Have you maximized your RRSP contribution?

It makes good sense to top up your RRSP contribution to take full advantage of the ability to accrue tax-deferred earnings in your RRSP investments.

Generally, you can deduct RRSP contributions equal to 18% of your previous year's earned income to a maximum of $18,000 plus any unused RRSP contribution room that you have carried forward. If you are a member of a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP), your contribution limit will be reduced by an amount called the pension adjustment (PA), as indicated on your T4. The $18,000 amount has increased from the 2005 maximum of $16,500 and will increase again in 2007 to $19,000.

Earned income generally includes employment earnings, business earnings, rental income and taxable support payments and is reduced by business losses, rental losses, and deductible alimony/maintenance paid. Retiring allowances, investment income, capital gains, pension income and business income earned as a limited partner are not classified as earned income.

To find out the maximum amount that you can contribute this year, check the “2006 RRSP Deduction Limit Statement” that was included in the Notice of Assessment you received after filing your 2005 tax return. If you cannot find your notice, contact your chartered accountant or a CRA tax office.

Have you considered contributing to a spousal RRSP?

A spousal RRSP is advantageous if you are likely to have the higher income at retirement. For purposes of the Income Tax Act, common-law spouses and same-sex partners are treated the same as spouses.

A spousal RRSP contribution is deductible to you in the year you make the contribution and taxable to your spouse at the time of withdrawal. The amount of the spousal RRSP contribution is determined based on your RRSP contribution limit for the year minus amounts that you have contributed to your RRSP. A major advantage of this RRSP strategy is that when the plan matures and your spouse withdraws funds from the RRSP, the funds are taxed in his or her hands, thereby creating an income-splitting benefit at retirement. This may also reduce your exposure to the Old Age Security clawback. Even though the government has proposed pension splitting commencing in 2007, using a spousal RRSP to equalize retirement income will often produce a better result.

It is important to note that your spouse cannot make withdrawals from any spousal RRSP in the same year you make a contribution to any spousal plan or in the preceding two years - otherwise you will have to include the withdrawn amounts in your income and be liable for the income tax. There is an exception for amounts your spouse must withdraw in his or her retirement years.

Can you still contribute to your RRSP if you are 70 and still working?

There is an age limit. You can continue to contribute to your RRSP until December 31 of the year in which you turn 69 at which time the plan “matures”. When it matures, the funds must be withdrawn, transferred to a RRIF or used to purchase an annuity.

However, it may be possible to continue to contribute to your spouse's RRSP. If your spouse is younger than you, you can make contributions until the end of the year in which he or she turns 69. If your spouse also has earned income, he or she is eligible to make an RRSP contribution in addition to the “spousal RRSP” contributions.

Contribution Deadline is March 1, 2007

You have until March 1, 2007, to contribute to an RRSP for 2006.

Typically at this time of year, hundreds of articles tout the tax and investment advantages of contributing to an RRSP. Yet statistics based on income tax returns filed in the spring of 2006 show that relatively few taxpayers are using this investment vehicle. Of the almost 86% of taxpayers that were eligible to contribute last year, about 31% actually made contributions. Notably, their RRSP contributions represented only about 7% of the total room they had available.

Don't procrastinate. Talk to your chartered accountant about how you can maximize this opportunity to build up capital for your retirement while reducing your income taxes for 2006.