A while back I listened to a pitch designed to get employees at my company to sign up for a group RRSP plan. One of the points the salespeople made that resonated with the audience was that employees could have their entire bonus payment deposited into their RRSP accounts without any withholding tax. Many employees were left with the false impression that this would save them a bundle on their taxes.
To make this more concrete, suppose that employee Megan receives a $20,000 bonus and has a 45% marginal tax rate. Megan will only get to keep $11,000 of her bonus. But if she signs up for this group RRSP, she can deposit the entire $20,000 into her RRSP. It seems like she is able to save $9000.
A first objection to this naive analysis is that Megan could have put the $11,000 after-tax bonus into an RRSP and would later get back $4950. So, Megan only saves $4050 with the group RRSP. However, even this analysis is flawed.
Suppose that Megan has $9000 in other savings. She could use that money plus her after-tax bonus to make a $20,000 RRSP contribution and then get a $9000 tax refund when she files her taxes for the year. This makes it clear that the main benefit of the group RRSP plan is that Megan essentially gets her tax refund right away instead of having to wait until she files her taxes. If Megan doesn’t have $9000 kicking around, then she can borrow the money and pay off the loan when she files her taxes.
Another twist is that Megan could file a T1213 form with CRA so that she would get her $9000 back spread over her remaining pay cheques for the year instead of waiting until tax-filing season.
In the end, the group RRSP doesn’t save Megan $9000. It just saves her a little interest on this amount and saves her some aggravation.