When not to claim your RRSP deduction

Sometimes it make sense to hold off claiming your RRSP deduction.



From the December/January 2013 issue of the magazine.


Q: I’m currently in the 31.15% marginal tax bracket. Between my employment expenses and my RRSP contribution room I can easily drop down into a lower tax bracket, but does it always make sense to do so?

—Michael Cooper, Barrie, Ont.

A: Generally, it’s a good idea to bring taxable income down to the lowest bracket, says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management. But it’s not always wise to claim the maximum RRSP deduction, he adds. If you’re already in the lowest tax bracket you may not even want to contribute to an RRSP, he says, since a large retirement portfolio could push you into a higher tax bracket when you retire and withdraw those funds. You might also be subject to clawbacks to benefits like the Guaranteed Income Supplement, the GST/HST Credit and, in rare cases, Old Age Security. (Use a TFSA instead.) If you expect to be moving into a higher tax bracket soon, you should still make your RRSP contribution to take advantage of tax-free compounding, Golombek says. But it may make sense to hold off claiming the corresponding RRSP deduction, since it will be worth more to you the following year (or later) when your marginal rate will be higher and your deduction larger.

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One comment on “When not to claim your RRSP deduction

  1. Be clear that this advice to delay claiming the RRSP contribution credit is ONLY valid for short delays. There is a penalty (reduced benefits) for a delay in the claim. It roughly equals the Future Value of the amount of income that would have been earned by the tax credit in the period of delay. See how the benefit of the higher tax bracket is offset by the increasing cost of delay with the spreadsheet http://www.retailinvestor.org/RRSPmodel.xls


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