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Strategies to keep tax planning simple. 10 ways to maximize your registered retirement saving plan room (RRSP):

If you live in Canada one of the most powerful ways to reduce taxes is to maximize your registered retirement saving plan room. What is the RRSP room? Every year that you have earned income, you earn RRSP contribution room equivalent to 18% of your earned income. If you contribute money towards your RRSP room you can decrease your taxable income by the same amount you contributed and up to the maximum RRSP room allowed.

How to maximize your registered retirement savings (RRSP)?

Make your RRSP contribution to a high interest saving account or short term 3 month GIC such as the ones that we recommend with EQ Bank: A savings account that helps you get the most out of your money, with no everyday banking fees, no minimum balances, free transactions (free Electronic Funds Transfers and Interac e-Transfers®) plus one of the highest rates in the market, 2.3% at this time.   Click the banner to learn more:

1. Why does it make sense to Contribute Early to your RRSP’S?

Start contributing to an RRSP as soon as you are able, why wait until you are close to retirement age?

If someone made a $10,000 RRSP contribution and held it in his RRSP for 20 years at 5%, his RRSP would grow to more than $26,000.

But hold on, what if the same person contributed $10,000 to his RRSP at 5% and held it in his RRSP for 40 years? , his RRSP would grow to more than $70,000.

Doesn’t it make sense? A longer time horizon produces a larger RRSP due to the tax-deferred compounding.

2. Why does it make sense for your employer to contribute directly to your RRSP’s?

Employers can make RRSP contributions directly to their employees’ RRSPs

Or

Even employers can deduct amounts from each pay check directly to the employee’s RRSP.

Even Better, Imagine the full amount of a bonus, up to $10,000 can be contributed to an RRSP without deduction of withholding tax.  Isn’t this great?

Make sure you have sufficient RRSP contribution room though!


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3. Why does it make sense to transfer a retiring allowance to your RRSP?

Avoid being tax at your marginal tax rate!  A retiring allowance can be transferred to the ex- employee’s RRSP in the year it is received or within 60 days!

4. Why does it make sense to Over-contribute $2,000 to an RRSP ?

Did you know that CRA allows a $2,000 over-contribution to an RRSP without penalty?

You should note that the over-contribution cannot be deducted in the year that it is made but it can be deducted in a future year when RRSP contribution room is available…

Imagine a $2,000 would compound to more than $8,500 over a 30-year period at 5% when it grows tax free.

5. Why should you contribute to your RRSP now and deduct it in a future year when income is expected to be higher?

Did you know that RRSP contributions do not have to be deducted in the year in which they are made?

Contributions can be deducted in that year but also in any other future year. It is better to defer the RRSP tax deduction if the marginal tax rate will be higher in a future year.

• Imagine if you are expecting a large bonus or salary increase in the next year YOU will qualify for a higher tax bracket……..Defer the RRSP deduction for the Future!

• Imagine if your are a summer student and will graduate in the next year after graduation……..Defer the RRSP deduction for the Future!

• If you are on maternity or parental leave ……..Defer the RRSP deduction for the Future! Did you know that RRSP contributions do not have to be deducted in the year in which they are made?

Contributions can be deducted in that year but also in any other future year. It is better to defer the RRSP tax deduction if the marginal tax rate will be higher in a future year.

• Imagine if you are expecting a large bonus or salary increase in the next year YOU will qualify for a higher tax bracket……..Defer the RRSP deduction for the Future!

• Imagine if your are a summer student and will graduate in the next year after graduation……..Defer the RRSP deduction for the Future!

• If you are on maternity or parental leave ……..Defer the RRSP deduction for the Future!

6. Why does it make sense to give money to adult children to contribute to their own RRSP?

When children earn money in small jobs during the year they can also accumulate RRSP contribution room even if they make less than their personal exemptions (approx $12,000 ). By giving them money to contribute to their own RRSP the tax deduction can be deferred and claimed in a future year when the child has higher income plus is a good habit to teach them.

7. Why does it make sense to make a RRSP contribution in specie if there is insufficient cash to contribute?

 When you have assets such as equity shares , you can contribute these assets to your RRSP’s and get the tax deduction from income. If you don’t have cash you can contribute any of the following assets to an RRSP:

Don’t miss the opportunity to pay less tax today and save for tomorrow!

» Bonds, debentures and similar obligations guaranteed by the Government of Canada, a province, a Canadian municipality or a Crown Corporation (including Canada Savings Bond issues and Treasury Bills).

» Shares and debt obligations of Canadian public companies.

» Shares of foreign public corporations listed on a prescribed stock exchange outside Canada (or on NASDAQ in the United States).

