Before ringing in the new year review your finances and start your tax planning. Taking action before the tax season begins allows you to find ways to utilize your money to work in your favour and ensure your finances stay on track.
RRSP Contributions
Contributions to your Registered Retirement Savings Plan (RRSP) can be claimed against your current year’s income when you file your tax return in the spring. You can deduct contributions made during the year or in the first 60 days of the coming year.
Consider making contributions throughout the year, perhaps by automated weekly or monthly deposits. This can get the tax sheltering growth working for you 12 to 14 months sooner than by lump sum at the deadline.
Maturing RRSPs (Age 71)
If you turn 71 this year, you can no longer make contributions to your RRSP after December 31, though you may contribute to a spousal RRSP if your spouse is under age 71. Also, by year-end you must convert any RRSP into a Registered Retirement Income Fund (RRIF) or registered annuity or take the lump sum as income.
If you have earned income this year, your contribution room credit does not arise until after year-end. If you have a spouse who is under age 71, you may use this room in the new year to contribute to a spousal RRSP.
If not, you could intentionally over-contribute the amount before year-end, incur the 1% over-contribution penalty for December, but then be back onside in January when the contribution room is credited.
Strategic Spousal RRSPs
Normally, withdrawals from a spousal RRSP are taxable to the plan’s annuitant/owner. However, if the withdrawal occurs in the year of contribution or the following two calendar years, the contributor spouse has to include the withdrawal amount in income and pay the tax. Contributions in the first 60 days of a year apply to that calendar year, not the year for which a deduction is taken. Consider making spousal RRSP contributions before year-end if you intend to make a strategic early withdrawal.
Registered Plan Rollovers After one Passes
After one passes away, RRSPs and RRIFs may be rolled over to a spouse, a financially dependent child, or a grandchild, without tax applying on the transfer. If the transfer does not happen by December 31 of the year after the year of death, the amount will be taxable to either the estate or the named beneficiaries on the RRSP/RRIF contract.
If you’re an executor of the estate or named plan beneficiary of someone who passed in 2023, make sure that steps to transfer the plan proceeds to the appropriate beneficiary are completed by the end of the year, to assure that the rollover will apply rather than the full amount of the plan being immediately taxable in a single year.
RESP Contribution Key Ages
The Canada Education Savings Grant (CESG) matches up to 20% of what a subscriber contributes to a Registered Education Savings Plan (RESP). Generally, this is maxed at $500 on $2,500 of annual contributions, but if unused contribution room is carried forward, you can get up to $1,000 of CESG for a $5,000 contribution. To be entitled to CESG for a 16- or 17-year-old child, there must be at least $2,000 total contributions by age 15 or at least $100 contributed in any four (not necessarily consecutive) preceding years.
For a 17-year-old, this is the last year for grant eligibility. For a 15-year-old for whom no contributions have yet been made, a contribution of $2,000 before year-end may be necessary to be entitled to any further CESG at ages 16 and 17. For a 12-year-old for whom no contributions have yet been made, a $100 contribution this year will keep the window open for CESG at ages 16 and 17, as long as that is followed with at least $100 in each of the next three years.
It’s important to look at tax saving opportunities prompted by both time of year and time in your life to ensure your moving your financial life forward. Get a head start for the new year and book an appointment today with your Advisor.
