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Jim Maroney

:: RRSP season half over … still time to use this Canadian tax shelter

:: Hard to believe it’s already been a month since Christmas – equally hard to believe is the fact the traditional RRSP season is almost half-over. I guess it’s time to hop on the RRSP bandwagon. To kick off my literary (I know, that’s a big stretch) RRSP season, I thought I’d start with some basic but frequently asked questions.

What’s an RRSP? That’s pretty simple - it’s a tax shelter. Indeed, an RRSP is a government-sanctioned tax shelter. True, the government would like Canadian taxpayers to use their RRSPs to help fund their own retirement. In reality, because there is no restriction on when funds can be withdrawn, rightly or wrongly, RRSPs are often used more for tax sheltering than retirement planning.

How much can I put into my RRSP? Don’t ask me. All I can say is generally, for deduction on your 2002 personal income tax return, you’re entitled to contribute 18 per cent of your 2001 earned income to a maximum of $13,500 plus whatever unused deduction room you’ve carried forward from previous years. Frozen since 1996 the $13,500 RRSP maximum is scheduled to rise to $14,500 for 2004 and $15,500 for 2005 with indexing for 2006 and beyond. Evidently, the Commons Finance Committee has recommended RRSP contribution limits be raised to $19,000 in the next federal budget but increases that have been promised in the past have not materialized so don’t hold your breath.

In any event, there are basically three ways to figure out how much you can contribute to your RRSP this year:

1) find the Notice of Assessment CCRA sent you after you filed last year’s tax return – your 2002 RRSP deduction should be right there in black and white. If you intend to contribute the maximum allowable amount, double-check to make sure CCRA’s calculation is correct;

2) failing step 1, get on the internet and do a Google search using the keyword “tipsonline”. Have a copy of your 2001 personal tax return handy and you’re away to the races, or

3) take a flyer. Obviously, this isn’t the best method and certainly not one I’d recommend but with statistics showing the vast majority of Canadians do not contribute the maximum allowable amount to their RRSPs each year, most taxpayers are carrying forward significant unused RRSP contribution room from prior years. So if your game plan is to contribute $2,000 to your RRSP this year and the last you recall you had unused RRSP contribution room of $30,000 plus, does the size of your 2002 RRSP contribution limit really matter?

When can I contribute? Whenever you want but, if you’re looking for a tax write-off on your 2002 personal tax return, you’ll need to make your RRSP contribution within the first 60-days of 2003. Get your 2003 calendar out and take a look – the 2002 RRSP deadline is technically Saturday, March 1, 2003. Practically speaking, because the deadline falls on a weekend, CCRA will probably extend this deadline to Monday March 3, 2003, although I don’t recall having seen no official announcement at the time of writing this article.

The truth be known, if you’re thinking about your 2002 RRSP contribution right now, you’re one year behind the times. Remember an RRSP is a tax shelter and that means it helps to reduce income tax. That being the case, you should be making contributions as soon as you can – indeed, in a perfect RRSP world you’d be mulling over your 2003 RRSP contribution and not your 2002 deduction.

How much tax will I save if I contribute to an RRSP? Maybe a whole lot or maybe nothing but probably somewhere in between – the answer depends on how much you contribute to your RRSP and the tax bracket or brackets at which your deduction is claimed. The higher your tax bracket, the higher your tax saving for a given RRSP contribution.

Roughly speaking, if your taxable income is under $31,000, before your RRSP deduction, you’ll save about $0.22 for every $1.00 you contribute to an RRSP. To be frank, that’s a crappy return. If your taxable income before your RRSP deduction is somewhere between $31,000 and $62,000 you’ll save around $0.31 for each $1.00 contributed. Between taxable income of $62,000 and $103,000 the saving varies from $0.34 and $0.41 per dollar. Over $103,000 of taxable income the saving caps out at almost $0.44 per $1.00 contributed. Remember if your RRSP contribution causes your taxable income to shift between tax brackets, the tax saving you’ll realize will be a blend of the applicable rates.

If you’re a net surfer there are numerous websites out there that will quickly calculate the tax saving you can expect from a given RRSP contribution. When using these calculators you’ll want to first check that they’re using the current tax rates, more specifically, that they’re using current BC tax rates – unfortunately many sites use either tax rates applicable to residents of Ontario (no surprise there!) or some generic rates that are supposed to be representative of rates across the country.

Finally, remember that a tax saving is not the same as a tax refund. An RRSP deduction will generate a tax saving; it may or may not provide a tax refund depending on your other sources of income and how much income tax you already have to your credit for 2002.

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Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

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