≡ Menu

RRSP Tip: Carry Forward Your RRSP Tax Deduction

With the RRSP deadline right around the corner (March 2, 2009), this is a strategy that I’ve mentioned in passing a couple times, but never in great detail. That is, providing that the situation is right, you should consider carrying forward all or a portion of your RRSP tax deduction to a future year to maximize your tax return.

Who should do this?

I can see this strategy being useful in two situations:

  1. Higher Income in the Future.  Recent university graduates are a prime example.  New job, lower starting salaries, but some built up RRSP contribution room over the past few years.  With higher future earning potential, thus higher tax rates in the coming years, it may make sense to carry forward the RRSP tax deduction to be claimed during years of higher income (thus higher taxes).  This will allow the new grad to start building their investment portfolio to take advantage of the time value of compounding growth and obtain a larger tax deduction in the years of higher earnings.
  2. Claim just enough to drop to the next bracket below.  As you may know, RRSP contributions result in a tax deduction which means that they reduce your income (and taxes owed) for the year.    However, since the Canadian tax system is progressive (the more you earn, the higher your tax rate), it may make sense to contribute just enough to lower your income to the next tax level below.  That way, your current RRSP contributions can be used for the higher tax bracket next year.  This works especially well if you expect to make more money in future years.

How Much Will I Save?

Say for example that Andrew, from NL, makes $42,885 / year with a $10k contribution for 2008.  Looking up his marginal tax rate, the amount earned above $37,885 will face 35.3% tax.  Amounts from $37,885 to $30,215 will face 28.3% tax.

If Andrew were to claim the whole RRSP contribution this year, it would result in a tax return of ($5,000×35.3%) + ($5,000×28.3%) = $3,130.  However, if he were to carry forward $5,000, then he would get an extra $350 back on his contribution (or 7% more) on his $5,000.

The caveat being that you need to account for the time value of money before using this strategy.  Basically, the tax savings from waiting a year should beat any potential gains you would have made by investing/saving the money.  Another thing to note is that sometimes the spread between tax brackets is small which makes this strategy not as effective.

Final Thoughts

Although carrying forward your RRSP tax deduction may not be for everyone, it works great for those who have a large RRSP contribution and would end up dropping down a significant tax bracket if the total contribution was claim in that year.  It also works well in reverse.  That is, if you expect to jump tax brackets due to increased income in future years.

As I mentioned above, if you only end up saving a couple percentage points, then it may not be worth your while to carry your tax deduction forward.  You’ll have to decide for yourself whether or not your situation warrants carrying forward the RRSP tax deduction.

Do you use a similar strategy?  Or do you simply claim your whole RRSP contribution every year?

As always, this post is for informational purposes only.  Please consult a financial and/or tax professional before implementing any strategies mentioned on this blog.

-> If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 55 comments… add one }
  • Englishman in canada February 19, 2009, 8:49 am

    FT can i clarify something, when you carry forward the tax deduction, I assume that it is calculated at your maximum Tax margin.

    using your example above.

    ($5,000×35.3%[2008 cont])+($5,000×35.3%[2009 cont])= $3530

    It would not drop the 2009 contribution into the next tax bracket?

  • Mark February 19, 2009, 8:51 am

    I purchased my home using RRSP’s under the home buyer’s plan a couple years ago. I’ll claim only enough RRSP’s to make sure I break even at tax time; everything above that will be claimed as repayment of the amount I took out under the home buyer’s plan.

  • Braiden Harvey February 19, 2009, 9:01 am

    Thanks for the great tips.

    Braiden Harvey

  • FT FrugalTrader February 19, 2009, 10:29 am

    Englishman: AFAIK, any carried forward amounts count as regular contributions the next year. That is, they are tax deductions that reduce income for that year thus calculated at the corresponding tax rate.

    So if in the next year you jump to the 45% tax bracket, you will get 45% of the RRSP contribution back providing that you don’t jump down tax brackets.

  • Charles in Vancouver February 19, 2009, 11:20 am

    Okay, so the strategy outlined is to contribute $(X+Y) to RRSP, claim $X in 2008, $Y in 2009.

    Or, you could choose to contribute $X to RRSP because you want only that much of a deduction, and $Y to TFSA. Assuming that your $Y grows in the TFSA, you can transfer it in December ’09 (in-kind) from TFSA to RRSP and get a tax deduction greater than $Y in 2009. Plus you get the TFSA room back in January ’10.

