The Chartered Professional Accountants of British Columbia offers the following information as the RRSP deadline draws near:
Anyone with earned income in a prior year who is subject to Canadian taxation on that earned income, including non-residents, may contribute to an RRSP.
Early Contribution to an RRSP
RRSPs can be tax-effective investment vehicles, especially if you are many years from retirement. If you do decide to take advantage of an RRSP, it is better to contribute at the beginning of the year to start the tax-free compounding of earnings within the RRSP earlier. Also consider monthly contributions to your RRSP throughout the year, instead of a lump sum contribution at the end of the year or in the first 60 days of the following year.
You can make an RRSP contribution in a year and not claim a tax deduction in the same year if you think your marginal tax rate will be higher in a later year; you will still benefit from the tax-deferred growth of the investments in the RRSP.
Provided your undeducted RRSP contributions do not exceed your RRSP deduction limit plus $2,000, your undeducted contribution can be carried forward indefinitely, without penalty, for deduction in future years. This could be a substantial advantage if you claim the tax deduction in a year or years when you are in a higher tax bracket.
For your RRSP contribution to be deductible for a particular tax year, the contribution must be made by the 60th day following the end of the year. For the 2017 tax year, the contribution deadline is March 1, 2018.
Borrowing to Make an RRSP Contribution
You can borrow to make an RRSP contribution, but any interest you pay on the borrowed money will not be tax deductible. For this reason, it is generally better to make your RRSP contribution using available cash rather than borrowing.
If you have to borrow to make your RRSP contribution, try to repay the loan as soon as possible to minimize the non-deductible interest you are paying. Before borrowing, seek professional advice to ensure the benefits of making an RRSP contribution outweigh the costs of borrowing.
If you hold investments outside of your RRSP, it would be more appropriate to borrow to acquire these investments, as the interest on such borrowing would likely be tax deductible.
If you borrowed to buy investments outside of your RRSP and you transfer those investments into your RRSP, the interest on the borrowed funds will no longer be tax deductible.
For more tips on RRSPs and tax filing, visit rrspandtaxtips.com.
