Keep Calm and Carry On

February 13, 2020

If you miss the RRSP contribution deadline, fret not. You’ve lost the opportunity to claim any additional RRSP contributions for the tax year, but you have not lost the ability to tap into that room in the future.

Imagine that. You don’t always lose what you don’t use!

Since 1991 when CRA capped how much a person can accumulate in annual RRSP contribution room, they have allowed any unused portion from previous years to be carried forward.

To determine your overall allowable limit – carry forward and all – your best source is your latest Notice of Assessment. On it, you will see a breakdown that looks something like this:

RRSP Deduction Limit from Previous Years – This is the portion you have never used but have earned in the past through earning income and filing your taxes like the responsible taxpayer that you are.

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18% of Prior Year’s Earned Income – To a maximum annual limit. For the 2019 tax year, that limit is $26,500.

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Pension Adjustment Reversal or PAR – This increase to your RRSP limit may occur, for example, in the event of a layoff where you decide to transfer your pension assets from the registered pension plan of the former employer to an individual RRSP or locked-in retirement account. This adjustment allows this rollover to happen without triggering a tax bill.

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Pension Adjustment or PA – On the other hand, if you worked for an employer that had a registered pension plan, your RRSP room would be reduced by both yours and the employer’s pension credits. Whether saving on your own or via a registered pension plan, CRA uses these adjustments to keep the tax assisted playing field level.

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Past Service Pension Adjustment or PSPA – This applies to enhancements made to pensions since 1989 and according to CRA is “designed to ensure that the overall limit on tax-assisted retirement savings of 18% of income is maintained.” Once again, this is CRA’s attempt at fairness among “taxpayers at comparable income levels.”

Why Carry Forward?

If you believe your income will go up over time, waiting to claim your RRSP contribution may make sense. The higher the tax bracket, the higher the tax savings. Here’s an example:

Sue earned $34,000 as a Business Analyst her first year out of MUN. That year she contributed $1000 to her RRSP but decided not to claim it. With all the other deductions she had as a new grad, her Accountant advised her to hold off. Her Financial Advisor assisted her with investing the $1000 into an RRSP so she could start taking immediate advantage of the tax deferred growth. Three years later, she was promoted Team Lead and her income jumped to $38,000. Her marginal tax bracket also jumped from 22.7% to 27.5%. By claiming the $1000 that year, she saved $275 on her tax bill, $48 more than if she had claimed it just a few years before.

Clearly this is a simple example, but it illustrates the point. You should treat your RRSP deduction limit the same way you should treat all other areas of your financial planning: with intention and clarity. Don’t contribute to (or claim contributions to) an RRSP just because you think you should. Always consider the big picture, weigh out your options and make informed decisions. It’s one of the best ways I know of achieving calm in these otherwise crazy times.