December 1997

Loophole Allows Extra Year
of RRSP Contributions

© Talbot Stevens

As explained in the October Strategy Sheet, a recent “minor” change to RRSPs means that everyone must now convert their RRSP by the end of the year that you turn 69, instead of 71.

1997 is the transition year for the new rules, where anyone who is 69, 70, or 71, must terminate their RRSP by December 31.

Everyone loses two years of tax-deferred RRSP growth, and possibly two years of RRSP contributions.

That's why it is important and urgent for anyone who must convert their RRSPs this year, to be aware of a loophole that allows an extra year of RRSP contributions.

RRSP contribution room is based on your previous year's earned income, up to a maximum of $13,500.

This means that in the year that you must terminate your RRSP, you could have taxable earned income, but no ability to claim a tax-deductible RRSP contribution.

By taking advantage of the overcontribution rules, you can gain one additional year to contribute to an RRSP.

You are currently allowed to overcontribute up to $2,000 to your RRSP without penalties. If you erroneously or intentionally contribute more than $2,000 beyond your allowed contribution room, you face a penalty of 1% per month.

Assume that this is your last year for RRSPs, you have used up all of your past RRSP contribution room, and this year's earned income produces $10,000 of new RRSP contribution room.

Because you claim an RRSP deduction in the year after you produce earned income, it appears that the potential $10,000 RRSP contribution room will be lost forever.

If you contributed $10,000 in December of your termination year, you would face a penalty of 1% of the contribution beyond the $2,000 you are allowed to overcontribute. Thus the penalty for December would be 1% of $8,000 or $80.

When January arrives, you immediately claim a tax deduction for your $10,000 contribution. Even though you are no longer eligible to make RRSP contributions, you can claim your previously unclaimed RRSP contributions to reduce taxes due on other income. This produces a tax savings of $4,000 for someone in the 40% tax bracket.

By overcontributing in December of your final RRSP year, and claiming the deduction in January, you can gain a year of RRSP contributions for a modest cost.

If you have been keeping your RRSP overcontributed by $2,000, you did not get a tax deduction for this yet. Don't forget to claim the $2,000 overcontribution, during your final RRSP year, or later as illustrated.

If you know anyone aged 69 through 71, don't forget to “Help a Friend” and tell them how they must convert their RRSP this year, and how a loophole allows them to get an extra year of RRSP deductions.

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