Personal Investor: Year-end RRSP and TFSA tax ‘gotchas’
For the average investor, December is normally a time to kick back and enjoy the holidays. Why not? New contribution limits for tax free savings accounts don’t come into effect until the new year and the deadline to contribute to registered retirement savings plans is way off in March.
But there are at least three potential tax ‘gotchas’ that can catch TFSA and RRSP investors by surprise.
- If you are one of the ten per cent of TFSA holders that contributes the maximum allowable amount each year, and you made a withdrawal in 2017, you must wait until 2018 to re-gain that contribution space. In other words, in the eyes of the CRA your TFSA was maxed out in 2017 - period.
Once 2018 rolls around the withdrawal amount you made in 2017 will be restored, plus the new allowable amount.
- If you turned 71 in 2017, you have until Dec. 31 to make any final contributions to your RRSP before converting it into a registered retirement income fund (RRIF) or registered annuity. A RRIF is like a reverse RRSP – instead of contributions going in, withdrawals go out.
Normally, the RRSP contribution deadline is the first Monday of March but the CRA will not allow a contribution to be made in the same calendar year funds are withdrawn.
- If you contribute to a spousal RRSP, and your spouse plans to begin making withdrawals from his or her plan by 2020, you must make your contribution before December 31. According to the rules, withdrawals from a spousal RRSP will not be taxed in the recipient’s hands until the third calendar year after the contribution.
If they are withdrawn before the third calendar year, the funds will be taxed in the hands of the contributor. That could be a costly problem considering the contributor to a spousal RRSP is normally in a higher tax bracket.