparison, I’ll use my own situation; your situation may vary.

I have in my hand a microFIT roof mount quote from a very reputable solar installer with very good references (which I checked myself), very reasonable production estimates (not the inflated production estimates you tend to see even from very long time solar installation companies), etc.

For purposes of this article and analysis, the following are the relevant financial numbers where all of the investment is funded by myself, i.e. no bank loan:

  • microFIT Solar PV Investment – $43,000
  • Vendor’s calculated return (including annual insurance, monthly LDC fees of $5.25, and annual module degradation factor of 0.5%):
    • Internal Rate of Return 13.4%
    • Simple Payback of 6.8 years

Sounds pretty good, right? Yes

Next, I use the Excel worksheet from SWITCH, the previously referenced non-profit organization out of Kingston, Ontario which generated the following relevant summary financial numbers where all of the investment is financed through a bank loan:

  • microFIT Solar PV Investment – $43,000
  • Before Tax Income + Residual value of solar installation – $112,500
  • Before Tax Internal Rate of Return – 16.8%
  • After Tax Income + Residual value of solar installation – $88,300
  • After Tax Internal Rate of Return – 13.0%

Sounds even better, right? Yes.

What if instead I took that $43,000 instead to make an RRSP or SRSP contribution? Here are the important factors unique to RRSP or SRSP contributions:

  • You can use the income tax refund from your initial contribution to make another RRSP or SRSP contribution the next year; you can then use the income tax refund from the second year’s RRSP or SRSP contribution to make yet another RRSP or SRSP contribution in the third year; you can…. see where I am headed with this?
  • As of the writing of this article you can purchase 20 year Provincial strip bonds yielding 4.5% per year or more. This is a relevant comparative investment to the microFIT 20 year 80.2 cents contract.
  • Your marginal income tax rate will be lower when you are retired and make RRSP or SRSP withdrawls; therefore, the income tax rate used to tax microFIT revenues after the solar installation is fully depreciated will likely be higher than that used to tax RRSP  or SRSP withdrawls.
  • Most people throughout Canada have large amounts of Cumulative un-used RRSP contributions; I know I do. This should allow you to contribute more than the 2010 RRSP contribution limit of $22,000. Remember, everyone’s own personal situation is unique. Before you make any decision you should contact a financial income tax specialist just as you need a licensed electrician for the AC connections and metering as well as an ESA inspection for a microFIT installation.

Below are the high level relevant numbers for my particular situation (numbers are rounded to nearest one hundred dollars). You will see that the initial investment generates not one but 6 revenue streams (compared to one revenue stream under the microFIT scenario) based on using the Income Tax Refund received in one year to be the RRSP or SRSP contribution in the next year (this is key):

Year        RRSP Contribution     Income Tax Refund

  • 0                    $43,000 $16,100
  • 1                    $16,100 $  7,200
  • 2                    $  7,200 $  3,300
  • 3                    $  3,300 $  1,500
  • 4                    $  1,500 $     700
  • 5                    $     700 $       -

The Year Zero’s Income Tax Refund is at 37.5% while the remaining are at 45% income tax rate.  The reason for the difference is because the size of the initial $43,000 RRSP / SRSP contribution is sufficiently large to reduce the marginal income tax rate for most individuals (in other words, it takes them down to a lower income tax bracket) in Year Zero while this is not the case for the remaining years. This is taking the conservative approach.

So, with 6 income streams earning 4.5% income inside an RRSP or SRSP each year, with each income stream starting one year after the next, what is the net income before and after tax?

Select this link to the next article in our RRSP vs microFIT analysis. The resultant numbers and strategies may surprise you.

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Comments

  1. Sods says:

    I understand that this is for demonstration purposes only. But I think the real question is not MicroFIT vs RSSP, it is why on earth do you have $43,000 in cash lying around to invest with?

    I think you need to consider financing in your comparison. Yes, the interest costs should be the same, but MicroFIT loan will be tax deductible as it is for business income while the RRSP loan is not. Not saying this will change your conclusion (Which we find out tomorrow), but you should definately compare apples to apples.

  2. Dan says:

    Hi Sods (unique name).

    Actually, we don’t. Many seem to have that chunk of change lying around but not us.

    In the next article we do in fact inlude from a cash flow perspective the impact of the interest on the $43,000 loan.

    Oh, and the article is not tomorrow but in a couple of days.

    Dan

  3. Sods says:

    In that case I will wait here patiently for Pt2!

    It dates back to gradeschool actually… long story, but it makes a great alias/screen name.

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