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Dale Jackson

Personal Finance Columnist, Payback Time

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As the March 2 RRSP contribution deadline nears, a recent Bank of Montreal survey finds the average contribution this year is expected to top $6,000 –  up 55 per cent from last year.

This shows a genuine commitment from the 69 per cent of Canadians who hold a registered retirement savings plan, but in the rush to get a break on their income tax, it might be best to hold off.

First, it’s important to know that the March 2 deadline only applies to the 2019 tax year. The amount you contribute before the deadline can be deducted from income received last year, but it can also be applied to this year, or carried forward to future years. Contributions can even be split between two or more years.

The finance industry hypes the RRSP deadline to get people motivated to save for retirement and generate some fees for itself. Most investment advisors suggest regular payments throughout the year, which alleviates a lot of headaches for them and their clients.

That nugget of information can come in handy for long-term tax planning and ultimately long-term tax savings. The RRSP refund that comes in the spring is based on the amount of taxable income you received in the year the contribution is claimed, and the marginal tax rate applied to that amount. If, for example, your income was under $40,000 in 2019, you would roughly be in a 20-per-cent tax bracket and would receive a refund of around $1,200 for that average $6,000 contribution.

That might seem like a tasty ticket for a Caribbean vacation, but suppose you got a big raise in 2020 or landed a higher-paying job. The marginal tax rate for income over $45,000 is roughly 30 per cent. That means you would receive a refund of around $1,800 on a $6,000 contribution.

Holding off on claiming your RRSP contribution, or contributing in another year, might make even more sense when you consider RRSPs are merely a tax deferral. That means all those contributions made over the years and any gains they generate through investments are taxed at the same marginal rates when they are withdrawn in retirement. 

If you claim your contribution in the lowest tax bracket, the best you can hope for is to withdraw it in the lowest tax bracket. If your RRSP savings grow beyond expectations, you will need to withdraw it in a higher tax bracket. Sure, your contribution grows tax-free over time, but you wind up paying more in tax and risk having your Old Age Security (OAS) benefits reduced.

To find which tax bracket you are in for 2019, compare the income posted on the “T” slips (such as T3, T4 or T5) you receive from employers and financial institutions with marginal tax levels on the Canada Revenue Agency website. Be sure to include tax rates in your home province.  

If you are in the lowest tax bracket, a more tax efficient use of your savings would probably be a contribution to a tax-free savings account (TFSA), which is not tax deductible, but contributions and gains are never taxed when withdrawn.   

If you were in a higher tax bracket in 2019, contributing to an RRSP makes sense before March 2.  But if you’re not sure where to invest it, don’t worry. You only need to contribute before the deadline. You can park it in cash for as long as you like and invest it when the time is right.

Perhaps a long chat with a qualified advisor about investment strategy and tax efficiency would be more thrilling than a Caribbean vacation this spring.    

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.