  • canucktuary February 19, 2009, 11:22 am

    Great post! This is exactly the situation I’m in (just finished school last year). I want to max out my HBP (by June 2010), but will not claim anything that puts me below the $37,885 limit because I only worked half a year and next year I’ll likely jump two tax brackets.

    Thanks for verifying this strategy and its potential pitfalls FT.

  • nobleea February 19, 2009, 11:59 am

    I’ve never been too clear on this. I assume that you can still only contribute to your maximum contribution limit for the year?

    And I’m curious about this:
    “If Andrew were to claim the whole RRSP contribution this year, it would result in a tax return of ($5,000×35.3%) + ($5,000×28.3%) = $3,130. However, if he were to carry forward $5,000, then he would get an extra $350 back on his contribution (or 7% more) on his $5,000.”

    What if Andrew contributed 10K every year? It would just keep on piling up.

    And this:
    “The caveat being that you need to account for the time value of money before using this strategy. Basically, the tax savings from waiting a year should beat any potential gains you would have made by investing/saving the money. Another thing to note is that sometimes the spread between tax brackets is small which makes this strategy not as effective.”

    I guess I don’t understand it. I thought that once you contribute the money to your rrsp, you can invest it however you want. Regardless if the contribution is claimed or not.

  • FT FrugalTrader February 19, 2009, 12:07 pm

    Nobleea: I apologize, my wording wasn’t very clear in the post. I’m no tax expert (one should be consulted), but my understanding is that you can carry forward your tax deduction from your RRSP contributions. Therefore, even if you were to make $10k contributions every year, it would indeed “pile up” if you were to carry forward the deduction every year.

    So yes, once you contribute your money, you can invest it. However, you have the choice on what to do with your tax deduction.

    Does that clear things up?

  • CanadianFinance February 19, 2009, 12:30 pm

    Good post. I think the “higher income in the future” strategy makes the most sense. Say you made the $42,885 in the example and always contributed just enough to drop you into the next tax bracket.

    Now if you know that you’ll get a minimum 3% raise in the new year, and you have the extra $1286 available now, you might as well make the contibution and claim it next year. That gives you an extra year of tax-free growth, not to mention that this year it could be the difference of getting in on the lower stock prices or missing the boat whenever they finally rebound a bit.

    The second strategy, “Claim just enough to drop to the next bracket below”, I would only use if I accidentally overcontributed beyound the tax bracket line.

  • J February 19, 2009, 12:35 pm

    Job stability also factors into this.

    The company is holding off on merit increases and have dropped the bonuses for 2009, so I will be making less this year than I did in 2008.

    Further more, I figure that I have a 10-20% chance of not having my current job next year. Being unemployed for some months or facing a pay-cut going to a new employer, would also lower my tax bracket for 2009. For me it makes sense to max out my RRSP and start the tax deferred growth now (while I still have money to contribute). Of course, if you don’t have at least somewhat of an emergency fund in place, that might be a higher priority.

  • Four Pillars February 19, 2009, 12:47 pm

    Nobleea – I believe the ‘time value of money’ comment applies to the tax refund only.

  • undecided February 19, 2009, 12:59 pm

    Thanks for posting this, I’ve been thinking about this for awhile as I’ve been fortunate enough to make a good income last year and hope to make a very significant increase this year. I’m still somewhat undecided on the issue, however this article did give me more to think about.

    For purposes of discussion, let’s consider a 70k income in 2008 with a 10k RRSP contribution. To use your Newfoundland example, the corresponding tax rates are:

    2008
    over $37,885 up to $60,429 35.30%
    over $60,429 up to $75,769 38.00%

    which means a tax return on a 1k RRSP of:
    = 9571 * 0.38 + 429 *0.353
    = 3636.98 + 151.44 = $3788.42

    Now, for 2009 consider an increased income to above 100k, the tax rates are:

    over $81,452 up to $126,264 – 41.50%
    over $62,121 up to $81,452 – 37.50%
    over $40,726 up to $62,121 – 34.80%

    The same 10k rrsp in 2009 will yield a tax return of:
    = 10,000 * 0.415 = $4,150.00

    Therefore by carrying over the RRSP to 2009, you get an extra 4150-3788.42 = $361.58.

