Last Call: Why the RRSP is So Important

Evelyn Jacks

Times are tough but there are some things that are just too important to pass up on.  One of them is the RRSP contribution for the 2023 tax filing year.  The final deadline for reducing your 2023 taxes is February 29 this year.  That’s a Thursday and here are 9 great reasons why you shouldn’t miss this opportunity.

• The RRSP will reduce your taxes payable if you owe money to CRA.  The average balance due last year was over $8,000 so if you have a chance to reduce that plus add to your savings it’s a good idea.
• The more you earn, the more you save… if you’re paying tax at a 25% rate, for example, you’ll save $250 for every $1,000 you contribute; if you are paying at a 50% rate, you’ll save $500.
• Refundable Tax Credits Rise. Even low income earners can save money on income-tested programs available from the federal government.  That includes:
  • The Canada Child Benefit
  • The GST/HST Tax Credit
  • The Canada Dental Benefit and new Canada Dental Care Plan being introduced this year
  • The Canada Disability Benefit – scheduled to be available by the end of the year
  • The Canada Worker’s Benefit
  • The Refundable medical expense supplement (see Federal Worksheet)
  • Certain provincial tax credits
• Non-refundable tax credits are increased too.  This includes the following preceded by their line numbers on the T1 return and the name of the schedule on which to calculate these amounts

• 30300 Spouse Amount (S5)
• 30400 Amount for an eligible dependant (S5)
• 30425 Canada caregiver amount infirm spouse/eligible adult (S5)
• 30450 Canada caregiver amount infirm adult (S5)
• 32400 Tuition transferred from child
• 32600 Amounts transferred from spouse (S2)
• 33099 Medical expenses for self, spouse or common-law partner, and dependent children
• 34900 Donations and gifts (S9)
• Investment income inside the plan accumulates on a tax deferred basis – which means it grows faster than outside a registered account.
• The money is taxable when you withdraw it, but if you use it to buy a home (the Home Buyer’s Plan) or go back to school (the Lifelong Learning Plan), you can withdraw either $35,000 or $15,000 respectively tax free with reasonable repayments into your RRSP for continued deferrals   
• You don’t always need to come up with cash. You can transfer assets your non-registered account into your RRSP to avoid having to borrow or come up with new funds; losses incurred however won’t be deductible.  In that case sell the assets, generate the loss and then contribute to the RRSP
• For Seniors, OAS Clawbacks can be avoided or reduced and the Age Amount reduced, too as long as you are age-eligible.More can be claimedfor medical expenses in some cases, as explained above.
• You can make spousal RRSP contributions to equalize income in retirement.

The drawbacks: you need to have earned income from prior years to make the contribution; maximum contribution is 18% of earned income or $30,780 for 2023 but check your Notice of Assessment or Reassessment from CRA to confirm the official amount of your RRSP room – for many, it’s much higher.  Also, the money is taxable when withdrawn, so you’ll want to average out those withdrawals over years when income levels are lower than your contribution years,  if possible. 

There is also an age limitation – you can’t contribute past the end of the year in which you turn 71.  But you can still make contributions for a younger spouse and take the deduction.

What’s better? For those who qualify for the First Home Savings Account (FHSA), it’s the better tax break – contributions are deductible, income is earned on a tax deferred basis and the money is tax free if used to buy a home.  The contributions are not based on earned income but are limited to $8,000 per year, $40,000 in a lifetime.

Either way the tax savings from either the RRSP or the FHSA are the real news:  they can be used to pay down credit cards, go on a vacation, or invest in a TFSA  - another great way to save on a tax-free basis.

How to Make a Difference.  Tell your friends and clients about the thousands of dollars in potential tax savings and bigger income-tested tax credits available to fight inflationary times. It’s a win-win – but you must act by February 29 for savings on the 2023 tax return!