Friday, December 23, 2022

RRSP Confusion

Recently, I was helping a young person with his first ever RRSP contribution, and this made me think it’s a good time to explain a confusing part of the RRSP rules: contributions in January and February.  Reader Chris Reed understands this topic well, and he suggested that an explanation would be useful for the upcoming RRSP season.

Contributions and deductions are separate steps

We tend to think of RRSP contributions and deductions as parts of the same set of steps, but they don’t have to be.  For example, if you have RRSP room, you can make a contribution now and take the corresponding tax deduction off your income in some future year.

An important note from Brin in the comment section below: “you have to *report* the contribution when filing your taxes even if you’ve decided not to use the deduction until later. It’s not like charitable donations, where if you’re saving a donation credit for next year you don’t say anything about it this year.”

Most of the time, people take the deductions off their incomes in the same year they made their contributions, but they don’t have to.  Waiting to take the deduction can make sense in certain circumstances.  For example, suppose you get a $20,000 inheritance in a year when your income is low.  You might choose to make an RRSP contribution now, and take the tax deduction in a future year when your marginal tax rate is higher, so that you’ll get a bigger tax refund.

RRSP contribution room is based on the calendar year


Each year you are granted new RRSP contribution room based on your previous year’s tax filing.  This amount is equal to 18% of your prior year’s wages (up to a maximum and subject to reductions if you made pension contributions).  You can contribute this amount to your RRSP anytime starting January 1.

Many people think that the “RRSP year” runs from March to the following February, and that you have to wait until March to make an RRSP contribution for the new year.  This isn’t true.  If you have new 2023 RRSP contribution room coming to you, you can make the contribution in January if you like.  It’s when you take the RRSP tax deduction that there are special rules for the first 60 days of the year.  I’ll explain that further below.

One complication with using new RRSP contribution room in January or February is that you won’t have your notice of assessment yet to tell you the amount of room you have.  However, if you can calculate this amount yourself, you’re free to use the room at the start of the year.

If you’re waiting for CRA to calculate your new RRSP room for you, Chris Reed suggests that you “use the Contribution Room stated on your Notice of Assessment after filing your tax return, instead of your [CRA My Account] webpage.  That webpage often has errors.”

Taking RRSP deductions


To be allowed to take an RRSP deduction for the 2022 taxation year, you have to satisfy the following  two requirements.  Firstly, you must have made a contribution based on RRSP room for 2022 or an earlier year.  Secondly, you must have made the contribution sometime before 60 days after 2022 December 31.  Some examples will help to illustrate these requirements.

Suppose you made a contribution in 2021 that was part of your available 2021 room, but you didn’t take the deduction on your 2021 taxes.  Then you can take the deduction on your 2022 taxes.

Suppose you used up all your RRSP room and deductions in 2021, and you have $10,000 of room for 2022.  Suppose further that you will get another $15,000 of room for 2023.  You are allowed to make an RRSP contribution of $25,000 in January 2023.  However, you will only be able to deduct $10,000 from your income on your 2022 taxes.  The remaining $15,000 deduction will have to wait for your 2023 taxes (or a later year if you prefer).

Early birds who use their new 2023 contribution room in January or February 2023 might become nervous when filing their 2022 income taxes a month or two later when they discover that they can’t take the RRSP deduction right away.  They might think they’ve over-contributed.  They haven’t.  They’re just way ahead of all the people making 2022 contributions just under the wire.  They have to wait until the 2023 taxation year to take the deduction.

8 comments:

  1. This is amazing Michael. No one provides detail the way you do. These are things Canadians think about but they find it too difficult to google. Funnily enough, I was thinking about this today as I look ahead to 2023

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    1. Thanks for the kind words. Chris Reed deserves much of the credit for suggesting the topic.

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  2. Sorry to be the grinch... RRSPs and TFSAs assume that an individual can be their own portfolio manager or have an advisor who can be their portfolio manager. To what percentage of the population does that apply? IMO, it doesn't apply to a large percentage of the population. And those for whom it doesn't apply tend to be the less affluent.

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    1. It's true that RRSPs and TFSAs are best used when the owner invests well. Fortunately for lower income Canadians, CPP and OAS fill a large percentage of their retirement needs, which makes RRSPs and TFSAs less important.

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  3. Another important note: you have to *report* the contribution when filing your taxes even if you've decided not to use the deduction until later. It's not like charitable donations, where if you're saving a donation credit for next year you don't say anything about it this year.

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    1. Hi Brin,
      That's a good point. I'll add a note about that to the article.

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  4. Hi Michael - not sure if you know the answer to this. Let's say I get a RSP bonus cheque dated Dec 27, 2022. I deposit this cheque on January 3, 2023 and want it recorded as 2023 tax year RSP contribution.

    Does CRA look at the 'date' of the cheque? or when I actually deposit the cheque?

    Thank you!

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    1. Anonymous,

      If I understand you correctly, this is a cheque that you deposited into your RRSP. I suspect that this will count as a deposit on 2023 Jan. 3, but that shouldn't matter because the RRSP deduction for any deposit made in Jan. or Feb. can be used in either the 2022 or 2023 taxation year (or any future year for that matter).

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