    Seems like a nice increase, but as you said, you must consider the time value of money. Taking the deduction in 2008, you get $3788.42 now, which can be used to invest or to pay down a mortgage (which has a more certain return value than investments). At a mortgage rate of 5.12% (5.19% effective annual rate based on semi-annual compounding), the value of the 2008 RRSP deduction is now:

    = 3788.42 * 1.0519 = $3985.04

    So now the value of carrying over to 2009 has diminished to 4150-3985.04 = $164.96. I’m not sure whether getting another $165 (not quite 2% extra) justifies waiting another year to claim it, plus betting that your income won’t be lower than anticipated in 2009.

    I think you’d have to be VERY certain about your income for the coming year to bet on this. Of course contributing more to your RRSP in 2008 will increase the gap, but you also must consider any new contributions in 2009 – you don’t want the combined contributions to push you back into a lower tax bracket for your deductions.

    In the end I think I am going to definitely do #2, claim enough in 2008 to use up my top-level marginal tax rate, then I may carry over the remainder to 2009 or just claim it now, I’m not sure. I will have to re-calculate when I have confirmed my income and RRSP contributions for last year.

  • Ray February 19, 2009, 1:01 pm

    Thanks MDJ for the tip. this is pretty much the strategy I have used previously but now with the TFSA coming out, I just contribute to that and and transfer it to rrsp when increase my taxable income, similar to what Charles from Vancouver suggested. I think it would work pretty much the same way.

  • Sampson February 19, 2009, 1:36 pm

    Andrew is obviously not caught up on his RRSP contributions ;)

  • Tax Resource Blogger February 19, 2009, 3:54 pm

    This is a not very well known fact. You can make the contribution but there is no reason why you should take the deduction.

    Another thought where it could apply is in a job loss: Someone lost their job and received severance or commuted value of a pension. The should contribute tot their RRSP to their contribution room and shelter as much money from tax as possible. However, deduct enough to reduce taxes to zero.

  • Stan February 19, 2009, 9:22 pm

    Excellent points. This is where tax software is especially useful since it allows you to adjust the optimal amount. There are indeed a few instances where taking the whole RRSP deduction in a particular year is a bad idea. A case in point: while just starting out their teaching careers, my sister and her husband each invested $20,000 in their RRSP in order to utilize the Home Buyers Plan. They then used that credit fully right away, even though they earned maybe $30k each at most that year. Sure, they received a nice wad of an income tax return, but they effectively reduced their income to a very low marginal tax rate. They would have been far better off sitting on the deduction for a year, and using it now when they make $55k a year and are in a higher bracket. It’s worth some planning.

  • Yamsicle February 19, 2009, 9:23 pm

    Question. For couples, is each individual taxed separately or is the income added together then taxed? If I make $60 grand and my spouse makes $90 grand, does CRA consider that our household made $150, and tax it accordingly? I have always been confused by this.

    p.s Great blog. You do an excellent job of explaining complicated financial info in an easy to digest manner!

  • FT FrugalTrader February 19, 2009, 9:27 pm

    Yamsicle: Thanks for the kind feedback. For couples, taxes are calculated separately. However, even though the incomes are calculated separately, there are some benefits of being a couple. Some of these include the ability to choose who claims the medical expenses, charitable expenses and dividends.

  • Yamsicle February 19, 2009, 10:15 pm

    Thanks for the quick reply! I am still confused. . .last year when I did my taxes separately, my return was 3 grand. As soon as I included my spouse’s income (we used Quicktax), my return went to $100. No joke!

  • DK February 19, 2009, 11:17 pm

    Yamsicle,

    The likely explanation for that is because certain tax credits for low income earners are based on family net income, thus when you include your spouse’s income your family net income goes up and the software takes back the tax credits it originally gave you when it only had your income.

  • Yamsicle February 20, 2009, 1:35 am

    DK – Thank you for the suggestion. I ruled that out; last year I earned $50 grand, which is not a huge amount, but I didn’t think that would qualify me for low income tax credits. Especially since we have no children. I used the last of my education tax credits from uni in 2006, so maybe that had something to do with it? I thought it was because the two incomes were added together. Now I am really curious. I think I will have to ask an accountant about this one.

  • Joeq February 20, 2009, 1:40 am

    Hi Guys,

    I’m somewhat different and wanted some info to see if I’m thinking straight. I am fortunate to make 150K/yr and plan on doing so for the foreseeable future. Seeing as I’m at the highest tax bracket, would it be better to carry forward my RRSP contribution so I can drop it down to the below 126k bracket? Ie 2 years worth?

