This year, an RRSP contribution for 2015 can be made any time up to and including Monday February 29, 2016. The allowable current year contribution to be made by any individual for 2015 is equal to 18% of income earned in 2014, to a maximum contribution of $24,930. However, many if not most Canadian taxpayers have contribution “room” carried over from previous years, and such carryover amounts can also be added to the 2015 contribution amount and deducted from income for 2015 .
Every taxpayer who filed an income tax return for 2014 received a Notice of Assessment from the Canada Revenue Agency (CRA), and the total amount of one’s allowable RRSP contribution for 2015 (including any carryover amounts) can be found on page 2 of that Notice of Assessment. Taxpayers who didn’t keep or can’t find their Notice of Assessment can call the CRA individual enquiries line at 1-800-959-8281 to obtain that information. When making that call, it’s important to have a copy of the last return filed on hand, as the CRA representative who takes the call will request information from the return, as part of the Agency’s information security procedures. At a minimum, a taxpayer will be asked to provide his or her social insurance number, date of birth, and the figure which was entered on line 150 of the previous year’s tax return.
Any amount contributed to an RRSP for the 2015 tax year is deducted from income for that year and then is allowed to grow, tax-free, once it’s in the RRSP. It doesn’t matter how the funds in the RRSP are invested or what kind of investment income (interest income, dividend income, etc.) is earned by those funds— no tax is payable on such investment income as it accumulates. However, when a withdrawal is made from the RRSP, all amounts withdrawn, whether original contributions or investment income earned, are subject to tax.
While RRSPs have been around for a long time, a newer tax savings vehicle in the form of Tax Free Savings Accounts (TFSAs) became available to Canadians starting in 2009. TFSAs are, in many ways, the mirror image of RRSPs. No deduction from income is permitted for contributions made to a TFSA, but investment income earned within such a plan is not taxed as it is earned, and amounts withdrawn from a TFSA (whether original contributions or investment income earned) are received free of tax. As is the case with RRSPs, where a contribution is not made to a TFSA for a particular taxation year, the contribution amount is carried forward and may be contributed by the taxpayer in any future year. However, TFSAs have one feature which completely distinguishes them from RRSPs: where an amount is withdrawn from a TFSA, that amount is added to the taxpayer’s contribution room and may be re-contributed in any subsequent taxation year. Finally, while an RRSP contribution for 2015 must be made on or before February 29, 2016, there is no such deadline for TFSA contributions—such contributions for 2015 can be made at any time during 2015 or, given the very flexible carryforward rules which apply to such plans, at any time in the future.
There is also a new “wrinkle” to TFSA planning in 2016 since the maximum annual TFSA contribution has, for the first time, been reduced. When TFSAs were introduced in 2009, the maximum yearly contribution amount was set at $5,000. That limit was increased in 2013 and 2014, and nearly doubled for 2015. However, for 2016, the contribution limit returns to pre-2015 levels.
Overall, the list of annual contribution limits looks like this:
The annual TFSA dollar limit for the years 2009, 2010, 2011, and 2012 was $5,000.
The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
The annual TFSA dollar limit for 2015 was $10,000.
The annual TFSA dollar limit for 2016 is $5,500.
It’s understandable, given the frequent changes in TFSA contribution limits, to say nothing of the calculations required to deal with the re-contribution of withdrawn amounts, that taxpayers would be confused about just what their total current and carryforward contribution amount limit is at any given time. Fortunately, the CRA keeps track of that information, and information on one’s current overall limit can be obtained by calling the CRA’s individual income tax enquiries line at 1-800-959-8281.
A decision about making a contribution isn’t, and shouldn’t be, an either/or choice, as it’s perfectly possible for Canadians to contribute to both an RRSP and a TFSA in the same year. The financial and cash flow limitations faced by most Canadians, however, mean that making the maximum contribution to both kinds of plans in the same year just isn’t a realistic possibility. Where that’s the case, it’s necessary to decide which kind of contribution, or combination of contributions makes the most sense. As is almost always the case in tax planning, there is no one “right” answer for everyone and no “one-size-fits-all” solution. That said, there are some general considerations which may help in determining which savings/investment vehicle is preferable for a particular individual for 2015/16.
There are, clearly, a number of factors, both present and future, to consider when deciding which savings vehicle best suits one’s circumstances. To meet the need for information in making that determination, the CRA has dedicated sections of its website to information about both TFSAs and RRSPs. That information can be found at www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html and www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html.