RRSP TIPS - 2008  

1.            The RRSP maximum has increased to $19,000 for 2007 and $20,000 for 2008.  This means that you need to have $111,111 of earned income in 2007 to generate the maximum amount of RRSP room.  Business owners should consider increasing their salary or bonus to this level in order to maximize RRSP room available.

2.            Ensure RRSP contributions are made by the higher income spouse.  This will maximize the annual tax deduction for the family.

3.            Defer claiming RRSP deductions in low (or no) tax years, if you are going to have income in a higher tax bracket in the future.  The RRSP deduction claim is discretionary, which means it can be deducted in any tax year after the contribution is made.

4.            Children earning employment or self-employment income should file a tax return in order to generate RRSP room.  RRSP carryforwards do not expire, therefore RRSP contribution room will be available in the future when the child is earning income and can use the deduction to reduce income taxes.

5.            Make your RRSP contributions early in the year instead of in February in order to maximize the sheltering of RRSP investment income.

6.            Contribute to your spouse’s RRSP, if your projected income on retirement will be higher.  The goal is for each spouse to have equal income levels upon retirement.

7.            Where an employer transfers remuneration directly to an employee’s RRSP, the employer will not be required to withhold income tax on the portion of the remuneration contributed to an RRSP.  This means that the employee will receive an immediate tax benefit as a result of making the RRSP contribution, rather than having to wait until their tax return is filed.  Business owners should always consider making their RRSP contribution directly from the company, rather than making it from after-tax personal funds.

8.            If you plan to use the RRSP Home Buyers’ Plan make sure that you have $20,000 in your RRSP at least 90 days before making the withdrawal.  Make additional RRSP contributions to your RRSP prior to the Home Buyers’ Plan withdrawal.  The contributions must remain in the RRSP for at least 90 days to be eligible for the Home Buyer’s Plan withdrawal.

9.            Consider deferring repayment of Home Buyers’ Plan withdrawals if you have a low income year (eg., on maternity leave or employment insurance).  If the required Home Buyers’ Plan repayment is not made, the amount of the required repayment is subject to income tax in the year.  If your spouse is in a higher tax bracket, have your spouse use this money to make a RRSP contribution.  The tax savings on the spouse’s contribution will exceed the income tax paid on the Home Buyers’ Plan income.

10.        Your RRSP must be collapsed by December 31 of the year in which you turn 71.  You should consider transferring your RRSP to a RRIF or an annuity, otherwise the RRSP balance will become fully taxable in that year.  You must start making withdrawals from your RRIF in the year that you turn 72.

11.        You can continue to make RRSP contributions to your spouse’s RRSP after you reach age 72 as long as you have RRSP room available and your spouse has not reached age 72.

12.        In the year of death, the estate of the deceased taxpayer can make a spousal RRSP contribution as long as the deceased taxpayer had RRSP room available and the deceased’s spouse has not reached age 72.

13.        If there are significant capital losses in your open investment portfolio, there could be tax advantages to listing your estate as the beneficiary of your RRSP.  In the year of death, the unused capital losses can be applied against all sources of income, in most cases.  The income from the RRSP can be applied against the capital losses.  This may result in additional probate fees.

14.        Administration, trustee, investment management and counselling fees related to the RRSP are not deductible.  However the funds already deposited in the RRSP can be used to pay these fees.  If all of your available RRSP contribution room has not been used, and it is not anticipated that the contribution room will be used in the foreseeable future, you could consider contributing the amount of the fees to the RRSP and then paying the fees with funds inside the RRSP.  This would enable you to get a deduction for the RRSP contribution made to pay the fees.

15.        If you are over 65 and do not receive pension income (excluding CPP and OAS), consider using a portion of your RRSP to purchase an annuity that generates $2,000 per year of income.  This income will be tax-free because you can use the $2,000 pension income credit.

16.        Consideration should be given to making a one-time (lifetime, not annual) non-deductible over-contribution of $2,000 to an RRSP.  This is beneficial where the funds are left in the RRSP for many years and the tax benefits of sheltering the investment income exceed the tax cost of the future withdrawals.

17.        Consideration should be given to an over-contribution for a child over age 18.  The over-contribution could end up being deducted by the child in a future year as the child earns income to create new RRSP contribution room.