    Also, I know this isn’t a TSFA thread, but would it not be better to max my TSFA if I’m at such a high bracket?

    Thanks for all the info guys, I’ve read for a while but have finally decided to contribute!

    Cheers

    Joeq

  • Ray February 20, 2009, 5:29 am

    Yamsicle- Try doing the taxes individually see if there is a difference, but definitely speak with an accountant about the issue, it seems a little weird to me.

    Joeq: as for rrsp deduction you can use the ernst and young calculator to estimate your tax refund depending on your province

    http://www.ey.com/GLOBAL/content.nsf/Canada/Tax_-_Calculators_-_2007_RRSP_Savings
    I tried your numbers and didnt notice any difference in the payout, also the difference between the last two brackets is 2% you could use your refund and buy a government bond returning about 3% and you’d come out ahead.
    About your TFSA well if you can max it out than go for it, but if it is rrsp vs tfsa i think contributing to your rrsp would be the better choice since you are in the highest tax bracket and would get a substantial tax refund.

    Ray

  • Adrian February 20, 2009, 6:18 am

    Just an observation for Mark regarding HBP and RRSP. As long as you haven’t maxed out your RRSP contributions, it is better to just keep up with minimum HBP repayments (for which you already got the tax refund) and instead claim (or carry forward) as much as you can from your annual contribution.

  • Mat February 20, 2009, 9:48 am

    This is exactly the strategy I’m going to use this year. I finished school in May, and so only worked 8 months of the year (the first 4 months of which was at reduced pay as I was still an “intern”). So, unless I lose my job, I know with absolute certainty that my income in 2009 will be significantly higher (1 if not 2 tax brackets) than it was in 2008. As a result, I’m going to carry any RRSP deductions from this year forward into 2009.

  • Amanda February 20, 2009, 11:19 am

    Yamsicle –

    Is it possible that when you did your tax return “separately”, you indicated to QuickTax that you HAVE a spouse (without entering her income)? If so, QT would have given you the spousal amount in your deductions (i.e. the basic deduction for her). That would account for around $2k depending on your province. It also might have moved around some other deductions (medical expenses or charitable contributions) once you added her income, to maximize the total refund for both of you.

  • Sarafina February 20, 2009, 10:35 pm

    I personally think carrying forward your RRSP deduction is overrated. RRSP’s are not a finite source for the most part. Yes, there is a limit that everybody can contribute but suffice to say very few people ever do and most people will die with unused contribution room. Why not contribute now, get the deductions and contribute later and get the deductions? If the premise is that you are going to be getting higher income then you should have more money available to contribute anyway…

    Also, for people mentioning RRSP’s and TFSA’s. It has been shown that contributing to an RRSP and investing the returns in a Non registered account produces a better return than simply contributing to RRSP’s or simply contributing to a non-registered account (assuming same rate of returns and tax brackets). This will be magnified with a TFSA so that is definitely the best way to go…

  • Sampson February 21, 2009, 12:34 pm

    Sarafina,

    It all depends on your tax bracket and marginal rates and your personal situation.

    Even if you do not max out your contributions, you can still carry both contribution room and the tax deduction forward. As many above list as an example, students and those on the cusp of a new tax bracket benefit the most.

    When I was in University (for a long, long long time – stupid grad school), I kept contributing to my RRSPs, did not max them out, but I didn’t claim the tax credits either. It simply didn’t make sense when I had huge tuition credits, and didn’t earn any income. But a few years out of school, I made good cash and because I carried my deductions forward, I essentially didn’t have to pay income tax for the first 2 years of my ‘working’ life.

    Also, re: RRSP vs. TFSA. Again, this depends on your personal financial situation. If you are currently in the highest tax bracket now, and expect to be so when you retire, there really should be 0 difference if the input is equal – its just a matter of whether the tax man gets you now, or later. In the simulations I’ve looked at, RRSPs can be worse if you lose all your CPP and OAS benefits due to high income.

    Again, there are fewer high income earners than low income earners in Canada, but it really depends on your personal situation and income levels.

