Think about how to minimize your not only when the registered retirement saving plan (RRSP) contribution is approaching or it’s time to file your tax return. Figuring out how to better position yourself for the future to optimize your tax and retirement savings needs to be an important part of your financial plan. In this first instalment, we focus on registered accounts. Please click here to learn more about non-registered accounts and other tax strategies.

Some of these strategies are complex. Investors should discuss them with an advisor or a qualified tax specialist before putting them into action.

Make your RRSP contribution early

To be tax deductible in 2024, Registered Retirement Savings Plan (RRSP) contributions must be made in the year or by within the first 60 days of following, calendar year. The RRSP contribution deadline for 2024 is March 1, 2025, but because March 1 falls on a Saturday, the RRSP contribution deadline is moved to the following Monday, being March 3, 2025.

It’s a good idea to make your RRSP contribution as soon as possible as you will have your money working for you sooner. Also, by making your contribution early, you may also benefit from potential upswings in markets. Such gains are taxable to you only in the year of an RRSP withdrawal; otherwise, your RRSP portfolio may continue to benefit from tax-deferred growth.

Set up an automatic contribution plan, perhaps monthly or on a date that coincides with your regular pay schedule. This is aligned with the ‘pay yourself first’ strategy. If you’re committed to this strategy, you can ask your employer to reduce the amount of tax withheld each pay.  Your employer will require a letter from the Canada Revenue Agency (CRA) to facilitate this request. To obtain a letter from the CRA, you will have to complete a Form T1213 Request to Reduce Tax Deductions at Source and mail it to the CRA (the address is on the form).

To find out the maximum you can contribute to your RRSP, consult your latest Notice of Assessment from Canada Revenue Agency (CRA). Any RRSP over-contribution exceeding $2,000 is subject to a 1% per month penalty, so it’s important to know your available contribution room.

If you don’t have available cash to contribute to your RRSP, consider the following options:

  • Borrowing the funds.  The interest paid on the borrowed money is not tax deductible; however, the potential tax refund that you receive could be used to replay some or all of the loan and you will be saving for your retirement.  Only borrow what you know you can afford to repay within the year.
  • Transfer mutual funds or securities in-kind from your non-registered account to your RRSP. The transfer is considered a disposition for tax purposes in the year and this will have to reported on your tax return in the year of the transfer.  Be warned that transferring securities-in-kind that have appreciated in value to registered investment accounts could generate capital gains, which are taxable to you. If the securities have depreciated in value, you could generate a capital loss on the transfer. Unfortunately, this loss will be deemed to be nil, and can’t be used at any time to offset capital gains. It’s best to talk to a qualified tax advisor before going ahead with such a strategy.

Turning 71 in 2024, consider making a RRSP over-contribution

RRSPs mature by end of the year in which you turn 71, with no contributions allowed after that. Typically, people choose to transfer their funds held in an RRSP to a Registered Retirement Income Fund (RRIF) by the end of that year. You could also make withdrawals from the RRSP or use the funds to purchase an annuity.  A combination of all three options is also possible.

If you turn 71 in 2024 and have earned income during the year, it may be worthwhile to make an over-contribution to your RRSP in December 2024. You will be assessed a 1% penalty per month on the over contribution amount in excess of $2,000, but possibly only for that month if the contribution is made in December.  Once the calendar changes to January 1, 2025, your RRSP contribution room will increase based on your 2024 earned income, potentially eliminating the previously mentioned over-contribution.

It will be critical for your accountant or a qualified tax advisor to assess your 2024 earned income to ensure that the over-contribution penalty tax only applies for the month of December 2024. If this strategy is implemented properly, the tax savings from the RRSP deduction for 2024 will likely far exceed the penalty paid for the over-contribution.

If this strategy is not used, the contribution room created by your 2024 income will be lost. An exception to this is available if you have a spouse or common-law partner (CLP) that is 71 or younger in the year. Your RRSP contribution room can be used to make a contribution to a spousal RRSP and you can claim the tax deduction on your tax return.

Contribute to a spousal RRSP

If you are planning to make an RRSP contribution to an account owned by your spouse or CLP, don’t wait until January or February. Contributing in the current calendar year (2024) will shorten the window that income can attribute back to you.

