– There are a number of sources of funds for RRSP contributions. Not all
apply to everyone, but they’re worth looking at in case you can make use of
one or two. But you’d better hurry! This year, the deadline for RRSP
contributions that will be eligible for a 2017 tax deduction is March 1,
Your maximum contribution to an RRSP is calculated as the lesser of 1) 18%
of your earned income from the prior year, or 2) the maximum contribution
limit for the tax year, or 3) the limit after deducting company pension
plan contributions. “Earned income” includes your salary, but may also
include alimony payments and rental income, but not investment income.
The maximum contribution limit for 2017 is set at $26,010. It increases to
$26,230 for 2018.
Looking for ways to make RRSP contributions? Here are some favourites:
This is still the surefire way to ensure you make an annual RRSP
contribution. Arrange with your bank or your employer (if they’ve set up a
group RRSP) to automatically deposit funds to your RRSP with every
paycheque. Contributing through the year gets your money invested and
compounding that much sooner. And psychologically, it becomes like just
another withholding amount from your paycheque.
If you received a severance payment in 2014 (and you haven’t already blown
it on something), use it to make an RRSP contribution. That way, you’ll
shelter some or all of the severance amount from income tax.
You may have received a bequest during the year. If it’s a substantial sum,
use at least some of it as an RRSP contribution. Bequests themselves are
generally not taxable as income, but any investment income from that
bequest is. So put some of it into an RRSP, where investment growth is
tax-sheltered until your RRSP matures.
Contributions in kind.
If you have qualifying investments outside an RRSP in a non-registered
account, consider transferring some of them to an RRSP. Their current value
will be deemed to be the contribution amount for tax purposes. If you make
this type of contribution, keep in mind that there will be a “deemed sale”
of the asset, and 50% of any capital gain may be taxed. However, the upside
is that you’ll get a tax deduction on 100% of your contribution. To make
contributions in kind, you’ll need a brokerage account or have a
self-directed RRSP that lets you pick and choose your own investments.
Borrowing to invest in an RRSP.
The biggest downside to borrowing your RRSP contribution is that you are
leveraging your investment. It makes no sense to put borrowed money into a
safe, interest-bearing investment like a GIC, because it earns less than
the cost of your loan. But if you invest in equity investments, either
directly or through a mutual fund or ETF, you run the risk of magnifying
any losses that may occur. In other words, the value of your investment may
end up being less than the value of your loan – never a good situation!
Another minus is that an “RRSP loan” is still a loan – a debt with interest
payable. And you must pay the lender (usually your friendly neighbourhood
bank) the money when it’s due, regardless of what happens to your RRSP
investment or anything else. People who jump into RRSP loans without
thinking about the effect on their cash flow are usually in for a rude
Carry forward contribution room
A contribution to an RRSP gives you a tax deduction for the year of the
contribution. This may reduce your overall tax bill, or even result in a
Many people are unable to make the maximum RRSP contribution in a given
year. If so, the rules let you carry forward the missed contribution
indefinitely as extra contribution room for future years. Your unused
contribution limit is also shown on your CRA Notice of Assessment.
The carry-forward feature may be especially useful for those who expect to
be in a higher tax bracket in future years.
The sooner you start tax-sheltered compounding in your RRSP, the better.
Start off with small amounts, gradually increasing as your salary rises.
Remember the magic of compounding. Even a $500 monthly investment
compounded monthly at a relatively conservative rate of 6% will grow to
$500,000 in 30 years.
You can also increase your contribution in a given year by using
“contribution room” you’ve carried forward from previous years (the
contribution you didn’t make last year, for example). And you should also
reinvest your tax refund. It’s found money.
Besides its tax-deferral features, another big advantage of an RRSP is that
it may hold a wide variety of investments, including cash, GICs, stocks,
bonds, options, mutual funds, and exchange-traded funds (ETFs). Check the
CRA website for a complete list of qualified investments. As always, such a wide choice
presents both opportunities and risks.
For many of us, an RRSP is our only source of retirement income apart from
the Canada Pension Plan. And while you can invest in just about every type
of asset class, an RRSP is not the place to speculate on junior mines,
high-tech start-ups, commodities, or other risky and volatile assets.
Remember, tax benefits like the dividend tax credit, the capital gains tax
exemption, and the ability to offset losses against gains are lost within
Aside from not contributing to an RRSP at all, the RRSP investment choice
is where most people go astray. Most of us tend to overestimate our
capacity to deal with market volatility and take investment losses. So be
realistic about your own tolerance for risk. Work with an objective
financial planner to allocate your RRSP assets according to a plan
determined by your personal goals and a realistic assessment of your
tolerance for risk.
Speak with your financial advisor or qualified planner about more complex
RRSP contribution ideas, such as contributions in kind or RRSP loans. – Robyn
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. She is also listed as a
MoneySense Approved Financial Advisor. Contact her directly by phone at 416-828-7159, or by email at
for a confidential planning consultation.
Notes and Disclaimer
© 2018 by the Fund Library. All rights reserved. Reproduction in whole or
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The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
loss. No guarantee of investment performance is made or implied. It is not
intended to provide specific personalized advice including, without
limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.