RRSP and TFSA Contribution Reminder

February is upon us and while it means that we are one month closer to the end of another long Canadian winter, it also means that we are one month closer to tax season! 

And of course, no tax season is complete without deadlines and tax-saving tips!

Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are two relatively easy ways to plan for the future and save taxes at the same time!

To help you take advantage of these opportunities (and avoid missing the deadline!), we’ve decided to take a moment to walk you through each one.

Here’s what you need to know about RRSPs, TFSAs, and how to make them work for you!

Registered Retirement Savings Plan (RRSP)

Registered retirement savings plans are a popular way to save some money. But, to take advantage of this opportunity, you must meet the contribution deadline. For this year, the deadline for 2020 contributions is March 1, 2021. 

Making RRSP contributions can benefit you in two specific ways:

  1. An RRSP contribution is tax-deductible in the year of contribution
  2. Income earned within an RRSP is tax-deferred until withdrawal, where it can be taxed at a lower rate. 

To maximize your savings, first examine your tax bracket to determine the ideal contribution amount. Each dollar you put into your RRSP is deductible from your income and may make you eligible for an additional tax refund. 

For more clarity, consider this example:

You are a person living in Ontario and you have earned an annual income of $120,000. This puts you in a marginal tax rate of 43.41%. If you were to contribute $10,000 to your RRSP, you would get a refund of 43.41% of that contribution, in this instance, $4,341. 

As your contribution increases, your taxable income decreases, potentially moving you to a lower tax bracket. 

If you are unsure of your RRSP contribution limit, you can check the amount on your most recent Notice of Assessment or through your My Account on the CRA website. 

Reducing your income when in a higher tax bracket is one of the more common uses of RRSPs but there are many other benefits and opportunities worth considering. 

These opportunities include:

Spousal RRSP

If you are married or in a common-law relationship, you can make an RRSP contribution for your lower-income spouse. This move can save money in retirement by potentially reducing the tax bracket and therefore, lowering taxes.

Again, the best way to understand this is with an example. Consider this:

In a marriage, one spouse earns $100,000/year while the other spouse earns $50,000/year. Individual RRSP contribution limits are set at 18% of the prior year’s earned income to a maximum amount that changes annually. If both spouses have an RRSP that only the owner can contribute to, the spouse with higher income would be able to contribute $18,000 while the spouse with the lower income would be able to contribute $9,000.  

With a spousal RRSP, these contributions can be levelled out a little. The maximum contributions will remain the same but the spouse earning more could contribute $14,000 to their RRSP and the remaining $4,000 to their spouse while still taking the $18,000 deduction on their income tax. The other spouse can still contribute their $9,000 and take their deduction on that amount.   

Making contributions to a spousal RRSP can provide benefits beyond retirement savings. For example, if one partner chooses to leave their job to stay home and raise the children, previous spousal RRSP contributions can allow that person to withdraw money while unemployed with minimal or no taxes. But, it is important to note that with spousal RRSPs, contributions are subject to the three-year attribution rule. This means if the funds are withdrawn within 3 calendar years of the year the contribution was made, the contributor will be liable for the taxes upon withdrawal. This means if you contributed $5,000 to a spousal RRSP, that amount will be added back to your income if it is withdrawn before 3 years have passed. 

First-Time Home Purchase and School Enrollment

If you have been regularly contributing to your RRSP but need access to the funds before retirement, there are programs that may be available to help. 

For the first-time homebuyer, the Home Buyer’s Plan (HBP) can support this significant purchase. For the person returning to school, the Lifelong Learning Plan (LLP) may be able to help cover the cost of tuition. 

Both programs allow individuals to borrow funds, tax-free, from RRSPs. These funds are subject to later repayment. The HBP has a repayment term of 15 years while the LLP has a term of 10 years. 

Deduction Deferral

This option is one of the best-kept secrets of RRSP contributions. Simply put, you can make a contribution to your RRSP today and defer the tax deduction to a later year. This is a beneficial strategy for people that are currently in a low tax bracket but are looking to maximize the tax-deferred growth within the RRSP. The tax deduction can be claimed at a later year, when in a higher tax bracket. 

Tax-Free Savings Account (TFSA)

Tax-free savings accounts are an easy way to earn tax benefits. 

The maximum amount you can contribute to your TFSA is limited by your TFSA contribution room. The contribution room for 2021 is the same as it was in 2020 at $6,000. But, if you have an unused contribution room from previous years, your contribution room will be greater than $6,000. It is a good idea to take advantage of this if you are in a position to do so. 

The amount you contribute to a TFSA is not tax-deductible but the income earned within the account is tax-free. 

If you are unsure about your contribution room, you can find the amount through My Account on the CRA site. 

If you are going to contribute to your TFSA, it is important to stay within your contribution limit. People often go over without even knowing. Commonly, this happens when they withdraw and then re-deposit money within the same year. 

Let’s say you removed $20,000 from your TFSA to make a large purchase and that your contribution room is $8,000. Sometime, later in the year, you have enough money to replace that $20,000 in the TFSA and so you put the money back in. If you did not wait until January 1st of the following year, you have now over-contributed by $12,000. When the calendar year changes, your withdrawal amounts are added to your contribution room. 

When you have over-contributed, the CRA charges a 1% penalty per month on your excess contribution. In the above example, the CRA would levy a penalty of $120 per month. And like many massive government agencies, it can take them more than a few months to alert you to the situation! 

If you have an unused TFSA contribution room, consider converting an existing part of your non-registered portfolio to a TFSA. Doing this may trigger a capital gain or a capital loss. 

A capital gain may result in additional tax liability. But, this gain can be offset by unused capital losses carried forward from a previous year. To determine whether or not you have any unused capital losses, check your most recent Notice of Assessment. 

Capital losses can be carried forward indefinitely to offset a capital gain in the future but if a loss is triggered, make sure you do not violate the superficial loss rules

A superficial loss occurs when you dispose of capital property for a loss and meet both of these conditions: 

  1. You, or a person affiliated with you, buys or has the right to buy the same or identical property during the period beginning 30 calendar days before the sale and 30 calendar days after the sale.
  2. You, or a person affiliated with you, still owns or has the right to buy the same or identical property 30 calendar days after the sale. 

Let WTC Help!

2020 was a strange year for many reasons, which makes securing your future all the more important. 

There is never a bad time to start saving, and never a bad time to start contributing to an RRSP or TFSA.

If you need support in determining proper contribution amounts or planning your next steps, WTC is here to help. From personal and corporate tax support to cloud bookkeeping and payroll, we have the knowledge and understanding to build the solutions that are right for you and your goals. 

Don’t wait any longer, contact us today to have all of your RRSP and TFSA questions answered!

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