The RRSP contribution deadline for this year is Monday, Feb 29th – not the typical March 1st you may be expecting because this year, as you may have already noticed, is a leap year.
Every year, it’s the same story; a chaotic and panicked ritual of making the RRSP contribution in time before the deadline. The CRA allows us to make contributions to our RRSP within the first 60 “magical” days of the following tax year (I call them magical because you can then choose to allocate the deduction to either your 2015 or 2016 taxable income - or future years, more on that later) and even though most of my clients have set up smart and proactive regular contributions to their RRSP, the rush persists every year.
Now, I’ve come to believe over the years that the panic around last minute lump sum contributions or top ups isn’t really our fault (human nature might suggest otherwise) - it is the availability of key information that is to blame. In order to decide on a strategic amount to contribute, we need to crunch the numbers based on our total earned income, along with pension adjustment details, contributions to date, taxes paid, taxes owing and any left-over room that may have carried forward from last year’s RRSP deduction limit – information that arrives mere weeks before the deadline.
The simplest tip to avoid the havoc is to conservatively estimate your income for the following year (and consider re-occurring factors like a pension adjustment) to set up a regular contribution plan to gradually contribute to your RRSP throughout the year, take advantage of dollar cost averaging, earn valuable time invested in the market and to reduce the drama of the last minute lump sum contribution.
I found a great article here that includes some “timeless RRSP tips for last minute contributors”. Here are my top 3 favourties I’d like to share with you because most often when I mention them to clients they say, “whoa I never knew that”…
1. You can defer the deduction. When you contribute to a RRSP, you do not have to use the deduction right away. In fact, if you think your income might be higher and potentially be in a higher tax bracket next year, you may want to use the deduction in the future year instead of this year. I have seen some people defer the contribution only to forget about it later or spend the money. Make the contribution and save the deduction for the future.
2. Should you make it a spousal contribution? If you have a spouse, your contribution can either go into your personal RRSP or a spousal RRSP. If the contribution goes to a spousal RRSP, you will still get the tax deduction but your spouse will pay the tax when they withdraw the money from the spousal RRSP. It’s important to be aware of the spousal attribution rules within the first three years of any spousal contribution.
3. Watch your marginal tax bracket. One of the biggest benefits of contributing to a RRSP is the tax deduction equal to the contribution amount. If you want to truly understand the benefit of the tax deduction you need to know your marginal tax rate and how much of a contribution might bring you down to the next tax bracket. Making proper RRSP decisions is all about understanding my one formula approach to RRSPs.
If I had you at leap year and you’re still thinking about why February has to have an extra day every four years, click here to learn more about why this happens along with everything else you need to know about a leap year in 2016.
Spoiler alert: it all comes down to the Georgian calendar and some drama between Julius Caesar and Pope Gregory. A complete orbit of the earth around the sun takes exactly 365.2422 days to complete, but the Gregorian calendar uses 365 days. So leap seconds - and leap years - are added as means of keeping our clocks (and calendars) in sync with the Earth and its seasons…obviously.