REGISTERED RETIREMENT SAVINGS PLAN
CONTRIBUTIONS VS. DEDUCTIONS
The RRSP contribution deadline is March 1st, or 60 days following the end of the "tax year" (December 31st). And, there still seems to be some confusion as to what this deadline is really all about.
You can make your RRSP contribution any day of the year, including weekends and holidays, using online facilities that are available ... with the click of a mouse ... 24 hours a day. Sure beats the long line-ups on deadline day.
But what is the deadline? The deadline refers to the RRSP contribution deadline, which is the last day you can make an RRSP contribution and still be able to claim that contribution as a deduction on your previous year income tax return. This may be the source of the confusion.
I still have some clients with funds sitting in non-registered investments, who also have large unused RSP Contribution Room available. One, who was rushing to make the RRSP deadline and had nearly $100,000 of unused RRSP contribution room, had several hundred thousand dollars sitting in investments in a non-registered account. She wanted to figure out the optimal amount to contribute that would bring her income down into a lower bracket.
I explained to her the difference between an RRSP contribution and an RRSP deduction.
The amount you can contribute to an RRSP is based on your RRSP contribution limit, printed on your Notice of Assessment from Canada Revenue Agency (CRA). Essentially, it is 18% of your prior year's earned income (to a maximum of $25,370 for 2016) less any pension adjustment you receive as a member of a company pension plan, plus any unused RRSP room carried forward from prior years. Your earned income is typically your employment income or business income, less any related expense deductions you claim.
CRA charges a penalty of 1% per month for any contributions beyond a $2,000 permitted overage. If you contribute less than your limit, any excess RRSP room is carried forward indefinitely for use in future years. You should review this each year when you receive your Notice of Assessment from CRA.
However, just because you make an RRSP contribution doesn't mean that you must claim it all in a particular year. In my client's case, I explained she should contribute the entire $100,000 to her RRSP, immediately, to shelter income and gains from tax. We would decide how much she should claim as a deduction when she files her tax return in April.
Generally, for higher-income earners, claiming as much of the RRSP deduction as needed to bring income down to the second highest federal tax bracket (about $85,000), may be a good 'rule of thumb'. However, each circumstance is unique.