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Everything You Need to Know About RRSPs As A Tax Planning Tool

[fa icon="calendar"] Feb 26, 2020 4:26:48 PM / by Allen Koroll

Pen and paper for taxes

Registered Retirement Savings Plan (RRSP) contributions - the one tax planning strategy you have left in your toolbox to ensure you make the most of your 2019 income tax return.

You see, when you contribute to your RRSP, you can reduce your taxable income by the amount of the contributions made, reducing your tax owing. Unlike other tax planning tools, however, contributions made until March of this year can be applied to last year’s tax return (except for those who turned 71, which is discussed below).

To help you make the most of your RRSP contributions, here are some important considerations for the 2019 and 2020 tax years.

Max contribution

Each year, there is a maximum amount that you can contribute to your RRSP. Any unused contribution room from previous years will continue to be available in the future. In 2019, the maximum contribution room is the lesser of $26,500 and 18% of your 2018 income less pension adjustments.

In 2020, the maximum contribution room is $27,230. To receive this entire amount, you would have had to have made $151,278 in 2019.

Note: If you exceed your total contribution limit on your RRSP, you may have to pay a tax of 1% per month on the excess.


The deadline for making contributions which can be applied to your 2019 tax return is March 2, 2020. Note the date always falls on March 1 unless this is a weekend and then the due date is the following Monday.

Turning 71

As we mentioned in our blog ‘Vital RRSP Information if You Turned 71 in 2019’, there is one exception to being able to make contributions to your RRSP into the new year and this is if you turned 71 last year.

In the year that you turn 71, your RRSP must be terminated so any remaining contributions must be made by December 31. Termination options include converting the RRSP to a Registered Retirement Income Fund (RRIF) or annuity, as well as taking a lump sum.

Note: lump sum withdrawals will be treated as income and taxed accordingly.

Tax tip: If you are turning 71 in 2020 consider over-contributing in December. While this will result in you paying a 1% tax for the month of December. The penalty will cease once the RRSP is terminated and you will have an additional tax deduction in 2021.

Spousal RRSP

In Canada, taxpayers can contribute to their spouse’s RRSP and claim the contribution as a deduction on their own tax return. When your spouse withdraws the funds from their RRSP, the withdrawal will be taxed in the hands of the spouse.

This can be a great tool to achieve future income splitting or for families where one spouse is in a lower tax bracket than the other. The spouse with the higher income will make the contribution, reducing their taxable income and therefore their tax owing in that year. When it is withdrawn by the spouse, it will be taxed in their hand (and at the lower rate if properly strategized).

It is also a great tool for those who have turned 71. While you can no longer make contributions to your own RRSP, you can make spousal contributions until the year following the one in which your spouse turns 71, allowing you to benefit from a reduction in taxable income.

Tax Returns for family members who own no tax

Many Canadians fall prey to not filing a tax return when they have income but know they will not owe tax. Not only does this disqualify some taxpayers from receiving valuable benefits and tax credits, but it also stops the taxpayer from being able to add a contribution room to their RRSP which can be carried forward indefinitely. To maximize your contribution room, individuals with income and no tax owing should file.

Home Buyer’s Plan

Generally, income drawn from your RRSP is taxable. There are, however, two programs available through your RRSP which allow you to withdraw funds without paying tax on the amount. These programs are the Home Buyers Plan and the Lifelong Learning Plan.

The Lifelong Learning Plan (LLP) allows you to take out money to pay for full-time education for you or your spouse up to $10,000 a year (up to $20,000 in total).

The Home Buyers Plan (HBP) allows you to withdraw money to help build or buy a home. This amount was previously $25,000 but has been increased to $35,000 starting in 2019.

For more information on RRSPs and how you can use them as part of your 2019/2020 tax planning strategies, contact us today.

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The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

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Topics: Tax Deductions

Allen Koroll

Written by Allen Koroll