Kevin Greenard: Unused RRSP contributions — mistake or strategy?

Kevin Greenard

In the majority of cases, when individuals make a Registered Retirement Savings Plan (RRSP) contribution, they intend to deduct those contributions on their tax return. When we take on new clients, we will request they sign a Canada Revenue Agency (CRA) representative form to enable us to obtain online access and view their tax information. With respect to the RRSP numbers, we will look at both the “RRSP deduction limit” and “unused RRSP contributions” to check for any irregularities.

What we have found over the years is that many people confuse the terms “RRSP deduction limit” and “unused RRSP contributions.” Both of these terms are used on the RRSP Deduction Limit Statement at the bottom of your Notice of Assessment from CRA.

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To illustrate these terms, we will use four different individuals: John, Jillian, Joseph, and Jennifer. The numbers below for John, Jillian, Joseph, and Jennifer do not factor in the $2,000 excess contribution that is permitted. The numbers below illustrate the amount that could be contributed and immediately deducted in the current year.

John

John has an RRSP deduction limit of $89,000 and unused RRSP contributions of $0 (most people have $0 unused). John can contribute $89,000 ($89,000 - $0) into his RRSP.

Jillian

Jillian has an RRSP deduction limit of $18,000 and unused RRSP contributions of $5,000. Jillian has the ability to contribute $13,000 ($18,000 - $5,000) into her RRSP. Essentially, you must subtract the unused RRSP contribution from the deduction limit to obtain the contribution limit.

Joseph

Joseph has an RRSP deduction limit of $8,410 and unused RRSP contributions of $8,410. Similar to Jillian up above, Joseph must subtract the unused RRSP contributions from the deduction limit. Joseph has no ability to contribute ($8,410 - $8,410) as he has no contribution room (his deduction limit equals his unused limit).

Jennifer

Jennifer has an RRSP deduction limit of $3,920 and unused RRSP contributions of $14,625. Jennifer has over-contributed to her RRSP account and has made a $10,704 ($3,921 - $14,625) excess contribution. When we met with Jennifer, we discussed the excess contribution. We outlined the T1-OVP penalties that would apply on the portion over $2,000 and assisted her in correcting the excess contribution.

T1-OVP penalty for excess contributions

When you have an unused RRSP contribution amount, it is important that you monitor this amount along with the RRSP deduction limit line. Be careful that the unused amount does not exceed your deduction limit by more than the $2,000 buffer that CRA allows.

If the unused amount exceeds the deduction limit amount by more than $2,000, then you have made what is referred to as an excess contribution. Excess contributions are subject to a one per cent tax on the excess amount for every month they are left in the RRSP. If you have excess contributions, you will have to complete and send a T1-OVP return with payment to your tax centre no later than 90 days after the end of the year in which the unused contributions exist. Failure to file this return may result in further interest and penalties. We would encourage all investors who have an excess contribution to proactively deal with their mistake before CRA sends you a letter.

Common unused RRSP and excess contribution mistakes

When we have reviewed the CRA information for new clients, we occasionally come across situations where clients have either unused RRSP contribution or excess contributions. Below are some of the most common mistakes that we have identified with new clients:

1) Not reviewing their deduction limit before making past contribution(s). We recommend knowing your limit before you contribute. We ensure these limits are known for our clients and that they do not over-contribute.

2) Forgetting to claim deductions that have been made. In some cases, we have informed clients that they have unused RRSP contributions that they should claim on their tax return.

3) Individuals have viewed the Notice of Assessment and interpreted the “unused RRSP contributions” as their deduction limit. This often results in an over-contribution situation being even worse.

4) Individuals not subtracting the unused RRSP contributions from the RRSP deduction limit when calculating the amount to contribute.

5) Not factoring in the pension adjustment and how that reduces the amount you can contribute into your RRSP.

6) Group RRSP plan contributions not factored into contributions that you do outside of a group plan.

