BY: FAZAAD BACCHUS
March 1st, 2017 was the deadline date given by the CRA as the final date where you could have made a contribution to your RRSP to be able to reduce your 2016 taxes. Some may have missed that opportunity and such an opportunity is not be recoverable. While that certainly does not reduce your contribution room, you did miss an opportunity to reduce some taxes and thus increase your overall savings. As an example, if you were in the 40% marginal tax rate any contribution that you made to the Registered Retirement Savings Plan would have resulted in a 40% refund to you. Therefore if you made a deposit of 3,000 dollars then your net outlay would have only been 1,800 dollars as the difference of 1,200 would have been refunded as a tax rebate.
If you did make a deposit before March 1st you have two ways in which to claim this deposit, either to your 2016 taxes or towards your 2017 taxes. While most people make the claim towards the previous year, you can carry forward all or some to the current year. Should you decide that you would like to make payments going forward you do not have to make a lump sum as you can make monthly contributions. This way your tax rebate is immediate and the payments are much easier as you do not feel the monthly payments as much. Monthly payments also give you an opportunity to invest earlier and earn a possible higher return rather than have the money sitting in CRA waiting for a refund.
Some clients have made the mistake of overpaying also when making annual contributions. It’s important to look at the contribution room on your Notice of Assessment to see whether you are overpaying or not. There is a maximum lifetime allowance of $2,000 as an overpayment but anything over that is charged a penalty. The penalty tax is equal to 1% per month of the over-contributed amount. This can add up to quite a bit over the years if not dealt with. It is not unusual to see clients who owe CRA in excess of $50,000 due to over contribution fines. You do not want to find yourself in a position where you have either not contributed or over contributed.
When you make a decision to pay into your RRSP monthly, you will save immediate taxes as the refund is done on each payment, secondly, you will be engaged in an investment strategy called dollar cost averaging. The latter is of great importance as this means you are able to spread your investment cost over a greater period and thus being able to gain more or your investment dollars. You will also have the benefit of early investment returns as you will be investing more money upfront and not one year later.
So, if you missed your RRSP deadline, why not consider a monthly payment option going forward for 2017. Remember you are saving money, not spending money, furthermore, you are investing money. This brings me to the final point. If you are investing your money with a financial institution and you are not happy with the returns or service, why stay there? Remember it’s your money and based on the fact that you are paying fees to have someone manage it, you should get the best available advice and service. If you are not getting either, find a financial advisor who can provide you both so that you can be at ease.