If you make an RRSP contribution in 2015, you need to include the deduction in your 2015 income tax return, right? Wrong.
It’s a common misconception among Canadian taxpayers worth clarifying.
If you make an RRSP contribution in 2015 (or in the first 60 days of 2016), you can use it for your 2015 income tax return as usual, if you wish. But what if you don’t want to? What if your circumstances change after you make the contribution? What if you no longer need, or want the deduction for that year? Can you defer it to another year? The answer; Yes you can.
In fact, you may defer RRSP contributions indefinitely to be used when you need it most. Contrary to what many people believe, you don’t need to use the deduction that year if you don’t want to.
As a refresher; an RRSP contribution is when you put the money in to your RRSP. A deduction is when you use that RRSP contribution amount on your income tax to reduce your income tax payable.
The goal of an RRSP is to help you pay less tax by deferring tax that would be payable in a high tax year, to be paid in a future lower tax year. To make it work best, you should use your RRSP deductions in your most highly taxable years.
So yes, you can push your RRSP deduction forward to a future year. What you can’t do is go backwards. For example, if you missed making a contribution in 2015 (or in the first 60 days of 2015) and at tax time realize you should have made a contribution, by then, it’s too late. You’re out of luck.
Why would someone want to defer their RRSP deduction to a future year? When would this make sense?
You would do it if it would mean a bigger pay off by waiting for another year. You would do it if you will make more money next year, or in a future year, than this one.
Some examples of this:
- You have had lower income this year and expect more next year
- Due to job loss or transition you did not work part of the year
- You had fewer hours or overtime, and income was unusually low during the year
- You were on maternity or paternity leave for all or part of the year
- You had low business income or high business losses in the year
- You are expecting a significant raise for next year
- You are expecting a taxable buy-out, severance or retirement package next year
Sometimes the answer isn’t earning more money; it’s about being smarter with the money you have. If you think you might fit one of these scenarios, talk to your tax and financial professional to have an analysis done and see what’s right for you.
Stephanie Farrow, B.A., CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial column for local business magazine Elgin This Month since 2010. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc. About our Farrow Financial Team.