Canadians can make registered retirement saving plan contributions for the previous tax year 60 calendar days into the new year. If you’re able to do so, it’s important to make your contribution before the deadline. You’ll get to use the contribution as a deduction when you’re doing your previous year’s taxes.
Annual RRSP contribution deadline
The deadline for RRSP contributions falls is 60 days into the new year. It’s usually March 1 or Feb. 29 during leap years. That’s the final day you can make a contribution eligible to be used as a deduction on your previous year’s taxes. If you don’t yet have an RRSP account, don’t wait until late February to set one up. You’ll want to set up your account at least a few days in advance of the deadline so that your new RRSP can be processed by the financial institution.
What are the tax implications?
Simply making an RRSP contribution doesn’t affect your tax return (although it does shelter the contributed money from taxes related to investment gains). Rather, the tax implications arise when you use the RRSP contribution to claim a deduction on your taxes. Claiming a deduction reduces your taxable income, which lowers the tax you will have to pay the Canada Revenue Agency (CRA).
Can I choose which year my RRSP contribution counts towards?
Yes, you can. As many experts have noted, it’s a common misconception that you’re required to claim the RRSP deduction for the same tax year for which you made the contribution. For example, just because you made an RRSP contribution on Jan. 1, 2018 doesn’t mean you have to claim the deduction for the 2017 tax year. If you wish, you can “carry forward” the deduction for a future tax year. This may sense if you think you’ll be making more money in future years. In this case, waiting to apply the deduction will have a greater effect on your taxes than claiming it now.
Penalties for over-contributing
The CRA can assess financial penalties to Canadians who over-contribute their RRSPs. Over-contributing is defined as making a contribution to your RRSP in excess of what is allowed as per your current notice of assessment. Note, however, that individuals are permitted a lifetime excess contribution of $2,000. Over-contributions greater than this amount, though, do become subject to the CRA’s penalties.
As a general rule, the CRA can levy a tax of 1% a month on excess RRSP contributions. For instance, if you over contribute by $10,000, you would be assessed a tax of $100 each month.
Unused contribution room carries over
If you don’t make the full registered retirement savings plan contribution possible in a given year, you still retain the contribution room. In fact, unused contribution room can be carried forward indefinitely. Your cumulative RRSP contribution limit is shown on your most recent notice of assessment from the CRA.
Borrowing to meet the RRSP deadline
Some people borrow money in order to make their RRSP contribution. The rationale behind this tactic is that a person may not have the cash on hand to make a contribution, but would benefit from the tax deduction that comes with doing so.
Not everyone should borrow to make their RRSP contribution before the deadline. You should consider the following:
- Your existing level of debt—If you already have a high debt load you may want to hold off adding to it.
- The interest rate on the loan—The higher the interest rate, the less attractive it is to use the “borrow to contribute” strategy.
- Your ability to repay the loan—If you will have trouble repaying the loan because of the first two points, you should not borrow to contribute.
- Your taxable income—It might not make sense to borrow to contribute if you’re already in a low tax bracket because the deduction you receive probably won’t be worth the interest you’ll pay on the loan.