RRSP Deadline - What You Need To Know

RRSP Deadline – What you need to know!

When my clients contact me at this time of year to make an RRSP contribution, the decision is usually fuelled by a desire to reduce taxes payable for 2020. The choice of making an RRSP contribution should be part of an overall financial plan but sometimes, you have to do what you have to do! As such, here are the five things you need to know about making an RRSP contribution and have it count against your 2020 tax bill.

1. When is the deadline to contribute?

Any contribution you make to an RRSP up to and including March 1, 2021 may be used against your 2020 taxable income. You may reduce the amount of your taxable income for 2020 by the dollar amount that you contribute to your RRSP. You do not have to use all of the contribution against your 2020 income; you can use it toward a future year as well.

2. What is the dollar limit that I can contribute?

Your RRSP contribution limit for the 2020 tax year is 18% of earned income you reported on your tax return in the previous year (2019), up to a maximum of $27,230. If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the pension adjustment. The pension adjustment is calculated by your employer and reported to the CRA on your T4 each year. If you're a member of a defined contribution registered pension plan (RPP) or defined profit sharing plan (DPSP), your pension adjustment is the total contributions to the plan made by you and your employer. If your RPP is defined benefit, your pension adjustment is determined by a formula designed to reflect the pension benefit entitlement you earned in the year.

3. Can I contribute more than my limit?

You may actually have more contribution room than you think. If you have not maximized your RRSP contribution in the past, unused contribution room carries forward, i.e. you can make  catch up contributions and use the deductions today. Be careful not to over-contribute though as the financial penalties are significant. Canada Revenue Agency allows you to over-contribute to your RRSP by up to $2,000 without being penalized. However, you cannot claim a deduction for the excess amount. If you over-contribute by more than $2,000, you are subject to a one per cent penalty tax for each month you are in excess of that. The easiest way to determine your personal RRSP limit is to refer to your most recent Notice of Assessment which provides your RRSP contribution limit.

4. What should I invest in?

Your RRSP investments should be part of an overall financial/investment strategy. If you are making a lump sum contribution today it is likely motivated by tax reasons. If you do not have an existing investment plan, it is best just to make the contribution and deposit it temporarily into something safe where you can reallocate the money in the future when you have more time to put together an investment plan. The tax receipt, you can use immediately. Don't rush into any investments without careful consideration.

5. Can I borrow money for my RRSP contribution?

Many financial institutions offer "RRSP Loans” which are designed to offer quick approvals for last minute contributions, flexible repayment options and competitive borrowing rates. It is important to note that unlike non-RRSP investment loans, any costs associated with borrowing are not tax deductible.

When used properly, RRSPs can be one of the most powerful vehicles in your financial model. The key to success is to know how and when to deploy RRSPs, and also when to surrender the investments so that you can take full advantage of our tax system. The key is to understand all of your financial moves that are available and execute the ones that provide the best overall financial result for you.