microFIT vs RRSP – Is There Not One Definitive Answer?

No.

Well, you asked. icon smile microFIT vs RRSP   Is There Not One Definitive Answer?

The past few articles in this microFIT vs RRSP series compared the financial results of investing the cost of our microFIT quote in a microFIT roof mount solar PV installation vs simply investing that money in an RRSP.

Andrew from Solsmart was very helpful in validating my earlier analysis and offering other perspectives. And no, we have not signed a contract with anyone.

From the previous articles, here are the relevant summarized financial information at the end of 20 year microFIT contract:

  • $   43,000 – proposed microFIT installation
  • 13.4% – Vendor’s Internal Rate of Return
  • 6.8 - Vendor’s simple financial payback in years
  • $112,500  – SWITCH Before Tax Income + Residual solar instal
  • 16.8%  – SWITCH Before Tax Internal Rate of Return
  • $  88,300 - SWITCH After Tax Income + Residual solar instal value
  • 13.0% – SWITCH After Tax Internal Rate of Return

Here were key assumptions used and results of instead investing in an RRSP over the same 20 year duration:

  • $   43,000 – initial RRSP contribution
  • 4.5% – compound annual income on RRSP investment based on Provincial Strip Bond
  • - reinvest resultant income tax refund as the following year’s RRSP contribution
  • $159,200 – Balance in RRSP account in 20 years from RRSP only investement
  • - reinvest annual microFIT net income in RRSP
  • - reinvest annual income tax refund in RRSP from microFIT RRSP contribution
  • $190,000 – Balance in RRSP account in 20 years from microFIT annual contributions

So, at this point it seems that  the choice is clear and I should go ahead and sign with the solar instalation vendor who provided the quote all things being equal.

And before we continue I’ll repeat what I have said in the prior 2 articles, just so we are ‘crystal’ icon smile microFIT vs RRSP   Is There Not One Definitive Answer? :

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.

Now, 20 years is a very long time to wait. A lot can happen during that time.

On day 1 of year 1, my RRSP account has:

  • $43,000 under the RRSP contribution alternative
  • $           0 under the microFIT alternative

How long would I have to wait for the RSP account under the microFIT alternative to equal the balance under the RRSP contribution alternative? Curious? I was.

Based on the previously mentioned assumptions, the RRSP account would be approximately the same after 11.5 years.

After that time the RRSP account balance under the microFIT alternative zooms past that under the RRSP only alternative for ever.

Eleven and a half years is a much shorter duration. This gives me some comfort.

Next, I don’t know about you, but I do not plan to be working 20 years from now. I plan to be retired. Therefore, I need to reduce the $190,000 RRSP balance at the end of year 20 above under the microFIT scenario because I am not able to make an RRSP contribution in any year when I do not have employment income. Neither are you. Being retired by definition means I am not working for a salary. And, with no RRSP contribution there will also be no resulting income tax refund.

Let’s say I want to retire  at the end of 13 years. Why 13 years? Well, that will be when I turn 65.

So, what is the impact by no longer contributing microFIT revenue to an RRSP in years 14 through 20 nor receiving the resultant income tax refund in years 15 through 20? Well, taking into account that investing the microFIT income in these last 7 years of the microFIT contract will attract immediate income tax, at the end of year 20 under the microFIT alternative I arrive at:

  • $152,400 – Balance in RRSP account in 20 years from microFIT annual contributions
  • $  22,800 – Balance in non-RRSP account in 20 years from microFIT annual income

Here, the total is more than the RRSP only investment alternative of $159,200. However, in total it is not that much more, is it?

And, I will also have something at the end of year 20 under the microFIT alternative; that is a working roof mount solar PV system.

What if I retire sooner than after 13 years? Well, the resultant RRSP account goes down while the non-RRSP account balance goes up but by less because the annual microFIT revenue will be taxable.

However, under the RRSP investment alternative, the balance at the end of year 20 of $159,200 does not change. Why? And this is the critical part … I only need to work and have employment income for 6 years to re-contribute the annual income tax refunds from the initial $43,000 RRSP contribution under the RRSP alternative. Once I retire, this money can stay in an RRSP until I am 69 or so, after which it is transferred into a RRIF with nominal annual minimal required withdrawals (the same under either investing alternative).

Again, I can send you the Excel worksheet I am using if you want to see the details. Email me at Dan@DailyHomeRenoTips. Remember it is a rough spreadsheet and you will have to use your own situation’s numbers for it to be useful to you.

Then again, under the microFIT approach I would have something which I would not have at the end of 20 years under the RRSP only alternative: a fully functioning solar installation. Remember the panels are waranteed to work for 25 years. Is this sufficient to go wtih the microFIT approach?

So, thoughts about my financial analysis or my logic? What did I miss? What would you do?

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Comments

  1. Richard says:

    Interesting analysis… I’d say the one conclusion that wasn’t clear was:

    1) RRSP contributions work best for individuals with a large amount of taxable income, and conversely
    2) MicroFIT income would be maximized if the contract were put in the name of someone with a very low amount of taxable income.
    3) For MicroFIT, if you do have a high tax base, then perhaps using debt to finance the project makes sense as there is no initial outlay of money for the project.

    So, a number of scenarios that would be good to model out and derive conclusions…

  2. Imad says:

    Great article. One little twist would be that any income you earn on the Microfit system for the first 5-6 years of the system you would essentially get it tax free. The CCA allowance would mean almost all the depreciation will write off the income and you get to keep it tax free. If you invest this into RRSP i am sure the return would be higher than what you have plus would outweigh the cons of the system such as early retirement, system maintenance, degradation of panels etc.

    • Dan says:

      Hi Imad,
      Based on the best quote we received, if one has 20 years more of full time employment ahead, then yes the mciroFIT investment is on paper the better option and provides very high returns if all of the income is invested in an RRSP. Later articles in this series examine the arithmetic calculations.

      I am sufficiently old that I hope I don’t have to work another 20 years so the numbers would be different.

      As it turns out we are expecting any day revised quote for a vendor we think we will go with, if we go with any vendor.

      We have learned a lot by going through multiple vendor evaluations and negotiations.

      We will be writing an extensive series of articles soon on what we have learned so others can also learn.

      Stay tuned.
      Dan

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