» Foreign government bonds with investment grade ratings.

» Debt obligations of corporations whose stocks trade on an eligible foreign stock exchange.

» Debt obligations of the European Bank for Reconstruction and Development and the International Finance Corporation, and securities issued under Ontario or New Brunswick community development Legislation.

» GICs issued by a Canadian trust company.

» Certain annuities issued by Canadian companies.

» Units of a mutual fund trust or an insurance company pooled fund.

» The writing of exchange-traded covered calls on securities that qualify for an RRSP.

» A mortgage or interest in a mortgage or a pool of mortgages secured by real property located in Canada.

» Shares, bonds, debentures or similar obligations issued by certain cooperatives or credit unions and shares of certain investment corporations.

» Certain life insurance policies.

» Bankers’ acceptances (these are short-term promissory notes issued by corporations and guaranteed by banks thereby increasing the negotiability of the instrument and lowering the cost of borrowing);

» Limited partnership units listed on a Canadian stock exchange.

» Certain shares in the capital stock of a small business corporation, prescribed venture capital corporations or specified co-operative corporations.

» Investment-grade gold and silver bullion coins and bars, and certain certificates based on financial institutions’ precious metal holdings.

8. Why does it make sense to contribute to an RRSP and use the resulting tax refund to pay down your mortgage?

You can build equity in home and build retirement assets at the same time.  As you contribute to an RRSP you increase your tax refund and this tax refund can be used to pay down your mortgage sooner. 

Why does it make sense to contribute to my spouse’s RRSP instead of mine?

You can benefit from INCOME SPLITTING and decreasing taxable liability in the future when your spouse has less income to declare on retirement.  Sweet! More disposable income for both to travel and make your dreams come true.


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9. Why does it make sense to contribute to spousal RRSP by December 31 each year?

You have to know that at least 3 years have to pass before withdrawing spousal RRSP without being attributed for the contribution.  If you contribute on December 31 you will reduce the 3 year waiting period from three to two years and avoid income attribution on the contributing spouse.

Did you know that if you are older than age 71 you can contribute to your spouse’s RRSP as long as the spouse is younger than 71 and you have RRSP contribution room ?

10. Why does it make sense to maximize RRSP contributions even if money needs to be Borrowed?

When you contribute to your RRSP’s you can increase your tax return even up to the previous 9 years.  This means getting back money you already paid in taxes.  This refund can be used to paid an RRSP loan.

Let’s look at this into detail.

As an example if you have RRSP room that you have not used yet, let’s say 100,000 and you are in a marginal tax bracket of 40% you will receive a 40,000 refund from CRA if you contribute 100,000 towards your RRSP room. This refund can be used to pay both an RRSP loan interests of approx. 5000 / per year and have a remaining 35,000 to pay some part of the loan principal. In addition, your 100,000 RRSP contribution grows tax free until you withdraw it and becomes taxable income in the year of your withdrawal.

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Remember…

Proper tax planning starts by organizing your financials, having up to date information, organizing receipts, sorting expenses, tracking mileages, recording invoices, tracking sale taxes and ultimate making proyections to prepare taxes. In order to take control of your finances with one simple solution we recommend quickbooks an amaizing tool that uses the lastest technology to make your life easy: from Snap and save photos of your receipts with your phone so you capture proof and ensure deductions to connecting your bank account(s) to automatically download transactions.

A good way to start is using a software that guides you through a series of questions that match your specific tax situation. We recommend Turbotax which not only guides you in finding the tax credits and deductions that you are eligible but also guarantees that all calculations are 100% accurate and your taxes will be done right. Please click the banner below to learn more and to take advantage of 15% discount when filing your taxes.


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This article is an expression of the author’s personal opinions. The Company will not be held liable in any way for the opinions expressed herein.  

© 2020 All Rights Reserved by FINMARKET INC. ALL FINANCIAL ADVICE IS PROVIDED BY FINMARKET INC .FINMARKET INC. Owns and operates the website moneylesson.org and YOUTUBE CHANNEL FINANCIAL ADVICE. Finmarket Inc. makes no representations, warranties, or guarantees about, and assumes no responsibility for, the content or application of the material contained this youtube channel, website, video, Podcast or any media posted on any website and expressly disclaims all liability for any damages arising out of the use of, reference to, or reliance on such material. The information contained herein is for information purposes. Particular investment and Tax strategies should be evaluated relative to each individual’s objectives. Individual should always consult with their financial professional before engaging in any strategy or investment and understand that some strategies have higher risks and are not suitable for all investors.You should consult an specialist to evaluate your individual circumstances before engaging in any financial strategy.


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