By: Larry MacDonald
True or false: when you contribute to an RRSP, you have to claim the tax deduction for the same year. Answer: False. You can report a contribution in one year and claim the tax deduction in another.
The ability to separate the two provides some benefits.
Here is one. If your income is less than $41,000 in 2009 and you know it will be higher in 2010 (say because of a new job), you might be better off not taking the tax deduction this year. “Someone in Ontario who made $30,000 in 2009, and expects to earn $60,000 in 2010, should defer their deduction until 2010 when they will get a 31% refund instead of only 20% if they deducted it this year,” says Talbot Stevens, a London, Ontario-based financial educator, author and industry consultant.
Another way of benefiting is when you are making a large contribution (perhaps due to a windfall or a catch-up loan strategy). “You generally should only deduct enough to get to the start of your current tax bracket,” advises Stevens.
“For example, if Sue earned $50,000 in Ontario for 2009, and contributed $15,000 to her RRSP, she should only claim a $9,000 deduction for 2009, to reduce her income from $50,000 to $41,000, where the 31.2% bracket starts.” Below $41,000 the deduction is only 20% and below $10,300, it’s 0%. Thus, Sue’s leftover $6,000 would be better deducted next year at the 31.2% rate.
If you are earning less than $41,000 and don’t expect to go higher, you might be better off saving for retirement with a tax-free savings account (TFSA). You’ll give up the RRSP refund but then likely make up for it by avoiding clawbacks of the Old Age Security (OAS), Guaranteed Income Supplement (GIS), age credit, and means-tested benefits.
8 Responses to “ Don’t deduct these RRSP contributions ”
I thought there was a $2,000. limit on RRSP overcontributions. Unless that has changed recently.
By Jean Paul Boisvert on Feb 9, 2010
Jean Paul
Not talking about overcontributing. Just taking about making a contribution when have the conribution room but claiming the deduction in a future year.
By Larry MacDonald on Feb 9, 2010
While I agree with the concept, the likelihood of someone who earned $30,000 contributing anything to their RRSP is somewhat remote. It is more likely they had to access their RRSP to make ends meet.
By Steve on Feb 9, 2010
Steve:
Some people will be low income all their lives. But many low-income earners are young people just starting out in the work force and as they gain experience and win promotions, their salaries will be rising into higher tax brackets.
By Larry MacDonald on Feb 9, 2010
Great Stategy. About 10 years ago I worked overseas where my income was tax-free in Canada. I contributed about $30,000 to my RRSP during this time but didn’t claim any deduction (because I had no taxable income). Now that I work in Canada, I’ve used these undeducted contributions (plus my regular RRSP deductions) over a few years to bring my taxable income to about $33,000 per year. So far, I’ve paid very little tax, but the bonus is the Gov’t throws money at you when your taxable income is so low – ie huge payments from the Child Tax Benefit, GST Credit, extra contributions to RESPs, etc. This year I finally ran out and have to start paying tax like every one else – which really sucks.
By James on Feb 11, 2010
Hi Larry,
I was just going through my files and realized I forgot to claim about $3,000 in RRSP contribution’s I made in 2008 on last years taxes. I didn’t make mention of this contribution at all in my filing. I have my official receipt. Can I claim the contribution this year? Do I have to fill out any special forms to make th adjustment?
By Reggie on Feb 17, 2010
Reggie
I believe if you had reported the contribution in 2008 (without claiming the tax deduction), it would have been straighforword to claim the deduction on your return this year. But since it was not reported, it’s a little more complicated. I asked a tax expert, Susan Kent, to comment and here is what she said:
“He needs to send it in to the CRA on a form T1ADJ, and ask for it to be added. If he is carrying the amount to the 2009 tax year, then he can still use it this year in his filing, but it may get reversed as CRA will not have it on file. If he wants it used on the 2008 year, then he needs to ask them to add it to line 208 of the 2008 return. If he has online access, he can simply go in and “change his return” and ask that it get reported on line 208 of the 2008 tax year.”
Susan Kent, http://www.Ottawataxservices.net
By Larry MacDonald on Feb 18, 2010
After reading above I learned that to maximize refund i should only claim RRSP to bring my income down to $41000. my husband contributed $13000 RRSP in 2009 but his income is only $49000. We did not know so we report all of $13000. We submit our tax return already and have also received the refund. Can we do the adjustment to only used $9000 instead of $13000 and refund the different back to CRA? or it’s too late to do the adjustment now?
also, if we have used RRSP carry forward to used in future year (not yet claimed on income tax) – can we still withdraw the fund to purchase our first home?
By Helen on Apr 30, 2010