RRSP Basics

It’s that time of the year – you’re hearing rumblings about RRSP…

RRSP Basics

It’s that time of the year – you’re hearing rumblings about RRSP contributions. Contributing to your RRSP is a great way to experience short-term and long-term benefits. Let’s do a quick crash course.

Remember the deadline
1. Deadline for the 2014 taxation year is March 2, 2015.
2. Income Tax Act sets the deadline as ‘on or before the day that is 60 days after the end of the year’.


Know your limit
1. Check your 2013 Notice of Assessment for your 2014 limit.
2. RRSP contribution limit for the year is 18% of your ‘earned income’ for the prior year to a maximum of $24,270 for 2014, minus your pension adjustment, plus any unused contribution room from prior years.


Don’t make excess contributions
1. Avoid making a contribution greater than $2,000 in excess of your limit.
2. You can contribute up to the amount of your deduction limit, plus an excess contribution as long as the total excess contribution never exceeds $2,000.
3. Any excess contribution over $2,000 may be subject to a 1% per month tax.


Consider carrying forward contributions to deduct in a future year
Your contributions don’t have to be deducted in the year they’re made and you may want to deduct them in a future year if you’re expected to have a higher income. This may result in you receiving a larger refund because of your higher tax rate in the future year.


Get your refund throughout year
1. You can get your tax refund throughout the year rather than waiting until your personal return is filed and processed by CRA.
2. Employees can provide authorization issued by CRA to their employer to reduce income tax withholdings throughout the year.
3. Form T1213 Request to Reduce Tax Deductions at Source must be completed.


Consider making spousal contributions
1. You’re allowed to contribute funds either to your RRSP or your spouse’s RRSP.
2. Caution – Several considerations need to be made – e.g., current age, expected retirement age, life expectancy and income at retirement from other sources.

Also, be careful of the income attribution rules relating to spousal RRSP’s and RRIF’s.


Consider borrowing funds to make your contribution


1. Interest paid on the borrowed funds is not tax deductible.
2. Caution – Several considerations need to be made – e.g., borrowing rates, return on investment rates, timeline, future cash flow, other major expenditures such as mortgage payments and children’s schooling.


Consider the investments held inside/outside your RRSP
1. Consider arranging your investments so that the ones which would attract the most income tax are held within your RRSP or TFSA.
2. The following investments which generate income are taxed 100% and it’s generally advantageous to hold them inside your RRSP:
3. Cash
4. T-bills
5. GIC’s
6. Money market funds
7. Bonds
8. Foreign stocks

The following investments are generally most suitable to be held outside your RRSP:
1. Foreign stocks paying no income
2. Canadian stocks


In-kind transfers can be made
1. You can transfer shares held in a non-registered investment account to your RRSP. The transfer will be considered a contribution equal to the fair market value of the shares at the time of transfer and you will receive the tax deduction.

2. Caution – If the transfer triggers a loss, the loss will be denied. If you have shares with an unrealized loss, it’s generally advantageous to actually sell them and contribute the cash proceeds so that the loss can be deducted.


Withdrawals are taxed
1.Tax is withheld at varying rates depending on withdrawal amount.
2. Depending on your income and tax withheld upon withdrawal, you may owe additional tax.


What’s your contribution worth to you?
1. Estimate your income tax refund by knowing your marginal tax rate.
2. Your marginal tax rate multiplied by your contribution amount is generally the amount of your refund.


Know the difference between tax savings and deferral
Remember that you are not receiving a tax savings, but rather a tax deferral. You’re deferring personal income tax until the amounts are withdrawn.


Home Buyer’s Plan and Lifelong Learning Plans
1. These plans allows you to withdraw funds without triggering penalties or tax.
2.Caution – Specific rules relating to both plans must be abided by.


Get ready for age 71
1. Your RRSP must be wound-up by the end of the year in which your turn 71.
2. Consider your options – e.g., RRIF, annuity.


Designate beneficiaries appropriately
1. Holding an RRSP at death can result in a significant tax bill.
2. Take advantage of deferring tax by designating your spouse, common-law partner or financially dependent child or grandchild as the beneficiary and following the applicable rules.

The information in this publication is current as of the time it was written. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Deuzeman & Associates to discuss these matters in the context of your particular circumstances. Deuzeman & Associates does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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