Year end planning of RRSP contributions

By Anne Chun, C.A., CFP

As the end of the year approaches you are probably thinking about how to reduce your tax bill for the year. One of the best tax planning tools available in Canada is the Registered Retirement Savings Plan (RRSP) and if you have "contribution room", you should consider maximizing your contribution which will save you taxes.

The contribution limit has increased to $14,500 for the year 2003. This is the ceiling which can be reduced for persons with a company pension or if the "earned income" for 2002 was less than $80,555.

The deadline for making contribution is normally 60 days after the end of the year, or March 1, 2004. However, if you will turn 69 this year, your contributions should be made no later than December 31, 2003. Alternatively, if your spouse is younger than you are, a spousal RSP plan can be set up and contributions made to that plan until your spouse turns 69.

RRSP contributions can be cash contributions or contributions "in-kind". Instead of contributing cash, you can transfer "qualified investments" from an investment account into the RRSP account and get a tax receipt for the contribution. This way you will still get a tax receipt even if you don't have the cash to make a contribution. A word of caution in considering which investments to transfer-the investment must be a "qualified investment" for RRSP purposes and you may trigger a capital gains on the transfer. "Qualified investments" include mutual funds, stocks & bonds of public companies, most government bonds, GICs and units in income trusts. When a transfer is made, the "fair market value" of the investment is used to value the contribution and the tax receipt you will receive. If the "fair market value" is higher than your cost, you will have to pay tax on one-half of the gain, unless you have capital losses from this or prior years that can be used to offset the gain. If the "fair market value" is lower than your cost, this capital loss cannot be used on your tax return if it is triggered by a contribution "in-kind".

Since the economy and the stock market seem to have "turned the corner", this is the right time to evaluate your investment and RRSP portfolios to see if any changes or re-allocation should be made. Income tax should not drive your investment decisions but a little planning will save you taxes. You can transfer those assets that have a capital gain into your RRSP portfolio and offset this gain by selling those investments with a loss. Consult your financial planner and accountant to maximize the tax planning opportunity for RRSP contributions.