Now that we’re in the new year, it’s too late to maximize most of your tax credits and deductions for your 2020 tax return. There is, however, one tool remaining that you can use to minimize your tax owing from 2021 and that’s RRSP (registered retirement savings plan) contributions.
When Do I Have To Make My 2020 RRSP Contributions By?
Unlike other tax credits and deductions, RRSP contributions can be made until March 1 of the following year, so long as you’re under 71 years old. That means any contributions you make from January 1 to March 1, 2021 will reduce your taxable income by the same amount, and therefore you tax owing for your 2020 tax return.
How Much Can I Contribute To My RRSP For 2020?
The amount you can contribute to your RRSP, without penalty, is limited to your contribution room. Your RRSP contribution room is equal to all the unused contribution room from previous years plus your contribution room from 2020.
For 2020, your contribution room is any unused contribution room from previous years plus 18% of your 2019 earned income up to $26,230.
Earned income includes income from employment or self-employment. It also includes …
- Rental income from real estate
- CPP disability pension
- Research grants
- Spousal support payments
To find out what your contribution room is, you will want to look at your previous years tax return.
Is The RRSP Deduction Limit The Same As Contribution Room?
Most taxpayers will deduct their RRSP contribution from their tax return in the same year that they make their contributions. In this case the deduction limit equals your contribution room.
But there are situations where the deduction limit will be different than your contribution room. That’s because if you contribute to your RRSP in any given year you are not required to deduct it in the same year. Instead, you can report the contributions on your tax return and then choose to carry them forward to a future year.
In these cases, your deduction limit will be greater than your contribution room because the deduction limit is equal to your Unused Contributions + Available Contribution Room.
Situations where you may want to carry forward contributions include years where your earned income can’t absorb the deductions or years where you only want to bring income down a single tax bracket to maximize the overall benefit of the RRSP contribution deductions.
To find out if you should carry forward any of your RRSP contributions for 2020, reach out to your tax planning professional.
What Happens To My RRSP Deduction Limit If I Have An RPP?
If you make contributions to an RPP (registered pension plan), the amounts contributed will reduce your contribution room.
What If I Make Contributions To A Spousal RRSP?
If you make contributions to your spouse's RRSP, the amount you contribute will be deducted from your contribution room and taxable income.
What If I Over Contributed To My RRSP In 2020?
Over contributions are usually accidental but can result in a 1% penalty for each month you exceed your contribution limit by more than $2,000 (if you are under 19, there is no $2,000 buffer). The only way to remedy an overcontribution is to withdraw the amount.
If you had an over contribution in 2020 but did not withdraw it, you’ll have been charged the appropriate penalty amounts. To pay the penalty, you must file a T1-OVP tax return by March 31, 2021 (90 days after the last day of the year the overpayment was made). If you file this return after March 31, there will be an additional penalty of 5% on the taxes owed plus 1% monthly.
The good news is, that once January 1, 2021 passed, your newly added 2021 contribution room (18% of your 2020 income up to $27,830 should have hopefully offset the over payment and stop additional penalties from being charged in the new year. In rare situations where your overcontribution exceeds the newly added contribution room you’ll most likely want to make a withdrawal to offset any further penalties. In these situations, consult with your tax professional.
If you make over payments in the future, you’ll also want to consult with your tax professional. Depending on when the over payment is made, it may be recommended you eat the penalties until the beginning of the following year when your new contribution room will absorb the overpayment.
If I Made An Over Contribution In 2020 Can I Deduct It From My 2020 Income?
If your deduction limit is equal to your contribution room, you will not be able to deduct the over payment from your income. Instead, you will report the contributions and carry them forward as unused deductions for the following years. If, however, you had previously carried forward contributions from previous years, your deduction limit will be higher, and you may be able to claim some of the overpayment on your 2020 tax return.
For more information on your 2020 RRSP contributions, please contact our team today.
