Dale Jackson

Personal Finance Columnist, Payback Time

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As the March 1 RRSP deadline rapidly approaches, a new survey finds more Canadians are boosting their contributions after a year of unprecedented economic disruption caused by the pandemic.

The study conducted by Pollara Strategic Insights for IG Wealth Management finds one-third of respondents have already, or will be, contributing to their registered retirement savings plan this year. The findings fall in line with last year as 20 per cent say they will be contributing the same amount, 13 per cent say they plan to contribute more and only nine per cent plan to contribute less.

It’s been a struggle for much of the Canadian workforce who have either lost their regular sources of income, experienced pay reductions, or feel insecure about their financial futures. 

For those opting to contribute less or take a pass altogether, the fear of missing out can be discouraging in the face of an onslaught of RRSP season marketing from the finance industry.

Despite the advertising blitz to meet this year’s deadline, the actual rules around RRSP contributions can be very forgiving. For starters, the March 1 deadline only applies if you want to deduct your contribution from your 2020 income. Any allowable contribution space can be carried forward to the current tax year, or any year in the future.

Also, if your income was reduced in 2020 it might be a good idea to take a pass whether you have the cash or not. Finance industry ads often dangle the tax refund that comes in the spring as an incentive to contribute now, but the refund amount is based on the marginal tax rate of the contributor. For high income earners, that means if the top $10,000 of their 2020 income is being taxed at a rate of 40 per cent, a $10,000 contribution would result in a refund of 40 per cent or $4,000.

If the top $10,000 of a low income earner is taxed at a rate of 20 per cent, a $10,000 contribution would result in a refund of only 20 per cent or $2,000.

To make matters worse, those glitzy RRSP ads also fail to mention that all contributions made over the years and all the returns they generate as investments are fully taxed when they are withdrawn in retirement. The best any plan holder can hope for is to keep withdrawal amounts low and be taxed at the lowest rate, but the chance of the high income earner actually keeping some of the tax savings in their pocket is far greater because they made their original contributions in a higher tax bracket and received a larger refund at the time.

The entire concept of RRSP deadlines and lump sum payments benefits the industry that sells RRSP-related products, but can sometimes be hazardous to the plan holder. The better choice for plan holders is strategic contributions. Several online RRSP calculators are available to determine the size of a refund. If your income was smaller in 2020, your refund will be less than previous years, and the tax savings will be greater if you claim your contribution in a higher income year in the future.

It’s impossible to know what that future holds but a qualified financial advisor can help with a strategy to maximize RRSP tax savings. The best way to start is to avoid lump sum contributions ahead of each year’s deadline and devise a regular contribution plan instead. You can use the time between the end of each year and the contribution deadlines to determine the best amount to contribute and the best amount to carry forward.

Another strategy to boost RRSP savings over the long term is to re-contribute the much-loved, much-hyped, refund. You can apply it against last year’s income by using an online calculator to determine the refund (including the refund on the refund amount), borrowing the amount needed, and paying the loan when the refund comes in the spring.

If you are committed to making regular contributions and want to get ahead of the game, you can help cover those contributions by instructing your employer to deduct less in income tax from each pay to reflect your lower income tax bill. Employers normally use a standard accounting method to estimate taxes owing based on your taxable income. If you contribute to your own RRSP (outside of work), your taxes owing will be less and the difference is usually refunded after you file your taxes. By paying less tax at the source, that extra money can go directly into your RRSP. To get your employer to deduct less you must submit CRA form T1213.