Registered Retirement Savings Plans, or RRSPs, are a great way to save for the future but they are also powerful tax planning tool.
This is because contributions made to an RRSP are tax exempt until they are withdrawn. As a result, any amounts you contribute to your RRSP will reduce your taxable income in the applicable year, which in turn reduces your tax owing.
For most Canadians, RRSPs are a unique tax planning tool, as you have until March 1 of the following year to make contributions.
There are, however, some circumstances in which your RRSP contributions must be made by December 31 of the current tax year to qualify from the tax deferral benefits:
You Turned 71 in the Current Tax Year
If you will be 71 years of age by the end of the year, you must make your 2018 RRSP contribution by December 31. This is because, all Canadian must collapse their RRSP by the end of the year in which they turn 71.
In most cases, this means that the RRSP will be converted into a Registered Retirement Income Fund (RRIF), or used to purchase an annuity and contributions will no longer be accepted.
You Plan on Withdrawing Spousal Contribution in the Near Future
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 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 When it is withdrawn by the spouse with the lower income, it will be taxed at the lower rate.
There is however, one stipulation. The withdrawal will only be taxed in the hands of your spouse if the withdrawal happens no sooner than the end of the second calendar year. i.e. You contribute to your spouse’s RRSP in December of 2018 and you reduce your taxable income in 2018 by that amount. If your spouse waits until January 1, 2021 to withdraw the amount, it will be taxed in their hands.
As such, if you plan on making a spousal contribution and withdrawing it in the foreseeable future – maybe for renovations, a trip or a child’s tuition – or you want to maximize your flexibility when it comes to accessing the funds in case of an emergency, putting the contribution in before the end of 2018 means that you will be able to withdraw it one year sooner, should you need to.
For illustrative purposes. If you waited until January of 2019 to make the same contribution noted above, you would have to wait until January 1, 2022 to withdraw that amount and have it taxed in your spouse’s hands.
For more information on RRSP contributions or to find out your RRSP contribution deadline, contact us today. We look forward to helping you with your tax planning strategy.