For example, if you make a spousal RRSP contribution this calendar year and none in the next two years, any income on withdrawals from the plan by your spouse/CLP up to December 31, 2026 would be taxable to you. On the other hand, if you wait until January 2025 to make the spousal RRSP contribution, this attribution date extends out a full year, up to December 31, 2027. What a difference a month makes! Despite the possibility of pension income splitting being available, contributing to a spousal RRSP can give withdrawal flexibility.

To learn more about spousal RRSP rules, read this article.

Contribute to your spousal RRSP if your spouse/CLP passed away in 2024

If your spouse or CLP passed away in 2024 and they had unused RRSP contribution room, the executor of their estate needs to consider making a final contribution to a spousal RRSP by March 3, 2025. This will provide tax savings for the deceased, as the RRSP contribution can be deducted against income on their final tax return.

To learn more about spousal RRSP rules, read this article.

Consider contributing to a FHSA

To open a First-Home Savings Account (FHSA), you must be 18 years or older and a Canadian resident.  In addition, you must meet a few additional first-time home buyer conditions:

  • You didn’t live in a qualifying home that you owned or jointly owned with your spouse or CLP in the calendar year or in the previous 4 calendar years, and
  • You didn’t live in a qualifying home that your spouse or CLP owned or jointly owned in the calendar year or in the previous 4 calendar years, or you do not have a spouse or CLP at the time the account is opened.

A contribution to a FHSA will provide tax savings in the year of contribution, because a FHSA contribution can be deducted against income in the taxation year of the contribution.

To learn more about FSHA rules, read this article.

Consider maximizing your TFSA contribution.

To open an Tax-Free Savings Account (TFSA), you must be 18 years or older and a Canadian resident. Since the TFSA was first available in 2009, the maximum total amount that a new TFSA user can contribute is now over $95,000. This contribution can be made in cash or by transferring investments in-kind. As noted above, in-kind transfers of securities to registered accounts, such as a TFSA, may result in capital gains or losses, which may produce adverse tax effects.

To learn more about TFSA contribution limits, read this article.

When deciding if it is better to contribute to a RRSP or a TFSA, it’s important to weigh the flexibility offered by the TFSA versus the tax deductibility of an RRSP contribution. Timing, age, and marginal tax rates are additional factors to consider, keeping in mind that while RRSP/RRIF withdrawals are fully taxable, TFSA withdrawals are tax-free.

If you plan to withdraw funds from your TFSA soon, consider doing so before the end of 2024. The amount of the withdrawal in 2024 will be added back to your TFSA contribution room in 2025. If you wait until 2025 to withdraw, you don’t get the contribution room back until 2026.

To explore more strategies to maximize TFSA benefits, read this article.

Contribute to an RESP.

The lifetime contribution limit for Registered Education Savings Plans (RESPs) is $50,000 per beneficiary. To help boost the account, the Canada Education Savings Grant (CESG) is available. The CESG is paid at a rate of 20% on the first $2,500 of contributions each year, to a lifetime maximum of $7,200 per child.

If you can’t maximize the CESG in a year, there are catch-up provisions available.  Up to a maximum of $1,000 in CESG can be received when catch-up contributions are made.

If a child or grandchild turns 15 in 2024 and has never been the beneficiary of a RESP, they can benefit from the CESG until age 17 (the last year that a CESG is paid), if one of two things happen:

  • $2,000 is contributed to their RESP before the end of the year, or
  • If there have been three prior years with contributions of at least $100, and at least $100 in RESP contributions are made 2024.

There are extra benefits available for lower-income families. And some provinces have additional incentives to promote saving for education and training. Your advisor can help you make these choices.

To compare RESPs to other types of investments, read this article.

As you can see, there are many strategies available to help minimize your annual taxes and boost your savings. If you’re planning to make contributions to or withdrawals from certain accounts, there are incentives to doing so in the actual calendar, as opposed to waiting until the next one. Talk to your advisor to see if implementing any of the strategies discussed in this article make sense for you.

Information contained in this article is provided for information purposes only. Its not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.