  • poor white trash February 22, 2009, 11:53 pm

    I didnt really see anyone mention the fact that if you use all your deduction immediatly then you get your return this year. even if it’s a little smaller then if you waited you still have the money in hand, and can invest it or recontribute it right back into rrsp’s. Im not sure but it seems to me you would come out ahead this way rather than leaving all your return money in the governments coffers an extra year or two

    • FT FrugalTrader February 23, 2009, 9:20 am

      pwt: Are mentioned in the article, the strategy works best when there is a large spread between marginal tax rates. Otherwise, it’s probably best to stick to the strategy that you mentioned.

  • Sandy February 24, 2009, 4:23 pm

    Do you know if there’s any software or formula out there that will tell me exactly how much I should deduct this year in order to just reach the next lower tax bracket? I’ve tried the ufile and H&R – and they both don’t seem to tell me how much I should deduct for the best benefit as mentioned here.

    I tried to do it manually myself but I’m getting all confused about which income (line #) I should use, i.e., is it the income before or after the deductions, if after, then after which deductions, taxable/non-taxable?

    Thanks for your help in advance. I live in AB.

  • Ben February 26, 2009, 11:35 pm

    Sandy:
    1. Start first with your total “gross” income from all sources. If your income is reported on a T4, this should be easy to find. Then subtract all of your deductions (RRSP, child care, etc), to calculate your “Net” income.
    2. It is your “Net” income that actually gets taxed. This number can easily be found using tax software, or by hand with a little know-how.
    3. Then get your hands on a copy of the tax table for AB, showing tax rates and tax brackets.
    4. Compare your “Net” income to the tax brackets, and find the next tax bracket lower than your income. The difference between the two is the magic number you want. You can then either make a new RRSP contribution equal to this difference, or apply any carried-over amounts against that difference.

    Using a software like Quicktax can quickly show you where you stand. After you enter all your incomes and deductions, it will tell you what your net taxable income is (have to go to Form view). Then do Step #4 above.

    I’ve always thought that Quicktax should incorporate a marginal tax bracket planning tool in the software, ie. tell you how much to contribute to RRSP’s to get down to the next “step” in your tax rates. For example, if I were $100 over a tax bracket, it should calculate that putting $100 into RRSP will return me $40, but putting another $100 will only return me $30. Etc, etc. The RRSP optimizing tool included has been absolutely useless to me so far, as it really only skims the surface.

  • Sandy March 4, 2009, 4:12 pm

    Ben:
    Thank you! I will try it this evening. I wanted to make sure I’m doing this right as I made a big contribution this past year (my first one ever) and I’m finally making enough money to cross tax brackets – I do want to save some deduction room for next year.

  • Remus March 5, 2009, 4:40 pm

    FrugalTrader can you please direct me to an “official” source stating that you can indeed carry forward the tax deduction?
    I was at my accountant today and he told me you can not so I would like to present him the official thing.

    thanks

  • DK March 5, 2009, 5:21 pm

    Remus,

    You should get a new accountant. Seriously.

  • Remus March 6, 2009, 2:38 pm

    That may be the case :) however I would like to get an official link or something. I know MDJ knows his stuff but this is too important to simply follow blindly. Having an official version of it would be great.
    Like somewhere on the Canada Revenue site. But I can’t find it.

  • nobleea March 6, 2009, 2:46 pm

    Remus;

    What you contribute to your rrsp and what you deduct for rrsp contributions on your tax form don’t have to be the same amount.

    The part where your accountant might be talking about is that you can only contribute up to your contribution limit. Regardless of whether you deduct it or not.
    For example, if you have a contribution limit of 10K, you can contribute 10K (well, 12K with the lifetime overcontribution). You can defer all of this contribution til a future year. Or you can deduct all of it against your taxes this year, or a mixture of both. If you only have 5K of contribution limit, you can’t contribute 10K, claim the 5K to your limit and defer the other 5K to another year.
    Just google Defer RRSP Contribution

  • aooa March 7, 2009, 9:46 am

    I swore I posted a comment/question the other day but don’t see it here.. so here it is again..

    My wife and I are only doing our 07 and 08 taxes – so looking at our RRSP contributions in 07, I was playing around with this carrying forward RRSP contribution to 08 Tax year.

    My thought was that since my wife and I made more money in 08 that if we carry forward most of the 07 RRSP Contribution to 08 (just enough so we don’t owe anything in 07 tax), we would end up paying less tax in total (07 + 08 refund).

    But after doing several versions of uFile with different carry forward 07 RRSP amounts, I’m finding that this is NOT necessarily true.

