Here we are in February! Every advisor’s favourite season – RRSP season! Somehow Costco and Walmart don’t have an RRSP display and have somehow paid more attention to Valentine’s Day. At BCC, though, we are acutely aware of RRSP season. February is normally our slowest month of the year, as many of our clients are focused on RBonnRSP contributions.
I know that we generally consider the RRSP to be useless as a tax saving tool after age 71, but I am going to work through a case study here and show that it can still be used later than expected, though only in a narrow set of circumstances.
To set this up, let’s build a scenario:
- Bonnie is age 71. She will turn 71 on May 10th of 2020.
- She is still working and does not plan to retire this year.
- She earns $120,000/a and resides in Saskatchewan.
- Bonnie is single.
- Bonnie has approximately $900,000 in her RRSP today and no pension.
- She has no carry-forward RRSP room. She used all available room with contributions in 2020. She will deduct these contributions on her 2020 tax return.
- She is not at risk of any OAS clawback if she takes her RRIF minimum.
We know that, given that she will celebrate her 71st birthday this year, that she will have to convert her RRSP to a RRIF by year’s end or face adverse consequences. There will be no minimum withdrawal this year. In 2021, there will be a minimum withdrawal of 5.28% of her RRIF account balance as of January 1st of 2021. This amount will have to be withdrawn by December 31st of 2021, unless she decides to annuitize some or all of her RRIF, which would change her minimum withdrawal calculation.
The Income Tax Act prohibits a taxpayer from contributing to their own RRSP after December 31st of the year the taxpayer turns 71. We know that Bonnie is going to lose this valuable tax planning opportunity. At her level of income, she is at a 38.5% tax rate, which makes RRSP contributions especially valuable.
Bonnie’s financial advisor talks to Bonnie’s tax advisor and determines that the following is possible:
- We know that Bonnie’s 2020 income will be approximately $120,000.
- This results in $120,000 x 18% = $21,600 of RRSP room being generated.
- She cannot contribute to her RRSP (or RRIF) in 2021.
- Turning 71 does not prohibit her from deducting RRSP contributions.
- There is a 1% penalty tax on RRSP overcontributions.
- Bonnie could contribute $21,600 (plus potentially an additional $2,000, if she has her lifetime overcontribution allowance available) in December of 2020.
- She will be offside for one month.
- She will get RRSP room effective January 1st of 2021, based on filing her 2020 tax return.
She can contribute up to $21,600 (or maybe $23,600) to her RRSP in December of 2020. This will result in a penalty tax of $21,600 x 1% = $216. She will just be offside for one month. When she gets her RRSP room in January of 2021, based on 2020’s tax return (which won’t likely be filed until April of 2020), she will be back on side.
She will have to file a T1OVP. This will be done with her tax advisor. The financial advisor will likely have to provide some supporting documentation for this. She won’t be able to deduct this contribution from her 2020 income; she will carry it forward and deduct it from her 2021 income. As a result, she will save approximately $21,600 x 38.5% = $8,316 on her 2021 tax return.
With a concept like this, I find it can be useful to draw a timeline:
This is quite a complex strategy. The tax savings are good and useful, but it’s a very easy place to set a client offside. If the client doesn’t fully understand, there is a risk that the client could incorrectly assume that they can continue to use this strategy in later years. I would only use this strategy with a sophisticated client who is using a tax professional and will maintain a relationship with the financial planner. The T1OVP is not an easy form, and the tax advisor will charge for this work.
Did you think Bonnie was done with RRSP contributions? So did she. However, when she is 75, she meets Trevor, and they enter into a common-law relationship. Trevor is quite a bit younger – just 68 years old. Bonnie is still working.
She finds that she is now able to use the RRSP deduction limit that she has accrued since 2021 to make a contribution to a spousal RRSP in Trevor’s name. This may not be a wise strategy, as it means Bonnie is giving up control of the funds. She would likely want to consult with a family lawyer before doing this. If Bonnie makes these contributions, she can deduct them against her income. Normal spousal attribution rules apply; if Trevor takes an amount in excess of RRIF minimums within the year or two years following any contribution by Bonnie, then the income is attributed to Bonnie.
There are ways for somebody to enjoy the benefits of an RRSP contribution after age 71, but they involve some risk and complexity. I hope this helps you to think about some of the less common uses of the RRSP.
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