RRSP Contributions to be made by February 29, 2024
A popular and important tax planning strategy is to ensure taxpayers contribute each year to a registered retired savings plan (or RRSP). Why? An individual can deduct contributions to an RRSP in computing their taxable income resulting in tax savings at their effective tax rate.
As a reminder, the current limit for RRSPs is the lesser of 18% of 2022 earned income and the 2023 dollar limit of $30,780. However, if you do not contribute your limit, it can be carried forward and claimed as a deduction in a future tax year but be wary, there are penalties if you over contribute more than $2,000. Earned income is a specific term but generally defined to be income from employment, business, and net rental income. The CRA confirms your contribution limit each year so best to always check online.
A tax planning point:
As the deduction saves you tax at the rate that applies to your income, timing of when you make that contribution is important.
“Recently, in our year-end tax planning call with one of our clients, we advised the client of a start-up company to switch from taking dividends to salaries for a number of reason including the ability to have RRSP contribution room. However, we suggested the client may want to wait and only make the RRSP contribution in a later year when taxable income was higher as the plan was to sell the company at a significant gain in a couple of years.” - Tracey Jennings, Founder
As an example, if an Ontario based individual earns more than $222K, the applicable tax rate is 53.53% compared to a tax rate of 29.65% on taxable income at $80K. Therefore, the tax savings on deferring a $20,000 RRSP contribution to a future year when taxable income was higher in this example would be 23.88% (the individual would increase the tax refund by $4,776 in the above example). The benefit of this strategy needs to be weighed with other factors such as the tax deferral opportunity on income earned in the RRSP but certainly important to consider.
