Want to save for retirement while lowering your potential tax bill? Have you maxed out your RRSP contributions for the year? Contributions to RRSPs are deductible from your total income which ultimately reduces the amount of income tax payable for the year!
A registered retirement savings plan (RRSP or RSP) is a financial account in Canada for holding savings and investment assets. Deductible RRSP contributions can be used to reduce your tax bracket and the income you earn in the RRSP is usually exempt from tax. When it comes to RRSPs, there are some essential things to keep in mind…
Contributions & Deductions
You can claim a deduction for the following:
- Contributions you made to your RRSP, PRPP or SPP
- Contributions you made to your spouse’s or common-law partner’s RRSP or SPP
- Your unused RRSP, PRPP or SPP contributions from a previous year
Note: Amounts you transfer to your RRSP, PRPP, and SPP directly do not affect your deduction limit BUT you may need to include an amount in income and claim an offsetting deduction. Transfers as well as repayments to withdrawals from the Home Buyers’ Plan or Lifelong Learning Plan are not considered contributions.
Your deduction limit is the maximum amount you can deduct from your (and your spouse’s/common-law partner’s) combined contributions made to your RRSP, PRPP, and SPP accounts. If you go over your limit amount, you then have to pay a tax of 1% per month on contributions that exceed your limit by more than $2K.
The Canada Revenue Agency calculates your RRSP deduction limit by:
- Using the unused portion of your previous year’s deduction limit
- Plus whichever of the following is less (while still exceeding your pension adjustment or prescribed amount for connected persons):
- 18% of your earned income in the previous year
- The annual RRSP limit (the limit is $29,210 for 2022)
- Plus your pension adjustments reversal
- Minus your net past service pension adjustment (PSPA)
Note: Certain types of qualifying income transferred to your RRSPs are excluded from the calculation of your RRSP deduction limit.
Important Considerations
Any contributions you’ve made to your RRSP, PRPP or SPP (or your spouse’s) from March 2, 2022 to March 1, 2023 qualify. If you don’t make the deadline this year, no worries! Your unused contribution carries over to next year’s limit calculation. Here are some other down payment considerations you’ll want to take into account:
- RRSPs have to be invested for 90 days before you can use them for a down payment
- The max you can withdraw as a first-time home buyer is $35K
- If you are not purchasing for the first time BUT it is due to a relationship breakdown or because you’ve been out of the homeownership market for over four years, you are eligible to use RRSPs as a down payment again (so long as the previous withdrawal has been repaid)
This (tax) time last year, a client who was going to be closing in a couple of months called. They were going to get hit with a hefty tax bill for the year, so their account was suggesting a sizeable RRSP contribution. Great idea BUT this was also cash that was going to be used as the down payment on their new house.
The client figured they’d put in the RRSP contribution, save on some taxes, then take the money out to use as the down payment. Closing was in 60 days though and that money would need to stay in the RRSP account for at least 90 days to avoid taxes. The client could still go through with their plan but we were able to figure out a better solution.
Money was being gifted so that the client could make a 20% down payment and avoid default insurance. Instead, we took the gift money and used it as an RRSP contribution, bringing down their tax bill, and leaving 15% for the down payment. The math worked out so that the minimal increase in monthly mortgage payment plus the default insurance was less than the tax bill they would’ve otherwise been paying. It made more sense to put down less money!
Everyone’s saving and investment strategies are different. Contact the Kyle Miller Mortgage Agent team today to have us review your situation!
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