RRSP deadline is March 2nd, 2020

BY FAZAAD BACCHUS

Why is this date significant? Well it is directly related to the deadline date given every year regarding the first sixty days to make an RRSP contribution to help reduce your previous year’s tax burden. An RRSP is an approved plan by the government of Canada in which money can be saved and grow tax sheltered or tax deferred. It reduces your taxable income in the given year you make a contribution. For example if you earn $50,000 in a year and were to contribute $10,000 into your RRSP then your taxable income will be readjusted to $40,000 (meaning you will only pay taxes on $40,000) The higher your earnings the better an opportunity for you in reducing your income taxes.

How much can you contribute to your RRSP? The first rule is that your maximum contribution is calculated as 18% of your earned salary in the previous year, with a capped limit for 2020 of $27,230. Therefore if you earned $50,000 in 2019, your maximum contribution allowable is $9,000 which includes any contribution that you are making to your group registered savings plan. However if you examine your Notice of Assessment (NOA) you may notice that you may possibly have contribution room building up over the years which have not been utilized going back as far 1991. You are allowed to contribute as much as you can afford to, so long as you do not exceed your contribution room, there are penalties if you do.

During the years while you are investing, your money will be tax sheltered. You will not receive a T-slip showing earnings or income on which you have to pay taxes. The money can be invested in mutual funds, stocks, bonds and other financial instruments etc. However when you start receiving payments or withdrawals from your RRSP, it will be reported as income and taxes will be deducted from those payments. All the same, it is expected that the payments from your RRSP will come at a time when your employment income has stopped, therefore putting you in a much lower tax bracket.

If you get into financial difficulty along life’s path and cannot contribute anymore to your RRSP, you simply don’t have to, you just stop the payments. And what about if you are out of a job or sick and need to access some money? Well you certainly can do so from your RRSP, but remember it is reported as income and therefore taxable. Apart from financial difficulty, you can also use your RRSP to make a down payment or pay off the balance needed on a home under the Home Buyers Plan agreement. You do have to pay this back over 15 years though, however you do not have to start repayment in the year which you borrowed.

So don’t let this tax and RRSP season go by without thinking about how much tax you can save, and how much you can enhance your retirement.