The incredible one

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  By Guest Blogger Sinan Terzioglu

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It’s coming! As the February 29 deadline to make 2023 RRSP contributions nears, it’s a good time to ensure you are utilizing your available contribution room in this tax-advantaged account letting you save with pre-tax money and lower your overall tax burden. For 2023, the maximum contribution is the lesser of 18% of 2022 income (minus pension adjustments) or $30,780 plus any unused contribution room from the past. With an estimated $500+ billion of unused RRSP contribution room, many Canadians are missing out on the full potential of this incredible tax shelter.

It’s never too early to contribute: You should start as soon as possible even if you anticipate being in a higher tax bracket in the future. A little-known fact is you don’t have to claim tax deductions in the same year you make contributions. They can be carried forward indefinitely and claimed in future years when in a higher tax bracket.

In-Kind contributions: If you don’t have available cash to contribute but hold assets in a non-registered account, make an in-kind contribution by moving investments from your non-registered account to the RRSP.  In-kind contributions are considered deemed dispositions so if there are any capital gains realized, 50% of the gain will be taxed at your marginal rate.

If you contribute a position in-kind and realize a capital loss, the loss will be considered a superficial loss and the CRA will not permit you to use the capital loss to offset capital gains. If you would like to continue owning the same holding in your RRSP but would like to be able to utilize the capital loss to offset capital gains, then you should sell the holding in your non-registered account, contribute cash to your RRSP and repurchase the same holding after 30 days has passed. The risk with this is the investment may increase in price so it may not be worth it in some circumstances. Another option is to purchase a different but similar investment.

Contribute from your TFSA: Depending on circumstances it may make sense to contribute assets from a TFSA directly to an RRSP. The RRSP contribution will count as a withdrawal from the TFSA so while you would not lose the TFSA contribution room you must ensure to wait until the following January to re-contribute the withdrawn amount to your TFSA otherwise the CRA will charge you a penalty (assuming you have no other available contribution room).

RRSP loan: Borrowing money so that you can contribute to your RRSP is a strategy many do not consider utilizing. While the loan requires you to pay interest, the contribution to your RRSP will help lower your tax bill and then you can use the tax refund to repay the loan partially or entirely.  Also, by being able to add funds to your RRSP sooner, you will have more money invested which will compound sheltered from tax for longer.

Spousal RRSP: Contributing to a Spousal RRSP is ideal when there is a disparity in incomes between married and common-law couples. When a higher income earning spouse contributes to a Spousal RRSP the lower income spouse is able to withdraw the funds after three years has passed and the withdrawal would be taxed at the marginal rate of the lower-income spouse. Also, Spousal RRSPs provide an opportunity to equalize RRSP balances over time so that you have more flexibility to keep total taxes lower if/when withdrawing from RRSPs before pension income splitting is permitted after the age of 65.

Incorporated business owners: If you have a corporation and pay yourself dividends you should seriously consider paying yourself a salary so that you can earn RRSP contribution room instead of paying yourself entirely in dividends. Since there is no tax-advantage by paying yourself dividends instead of paying yourself a salary, you may as well utilize the advantages of a tax-sheltered RRSP.  Also, paying a salary allows a business owner to contribute to the Canada Pension Plan (CPP) which is one of the best investments Canadians can make because it provides a hedge against inflation and longevity risks.

Home Buyers Plan: The HBP allows you and your spouse to each withdraw up to $35,000 from your RRSPs tax free and use the funds towards the purchase of a first home. The withdrawals must be repaid at a minimum of 1/15th of the withdrawn amount per year.  The HBP can be used simultaneously with the First Home Savings Accounts (FHSA) so couples that take full advantage of both plans can potentially put $150,000+ of tax free money towards the purchase of their first home.

Fund your education: The Lifelong Learning Plan (LLP) allows you to withdraw funds tax free from your RRSP to fund education or full-time training with the promise that you repay the withdrawn amount. Under the LLP you are able to withdraw up to $10,000 in a calendar year from your RRSP (up to a maximum of $20,000 during a qualifying period) to finance education or full-time training for you or your spouse/common-law partner.

The Bottom Line: Taxes will continue to be one of our largest expenses and RRSPs are a great way to pay less of them plus save for retirement as well for the purchase of your first home. By contributing early and regularly, you will be able to take advantage of tax-free compound growth and significantly increase your chances of achieving your long-term financial goals.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

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About the picture: “I wanted to say thank you for the free advice on your blog,” writes Kalin. “I’ve been a daily reader for years, and the blog has helped keep me (relatively) rational. This week we had to say goodbye to Chickpea, our Rottie mix, after 11 years and 10 months.  She was, in turns, an acreage protector and apartment slouch, a menace to muskrats and shoulder to lean on. She was the finest furry friend, and we’re missing her dearly. Here’s a picture of her enjoying the view from a 1950 Fargo grain truck. Thanks for the wisdom, the quips, and the dog pics.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.