7) People have made RRSP contributions when they shouldn’t have. Either the taxable income is too low, or they have significant tax credits, that once utilized would mean that claiming an RRSP contribution does not make sense. In these cases, an accountant would carry it forward to a future year where hopefully income will be higher or tax credits lower.

Using strategy for unused RRSP contributions

Investors should understand that they do not have to claim the deduction immediately. In some cases it is recommended that you do not claim the deduction immediately. As noted above, if you carry forward a previously contributed amount (and not claimed the deduction) it is referred to as “unused RRSP contributions.”

Why would you contribute to an RRSP and not claim the deduction immediately? The main reason is to shelter the income from tax. Once you have made the contribution into an RRSP, all income generated within is deferred regardless if you have claimed the deduction. Two other reasons why you may not claim a deduction immediately are the contribution exceeds current year taxable income, or future income is expected to be higher.

We have provided three illustrations below with different situations where a person may have unused RRSP contributions at the end of the year.

Mr. Wilson

Mr. Wilson recently received a significant inheritance of $200,000 from his mother who passed away. Mr. Wilson came to see us and asked for our recommendations. Prior to our meeting we asked Mr. Wilson to gather some information together including his mortgage statement and 2020 tax Notice of Assessment. We noted that Mr. Wilson had $78,000 left on his mortgage with a very small penalty for prepayment. We recommended that Mr. Wilson repay this debt. Next we looked at his Notice of Assessment and noted that he had a $79,754 RRSP deduction limit. Mr. Wilson is earning approximately $78,000 per year, but over the years, he has not been maximizing his RRSP contributions. Mr. Wilson expects to work for at least another five years and believes that his income will increase over current levels.

Based on the information gathered, we recommended that Mr. Wilson contribute $79,754 to his RRSP. Based on his current level of income, Mr. Wilson should speak with his accountant and determine how much of this contribution he should claim in the current year and how much he should carry forward as unused RRSP contributions. For example, Mr. Wilson, could claim one-fifth of the amount he contributed each year for the next five years.

Ms. Thomson

Ms. Thomson recently became a widow at the age of 55. Her deceased husband had a life insurance policy with a death benefit of $250,000. Ms. Thomson mentioned that she has no debt and approximately $77,300 in RRSP deduction limit. Ms. Thomson is planning to work another ten years and has expected income during this period of approximately $80,000 a year.

We recommended that Ms. Thomson shelter $77,300 from tax immediately. However, we also recommended that she claim the deduction over the next few working years. At the beginning of every year we would encourage Ms. Thomson to roll some of the remaining non-registered funds to top up her RRSP. Based on $80,000 a year, she will have another $14,400 each year in additional RRSP room. She may also want to take advantage of the $2,000 excess contribution that CRA allows over the deduction limit.

Mr. Macdonald

Over the last 20 years, Mr. Macdonald has worked hard as a realtor. His knowledge and expertise has been in real estate and he has focused nearly all of his investments in that area. Mr. Macdonald has never contributed to his RRSP and has an RRSP deduction limit of $143,600. Mr. Macdonald is now in the process of selling one of his rental properties. We have estimated that his taxable capital gain on this property will be approximately $33,800 and the total proceeds will be approximately $389,000.

We explained to Mr. Macdonald that contributions to an RRSP may offset the taxable capital gains. We also provided Mr. Macdonald some information on alternative investments that he could focus on outside of real estate. We recommended that he could use a portion of the proceeds from the rental property and contribute $143,600 to his RRSP. He could deduct enough to reduce the capital gains tax and his real estate income in the current year. The remainder of the contribution he may carry forward as “unused RRSP contributions” to offset against future rental properties that he sells and his real estate commissions.

Understanding RRSP terminology and your existing tax situation may ensure that you can benefit as much as possible from all your available options, including when to deduct your RRSP contributions and to ensure you avoid excess contributions.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email greenard.group@scotiawealth.com, or visit greenardgroup.com.

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