As December 31st approaches, the need to decide on and implement tax planning strategies for the year becomes top-of-mind for many Canadians. Under general tax rules, tax-free savings account (TFSA) contributions and withdrawals can be made at any time during the year, and registered retirement savings plans (RRSP) contributions for 2013 don’t generally have to be made before March 1, 2014. As outlined below, there are some situations, however, in which planning strategies involving TFSAs and RRSPs have to be put in place by the end of the calendar year.
Accelerate any tax-free savings account withdrawals into 2013
Canadians aged18 and over can contribute up to $5,500 per year (as of 2013) to a Tax-Free Savings Account (TFSA). Where amounts are withdrawn from a TFSA, the withdrawn amount is added to the taxpayer’s TFSA contribution limit for the following year.
It makes sense, consequently, where a TFSA withdrawal is planned within the next few months, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from a TFSA before December 31, 2013, will have the amount withdrawn added to his or her TFSA contribution limit for 2014. If the same taxpayer waits until January of 2014 to make the withdrawal, he or she won’t be eligible to replace the funds until 2015.
Make spousal RRSP contributions before December 31
Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income at a (presumably) lower tax rate. However, the benefit of having withdrawals from a spousal RRSP taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2013, the spouse can withdraw that amount as of January 1, 2016, and have it taxed in his or her hands. If the contribution isn’t made until January or February of 2014, the contributor can still claim a deduction for it on the 2013 tax return but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January of 2017. It’s an especially important consideration for couples approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the case, making the contribution before the end of the calendar year will ensure maximum flexibility should an unanticipated withdrawal become necessary.
When you need to make your RRSP contribution before December 31st
As just about everyone knows, an RRSP contribution can be made up to 60 days (March 1, or, in a leap year, February 29) after the end of the current year and still claimed on that year’s tax return. There is, however, one important exception to that rule.
Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 (done usually by converting the RRSP into a registered retirement income fund (RRIF) or purchasing an annuity). An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31.
