Registered Retirement Savings Plan (RRSP) - Part 2 of 4

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Publish Date: February 5, 2023

Important Information and Disclaimer

The matters mentioned in this Article and three related Articles thereafter, are only general in nature, in broader terms, in brief and cover only limited topics related to RRSP. There could also be exceptions to what is covered in these articles by the Author. Each person's tax and finance situations are different and may be unique. Therefore, only your Accountant/Financial Planner/Advisor and other relevant professionals can provide you with the right advice. The only intention for these series of articles is to invoke a new interest in the readers to start thinking in a different way and to seek advice from the appropriate qualified professionals, including but not limited to an Accountant, Financial Planner, and Investment Advisor who have a proven track record in this specific area. DO NOT act solely based on these articles, caution to readers is advised. The Author of these articles and the publishers will not be responsible for the consequences of any actions, of whatsoever nature, of the readers or anybody else. Wherever a singular term is used or a reference to a certain gender is made, it is used only as a representative of the general public. Wherever the term 'Bank' is used, it may include designated Financial Institutions as well.

For the preparation of this article, the Author referenced relevant publications of the Canada Revenue Agency (CRA). This does not mean that the accuracy of the article is assured by the CRA. Opinions expressed are solely that of the author.

Part 2 of 4

RRSP Contribution Limit

Each individual who wants to make a RRSP Contribution, should have a sufficient amount of RRSP Contribution Limit. This limit gives the individual the entitlement to contribute. How is this Limit calculated? Generally, it is equal to 18% of the 'earned income' of the individual in the previous year. But, there is 'limit' for this Limit. For the tax year 2022, $29,210 is the maximum allowed contribution limit for an individual (Source: CRA Publication on RRSP). By the way, for those taxpayers who are entitled to pension, the above calculation of RRSP limit is different. For the purpose of calculating the RRSP Limit, not all income of a person may necessarily be considered 'earned' income. For instance, salaries received is 'earned' income. Dividends received from a Corporation are not 'earned' income for this purpose. Therefore, people who intend to make RRSP Contributions should first find out what their RRSP Limit is for the relevant year, and whether any part of this limit has been used already. There may be some unused Limit carried forward from previous years as well. Taxpayers should contribute to RRSP only to the extent of the limit still available to them. Contributions over the RRSP limit may be subject to a penalty/tax. Over-contribution is a mistake that some people make and it could be a costly mistake. Accountants should be able to help you in this regard. If you have the slightest doubt that you might have over-contributed, do not wait, consult your accountant. You can find out the Limit from the Notice of Assessment received from Canada Revenue Agency, or call CRA at 1-800-959-8281 to determine your limit. If one or more years' past tax return is not filed or improperly filed, then special care needs to be taken in the determination of the RRSP Limit.

It needs to be emphasized that employees who have pension, have to take extra care in making sure that they don't exceed the RRSP Limit, since they have a reduced limit. A vast majority of over-contributors are typically in this category of taxpayers.

Over-Contribution to RRSP

For any reason, if you contributed more than your Limit, your Accountant should be able to help you minimize the financial cost of such over-contribution. Currently the 'tax' on the over-contribution is 1% per month (or 12% annually) of the over-contributed amount. This is much more than what a bank gives you as interest income on your savings. If this 'tax' payment is delayed, then there would be a penalty and interest as well. You also have to file additional Form(s), which means more lost time or costs incurred. A little care at the time of contributions can avoid all these hassles and costs in the future dealing with the consequences of over-contribution. Remember the old saying, a stitch in time saves nine. A simple but timely action by you can prevent the over-contribution. Based on his/her age, a taxpayer may not have to pay 'tax' on contributions up to an additional $2,000 over and above the Limit. Personally, I do not encourage anyone to contribute more than their Limit, falsely assuming that there is the 'permissible over-contribution' of $2,000 over the Limit. Instead, I encourage you to stick to the Contribution Limit in the first place. With the help of the right professionals, deal with the over-contribution at the earliest, in order to avoid future charges. When I see people over contributing to RRSP and getting into avoidable trouble, a question comes to mind. Can the bank play a greater role in helping the taxpayer find out what their limit is and how much has already been contributed, before the bank accepts that contribution?

Unused Contributions

It may be better not to contribute more than what you intend to deduct from your taxable income, even if you have more limit available. This is in case you later need cash for some other purpose, and you have to withdraw it from RRSP. This may attract taxes or may involve additional work and costs. Therefore, do not wait till the RRSP deadline, plan ahead about what your maximum contribution should be that you can deduct from your income. In any case, remember to stay within your Limit.