    We get MORE total 07+08 refund if we actually use more 07 RRSP contribution in 07 tax year VS. carrying forward majority to 08 Tax year – difference is $409!

    This does NOT make sense to me.. I’ve been racking my brain the last couple of days trying to figure out why this is… Can any one offer possible explanation??

  • aooa March 7, 2009, 12:47 pm

    Just wanted to add the following:

    TOTAL $BASE REFUND is the total (07+08) refund if I use up all RRSP contribution in 07 and do not carry forward any amount to 08.

    If I carry forward ALL 07 RRSP contribution to 08 Tax year, the total (07+08) refund is approx $300 LESS than TOTAL $BASE REFUND.

    If I Carry forward just enough of our 07 RRSP contribution to 08 Tax year so we do not owe any taxes in 07, the total (07+08) refund is EXACTLY the same as if I carry forward all 07 RRSP contribution to 08 Tax which is approx $300 LESS than TOTAL $BASE REFUND.

    If I carry forward only about 24% of my wifes and 50% of my 07 RRSP contribution to 08 Tax year, our total (07+08) refund is a little over $100 MORE than TOTAL $BASE REFUND.

    aooa

  • aooa March 7, 2009, 12:55 pm

    clicked submit to early..

    So if I carried over most of our 07 RRSP to 08 thinking that we’ll pay less tax since we made more money in 08 then I would have lost out on over $400 in total 07+08 refund compared to the last scenario of carrying forward only 24%/50% to 08 tax year..

    again this still doesn’t make sense but at least we got more refund!

  • DK March 7, 2009, 10:36 pm

    probably using all your RRSP room in 07 when you made less money dropped your net income to the point where you qualified for some refundable tax credits thus maximizing your total return.

  • aooa March 8, 2009, 4:59 am

    Started to look at the actual returns more closely… what I’m finding is that by using up more 07 RRSP contribution for both my wife and myself, both our 07 Ontario Health Premium was lowered to the next bracket which is $150 less – so instantly that’s $300 in savings. While in 08, the difference in carry forward didn’t make a difference in our 08 Ontario Health Premium.

    So for those looking at doing carrying forward RRSP contribution – take into account the Ontario Health Premiums you’ll end up paying as well!

  • Mechanonuke March 8, 2009, 10:28 pm

    Just a follow up to aooa’s post.
    I took a look at the Ontario Health Premiums, specifically the $72,000 to 72,600 bracket premiums ($600/year -> $750/year).

    If one had the contribution room and was somewhat above the $72,600 mark, there could be a definite savings.

    http://www.rev.gov.on.ca/english/taxes/healthpremium/rates.html

  • Sarah March 16, 2009, 5:48 pm

    Hi! Great tip. I use this strategy frequently (being self employed). One question..is there a time limit on how many years you can carry this forward? Thanks!

  • Ed Rempel March 16, 2009, 9:55 pm

    Hi FT,

    Good post. This is one of the 3 Ds of tax savings – deduct, defer, divide. We use this strategy a lot with our clients – not just with RRSP contributions, but with other deductions or credits. It is useful to know what tax bracket you are in and how far your income is from the next higher or lower tax bracket.

    Ed

  • Ed Rempel March 16, 2009, 9:57 pm

    Hi Remus,

    If you want to prove this to your accountant, look at the bottom of your Notice of Assessment in the RRSP contibution room section. The very bottom number is the amount of RRSP contibutions not deducted and carried forward. If you accountant doubts this works, why does CRA have field to track the amount you carry forward?

    Ed

  • Ed Rempel March 16, 2009, 10:01 pm

    Hi aooa,

    You have not mentioned your income amounts. Carrying forward your RRSP contributions will not save you money, unless it would bring you to a lower tax bracket this year.

    Also, the optimum RRSP contribution is not the amount that means you don’t pay tax when you file your return. Many people look at whether they have to pay at tax time, but that is not the important issue.

    The optimum RRSP contribution is the amount that will bring you to the bottom of you current tax bracket, but only if you can deduct it at a higher tax bracket in a future year.

    Ed

  • Leanne March 16, 2010, 5:30 pm

    My husband and I have not used any of our RRSP room to date. We are currently 24 and plan on making a huge lump sum into our RRSP’s for the 2010 tax year then withdraw for the 1st time home buyers plan. This way my husband’s income will be taxed at the lowest rate and we can also get a large tax return! I’m thinking new furniture for the new house and an emergency savings account. I am just researching how long you can carry forward unused RRSP contribution amounts, haven’t found an answer yet, but I assume it is indefinite?

