Although we are now into the second month of 2024, there is still an opportunity to influence the amount of tax you pay for 2023 through contributions to your Registered Retirement Savings Plan (“RRSP”).
Unless you turned 71 by the end of 2023, RRSP contributions made before March 1, 2024 can be claimed in your 2023 return, and the amounts contributed can be deducted from your 2023 income, thereby reducing your tax for the year, and potentially giving you a tax refund!
You must be careful not to contribute more than you are allowed to. Your contribution “room” for 2023 is generally 18% of your 2022 “earned income” (up to a maximum of $30,780) plus any unused contribution room from previous years. You can find details of your available contribution room through the CRA “My Account”.
The CRA usually starts to allow the filing of personal tax returns in mid-February, and most tax-filing software should be updated for 2023 returns by then. This can be used to your benefit.
For example, once tax-filing software has been updated for 2023, you can enter all your relevant information for the year and get a sense of the tax you are likely to pay (or the refund you are likely to receive). You can also find out the highest tax bracket that you fall into for the year.
RRSP contribution deductions work by reducing your taxable income for the year. So, for example, if you live in Ontario and only the final $1,000 of your taxable income falls into the 43.41% tax bracket, a RRSP contribution of $1,000 will remove this amount of income at that tax rate, saving you tax of $434. The highest rate of tax you will then pay will then be reduced to 37.91% as the last of your taxable income will fall into a lower tax bracket.
RRSP contributions do not have to be deducted in the year the contributions are made. Therefore, by getting a sense of what your tax liability is for the year, you can use contributions to your advantage, by claiming higher deductions for higher tax years, and holding off on claiming deductions for lower tax years.
One note of caution – if you also contribute to certain pension plans provided by your employer, this will normally reduce your RRSP contributions room, although CRA’s record of available contribution room should already factor this in. Check your CRA My Account for the exact amount that you can contribute.
There is a buffer of $2,000 available for over-contributions before penalties are charged, but you cannot deduct any over-contributed amounts.
Also be careful if you also contribute to a First Home Savings Account (FHSA). These have similar tax deduction benefits to RRSPs, but the contribution deadline for a FHSA tax deduction in 2023 was December 31, 2023. Therefore, any contributions made to your FHSA now, in February 2024, will be deductible only on your 2024 tax return.
