RRSP Deadline: Most Won’t Contribute & That Will be Costly

Evelyn Jacks

According to a recent survey, more than 56% of Canadians do not plan to contribute to an RRSP this year and an additional 12% are unsure if they will.  That potentially means that more than two thirds of Canadians could be at risk of overpaying their taxes or worse, having important social benefits clawed back in this second year of the pandemic. Tax and financial advisors can help by preparing “what if scenarios” before the March 1 contribution deadline.

On the good news side,  The Scotiabank 2021 Retail Investor Sentiment Survey noted that almost half of their respondants (47%) did say they would contribute to a TFSA this year and that 55% of investors were feeling optimistic about their financial future.

However, the RRSP miss could be a big one, especially for middle income Canadians.  For example, the Canada Child Benefits, will feature a $300 a child additional payment in each quarter this year, for those with family net income under $120,000 and $150 per child for those with family net income above this, based on the 2019 tax year for the first two payments and the 2020 tax year for the next two. This is significant cash flow and families with net income close to the $120,000 mark should review RRSP contribution opportunities now.

Those individuals who received the Canada Recovery Benefit should also be aware of the 50% clawback of benefits when individual net income exceeds $38,000.

For regular EI benefit recipients, a 30% clawback of benefits could occur if net income exceeded $67,750.  This clawback however, will not apply if the taxpayer received less than 1 week of regular or fishing benefits in the preceding 10 tax years or if special benefits were paid, such as maternity, parental, sickness, compassionate care or family caregiver benefits.

There is an interesting tax trap with these regular benefits, though. People who receive regular EI benefits that overlapped 2 calendar years could qualify for an exemption based on the 1-week criteria described above in the first year.  However, the exemption would not apply in the second year as there would be more than 1 week of regular benefits paid over 10 prior years.

The Scotiabank survey also noted that 55% of Canadians rely on their financial advisor to help them make important decisions about the markets. With the recent volatility due to frenzied speculative trading of stocks like GameStop, Corp., it’s always a good idea to get back to basics: regular, tax-efficient investing that prizes the time value of money.

That is, increased tax savings and available refundable tax credits are a sure thing and totally within the investor’s full control when RRSPs are maximized.

Sound retirement and estate planning strategies for individuals and business owners will be the subject of Knowledge Bureau’s next comprehensive Virtual CE Summit on May 20.  Register by May 15 for early bird discounts and to hear outstanding guest experts describe tax efficient retirement income layering strategies. For personal assistance call 1-866-953-4769.