  • Laura December 18, 2010, 9:59 am

    Leanne:

    Yes, RSP contribution room carries forward indefinitely.

    Re: the homebuyers program, your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year. Not sure how quickly you are looking to buy, but that is something important to keep in mind.

    Also, don’t forget you can only withdraw $25,000 per person for the Homebuyers Program so if you have more than that to invest, you will want to both open up an RSP.

    http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

  • Ian November 15, 2012, 4:35 pm

    I think this strategy almost never makes sense if you’ve planned your taxes appropriately.

    If you are going to be in a higher tax bracket and want to claim later then invest later and claim when you invest. Instead of putting the money in your RRSP you should put it in a normal trading account – take advantage of the capital gain tax rate that saves you 50% as well as the potential capital loss rule – and then just pay the tax and move it into your RRSP when you need the deduction or continue deferring the captial gain and instead invest new cash into your rrsp.

    You can always know what your tax bracket is before putting money into your RRSP since you can put January,February contributions from say 2013 into the 2012 taxes which you should be able to calculate exactly in 2013. With that in mind you’d always just contribute exactly what you needed to bring you down the tax bracket and again invest what you don’t need outside in a normal capital gains advantaged account.

    The only exception I can think of is that your company matches RRSP contribution and this effectively forces you to contribute to the RRSP. In this case it could make sense to defer the claim until you are in the next tax bracket. Still you are losing interest on the refund that would normally come from claiming this money so depending on your debt load you may be paying more in interest expenses than you’d be saving on the next tax bracket margin. If you have no debt then the equation gets trickier as interest rates are so low right now.

  • Andy March 24, 2013, 11:55 pm

    For the sake of future readers looking for an answer to Remus’ question about the official aspects of this: See Schedule 7, i.e., T1 General 2012 – Schedule 7 – RRSP Unused Contributions… it distinguishes between the Contribution (Part A) and the deduction (Part C), giving rise to the unused contribution to carry-forward (Part D).

  • Jess January 12, 2017, 7:06 pm

    Hello

    I have some questions regarding RRSP, I never contribute before and a bit confused.

    For example if I make 46K per year and I receive $1.400 biweekly on my paycheque.
    – What is my taxable income? Is it 46,000 or the net (1.400×24= $33,600)?
    – What about dividend and interest from the bank, does it count toward my taxable income?
    – Is my RRSP contribution room 18%x46,000 or 18%x(46,000+dividend/interest) or 18%x33,600?
    – If I have contribution room of $10.000, can I contribute all to my RRSP account at one time and make a split deduction? For example for 2016 tax year I will deduct 3,000 and for next year I will deduct the 7,000?

    Thank you

    • FT FT January 13, 2017, 8:43 am

      Hi Jess,

      To start, with your income, have you considered contributing to a TFSA instead? But to answer your questions:
      1. Your RRSP contribution would reduce your taxable income for the year.
      2. Dividends and interest are taxable in a non-registered account (ie. not taxable in RRSP/TFSA), but at a different rate than regular income. (https://www.milliondollarjourney.com/how-investing-taxes-work-part-2-dividends-and-interest.htm)
      3. Best way to get an accurate RRSP contribution room is via your notice of assessment that you receive every year. But generally, it’s 18%xyour earned income (not investment income).
      4. Yes, you can claim some this year, and carry forward some as well. If you expect higher income in future years, you might want to consider carrying forward some of your deduction.

      • Jess January 13, 2017, 6:16 pm

        Thank you for your reply.

        I think I understand now the difference between taxable income and earned income. I have max out my TFSA so that’s why I’m looking to invest some in RRSP.

        I’m planning to invest in some US stocks and ETF in my RRSP account using Questrade. I will transfer US money directly (not doing currency exchange) from my bank account to Questrade using direct deposit. When it comes to the tax season, is Questrade will automatically doing the currency exchange for my RRSP contribution? Or I have to do it approximately using National Bank currency exchange?

        • FT FT January 14, 2017, 1:40 pm

          Jess, I don’t have experience with depositing USD into an RRSP. I would assume that they would take the spot rate on the day of deposit and convert it to CAD for your tax receipt. Might be something to ping Questrade support about.

Leave a Comment