Spousal RRSP

A spousal RRSP is when an individual contributes to his/her spouse's or common law partner's RRSP. In this case, it is the RRSP Contribution Limit of the contributor that is used. In other words, in order to contribute to the Spousal RRSP, you need to have sufficient RRSP Limit. If you do not, and your spouse does, he/she will make the RRSP contributions to his/her own account. It is the person who makes the contribution, who can claim a deduction from the Income. Therefore, seek professional help to determine who can contribute, to whose RRSP account to contribute and how much to contribute. Spousal RRSP becomes more important and relevant where one of the spouses has a much higher income than the other spouse. By contributing to the lower income-earning spouse's RRSP, the income (by way of withdrawal from RRSP), during the retirement period, is somewhat evenly distributed among the spouses. By doing this planning, both spouses can pay tax at a lower rate, given there are no additional sources of income. If this is not done, then the higher income-earning spouse might be paying tax at a higher rate, during retirement.

A person can contribute to his/her own RRSP and also to his/her spouse's RRSP. The final RRSP contribution allowed is up to December 31 of the year that the taxpayer turns 71 years of age. However, this taxpayer can still contribute to his/her spouse or common law partner's RRSP until December 31 of the year that, that individual turns 71 years of age. (Source: CRA Publication on RRSP)

RRSP vs TFSA - Are they competing against each other for your money?

The introduction of the Tax Free Savings Account (TFSA) for the first time in 2009 affected the RRSP to a certain extent. Now the taxpayer has a decision to make - save in an RRSP Account or a TFSA Account or both? That is an important and crucial question faced by several taxpayers, who have limited financial resources. Your team of professionals can help you resolve this question. Is there a competition between RRSP and TFSA for your scare finances? There is no need for such a competition. The reason is that RRSP and TFSA work in different ways. A taxpayer can take advantage of both, at the same time, to a certain extent.

Take a look at this hypothetical case, used here only for illustration purposes. Caution is urged; please consult your team of professionals (financial planner, accountant, other relevant professionals) before making any financial decisions. Let us assume that the taxpayer has no idea how much to contribute to his RRSP and how much to contribute to his TFSA. He simply knows that he has lots of available limits for both RRSP and TFSA. He also knows that he only has limited funds available to deposit to these two accounts. He further knows that there is a specific deadline to contribute to his RRSP in order to take advantage for the tax year, 2022. Therefore, he decides to contribute $10,000 to his RRSP account on or before March 1, 2023. His assumption is that with this RRSP contribution, he will be able to receive an additional tax refund of $3,000 when he files his 2022 tax return, say on March 10, 2023. He files his 2022 tax return and claims $10,000 as deduction from his otherwise taxable income of $100,000. Now his taxable income is reduced to $90,000. Thus, he gets an additional tax refund of $3,000, say on March 20, 2023. He contributes this $3,000 to his TFSA Account. Eventually, with just $10,000 in his hand, he is able to save $10,000 in his RRSP account and also $3,000 in his TFSA Account. Let us assume that this person is able to grow his RRSP contribution of $10,000 to $11,000 within the RRSP tax shelter and pays no tax for that additional income of $1,000 in that year. If he can grow the original contribution and also all the income earned from it, and keep these amounts growing in the coming years and pays no taxes on such income, until that income is actually withdrawn. When we look at his strategy, we may think of how smart he is! But the reality is, nobody knows. Why is that? The simple reason is that, we don't know what his overall financial and tax situation is. Everyone's situation is different and therefore subjective. Therefore, consult a team of accomplished professionals to help make the right decision for you. This will reduce your risk and increase your comfort making these decisions. The above example is just to illustrate how you and your professional team could work together in an imaginative, productive and meaningful way to maximize your wealth. This also shows how RRSP and TFSA can co-exist and help you do better.

Another situation where a taxpayer may prefer saving in a TFSA, rather than a RRSP, could be when there is no real advantage, if saved in RRSP in a certain year, for any reason. That reason could be that there may not be a sizable taxable income resulting from other allowable deductions, expenses or tax credits available to the taxpayer. A very careful evaluation of various situations is necessary in a vast majority of cases. Therefore, taking a random decision by the taxpayer should be avoided, rather take a well-thought out, well-planned, well-educated and calculated decision, with the help of the appropriate professionals.

What is the deadline to make a RRSP Contribution?

The deadline for taxpayers to make RRSP Contribution is 60 days from the end of the relevant tax year. Accordingly, the deadline to make Contribution for the Tax Year 2022, is March 1, 2023. If you intend to make an RRSP Contribution for the Tax Year 2022, that needs to happen before the end of the day on March 1, 2023. All contributions made after this date will be available to be deducted from Income only for the tax year 2023 or later years.