Tag Archives: RRSP contributions

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Forget to Record RRSP Contributions on Last Year's Income Tax Return

Did You Forget to Record RRSP Contributions on Last Year’s Income Tax Return? We Can Help!

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Canada Revenue Agency requires that all RRSP contributions be reported on Schedule 7 for the past calendar year, as well as any contributions made within the first 60 days of the current year. If you forgot to report, CRA will allow you to file an adjustment to record any RRSP contributions missed when you filed your income tax form. If you do not currently have all your receipts, you can still file a T1-Adj online, and then supply receipts later if CRA asks to see them. See Schedule 7 and General Income Tax and Benefit Guide page 23.

You can report your adjustments by making a request online or by mail. To complete an online request, log in to My Account on the CRA website. You can complete more than one request if necessary, as long as you do each on separately. To complete a mail-in request, you will need to print and complete the T1-Adj, T1 Adjustment Request Form.

Most tax return adjustments may be made within CRA’s 10 year time limit. You can expect online adjustments to take approximately two weeks to process and eight weeks for any mail-in requests.

Do you still have questions or need help requesting adjustments to your tax return? Brooks Financial is available year-round to offer tax preparation, tax planning and other income tax services. Learn more about our services here or contact us now for assistance.


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Top-Up RRSP Loan

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The Top-up RRSP loan strategy is where you borrow a modest amount that is completely paid off within a year, before next year’s RRSP contribution deadline.

 

Example:

  • You are in a 40% tax bracket and you have $3,000 available to contribute into your RRSP by the deadline date of March 3, 2014.
  • You top up your contributions with a $7,000 loan and put a total of $10,000 into your RRSP
  • This would generate a $4,000 refund ($10,000 x 40% = $4,000)
  • The $4,000 refund can almost immediately reduce the $7,000 loan to $3,000, which is paid off before the following March.
  • The $10,000 starts compounding in your RRSP right away, and you won’t be tempted to blow the refund on things you don’t really need

 

This top-up RRSP loan strategy should only be implemented after consulting with your Financial Planner. Everyone’s situation is unique, and there are many things to consider when making RRSP contributions and borrowing money.


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Gross-Up RRSP Loan to Maximize Your Contributions Each Year

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The Gross-up RRSP loan allows you to make a larger RRSP contribution than you otherwise would have. I know it sounds a bit strange to borrow and save at the same time but the strategy can ultimately improve your financial position. Over the long term, the benefits of deferring taxes and earning compound interest can far outweigh the interest cost of using a loan to contribute to your RRSP. The strategy is basically borrowing the exact amount needed for the RRSP refund to completely pay off the loan immediately (a few weeks later when your refund comes back after filing your tax return).

Example:

  • You are in a 40% tax bracket and you have $6,000 available to contribute into your RRSP by the deadline date of March 3, 2014.
  • You top up your contributions with a $4,000 loan and put a total of $10,000 into your RRSP
  • A few weeks later you get your tax refund of $4,000 and you use it to pay back the loan
  • The $10,000 starts compounding in your RRSP right away, and you won’t be tempted to blow the refund on things you don’t really need

Below is the calculation to determine how much to borrow to generate a refund close to the amount of the RRSP loan:

 

(RRSP Contribution available x Marginal Tax Rate) ÷ (1 – Marginal Tax Rate) = RRSP Loan

 Our example ($6,000 x 40%) ÷ (1 – 40%) = $4,000 RRSP Loan

Doing this calculation will give you an idea of how much you should borrow to ensure that the amount of your refund is close to the amount owed on your RRSP loan. There will likely be some interest due when you pay off the loan which is not accounted for in the gross-up calculation. If you repay the full amount of the loan quickly, however, the amount of accrued interest should be minimal.

 

Your Marginal Tax Rate (MTR) is the amount of tax you pay on the last dollar earned. Ask your Financial Planner for help figuring out what your MTR.

 

Rules for successful implementation of the Gross-up RRSP loan strategy:

  1. A portion of the RRSP contribution must come from your own savings.
  2. The expected tax refund should be the same as the amount borrowed (not including interest).
  3. The tax refund must be used immediately to pay off the RRSP loan.
  4. There must not be any outstanding personal tax liabilities.*
  5. Home Buyer’s Plan or Life-Long Learning Plan repayments must be considered separately from the strategy, as they will not generate a tax refund.

 

The gross-up RRSP loan strategy should only be implemented after consulting with your Financial Planner. Everyone’s situation is unique, and there are many things to consider when making RRSP contributions and borrowing money.


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Does Contributing to an RRSP Make Sense for You?

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Anyone with earned income will have RRSP contribution room, but does that mean you should use it? There has been much discussion these days about whether the RRSP is of benefit at all. After all, you just have to pay the tax when you withdraw from your RRSP later. It is true that a RRSP is a tax deferral vehicle. You will save on your taxes today but you will pay those taxes at some future date. This is a great opportunity for some but it can be detrimental to your Retirement Income plans in other situations.

If you are earning under $11,000 annually (the basic personal amount) it won’t make any sense to contribute to a RRSP and claim the corresponding RRSP deduction.  Income tax will not be payable at this level of income, consequently no benefit to the RRSP deduction. An individual who expects to earn a higher level of income in the future could make a contribution and then choose to save the RRSP deduction to use on a future tax return.

As your income increases and becomes subject to tax, you need to decide whether it makes sense to contribute to an RRSP or a TFSA. The general rule is that if your tax bracket today is low and you expect to be in a higher tax bracket later on when the funds are taken out, you’re better off maxing out your TFSA before contributing to an RRSP. If an individual is in their twenties and earning less than $40,000 annually stick with TFSA contributions and save the RRSP room, contribution and deduction for the future, when you’ll be in a higher tax bracket.

If you are a middle to upper income earner, typically in the age range of 30 to 70 years old, the general rule is to maximize RRSP contributions since your tax rate throughout your working years is typically higher than it will be when you retire.

Once you hit 71 years of age you can no longer contribute to your own RRSP. However, you can still contribute to a spousal RRSP if your spouse or partner is 71 or under as long as you have unused RRSP contribution room. This could be the case if you haven’t contributed the maximum allowed during your working years or you continue to generate new contribution room annually from employment or rental income.

How do you know what makes sense for you? The decision to contribute in a particular year should be based on your personal circumstances, including your tax bracket today and your expected tax bracket in the future, specifically, the year of withdrawal. Have a conversation with your Financial Planner to help you make good RRSP decisions.


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