Where to find that RRSP contribution

Where to find that RRSP contribution (Photo: reynermedia/flickr)

If you have not yet made a contribution to your Registered Retirement Savings Plan (RRSP) for 2016, you have only about six more weeks to get your act together. The deadline for 2016 contributions is March 1, 2017. But the big question at this time of the year, when your bank account might be a bit low after the holidays, is where to get the money for a contribution. Fortunately, there are a number of options to consider.

Contributions in kind

If you own qualifying investments, it’s possible to transfer these to an RRSP and obtain a deduction based on their market value. Some candidates include shares that trade on qualifying stock exchanges, Canada Savings Bonds, and so on. For this strategy, you’ll need to set up a self-directed RRSP (e.g., at your bank or broker), because they allow you to pick and choose your RRSP investments. Alternatively, it’s possible to do a swap for an RRSP’s cash or other assets of an equivalent value. In this case, though, you won’t get a tax deduction.

Either way, though, there will be a “deemed sale” based on the current market value of the transferred assets. If the value is different than the cost, the Canada Revenue Agency can challenge in two different ways. First, if the investment has gone up in value, there will be capital gains tax to pay. But you may also have offsetting capital losses if you sell other investments that have declined in value. Even if you don’t have any losers in your portfolio, since the contribution itself will shelter at least double the capital gains tax, these contributions may not be a bad idea, especially if you would not otherwise have the resources to make a contribution.

If the value of your investments has dropped since you originally invested, another set of tax rules known as “stop-loss rules” may deny the loss (this applies when you sell and you (or an “affiliated person,” i.e., a spouse or minor child) reacquire the investment within 30 days). One potential alternative that may avoid the stop-loss rules is to sell your shares and then have the RRSP reacquire the same investment. Be warned though: some CRA Technical Interpretations suggest that the General Anti-Avoidance Rule (GAAR) might apply in these cases. Whether CRA would succeed on this basis (especially in light of certain Supreme Court decisions on GAAR), or even bother to make a federal case about your tax file to begin with, is another matter.

Retiring allowances

A large severance payment may present a great opportunity for a catch-up contribution. Kicking the severance payment directly into your RRSP may shelter tax you would otherwise pay on the severance itself.

For longer-standing employees, there’s another opportunity to enlarge your RRSP contributions as a result of a severance payment, as this type of payment usually qualifies as a so-called “retiring allowance” if you were in the job during 1995 or previously.

The amount per year that you can contribute to your RRSP – this is over and above your normal RRSP limits – is $2,000 for each year between 1989 and 1995 during which you had the job. (For years of service prior to 1989, the extra RRSP contribution room can be hiked to $3,500 from $2,000, except for years where employer contributions to a pension or deferred profit-sharing plan have since “vested.”)

If your employer transfers the retiring allowance directly to an RRSP, withholding tax on the payment can be avoided. Otherwise, you must make the retiring allowance contribution by the normal RRSP deadline for the year in which the retiring allowance is received. By the way, you can’t contribute a retiring allowance to a spousal RRSP.