Special RRSP contributions can help ease tax tab

Sometimes a one-time window of opportunity unexpectedly opens for you to make a special RRSP contribution.

Whether it is a job loss, a death or something that caused a one-time spike in your taxable income, grab the opportunity to contribute to your RRSP by March 1. Otherwise, you will lose your chance forever.

JOB LOSS

A special RRSP opportunity can arise if you lost your job in 2016. Maybe you were let go because of the slowdown in the economy. If you received a severance package as a reward for long service, that lump sum of taxable income could push you into a higher tax bracket.

Did you transfer your severance package to your RRSP? Part of your severance pay may count as an “eligible retiring allowance” amount, which you are allowed to transfer to your RRSP, over and above your regular RRSP room. The amount that is eligible for this special transfer depends on how many years you worked for your employer prior to 1996. See Box 66 of your T4 slip.

The other, non-eligible portion of your severance pay (shown in Box 67 of your T4 slip) could be enough to push you into a higher bracket. Assuming you have enough regular RRSP room, put as much of that money into your RRSP as you can. Until you find a new job, you can always make RRSP withdrawals to cover living expenses. On the other hand, if you are lucky enough to find a new job quickly, you will be glad to have salted away your windfall as a nest egg for retirement.

Even if you missed the chance to transfer your retiring allowance directly to your RRSP (to avoid withholding tax) you still have time to make your RRSP contribution by March 1.

2017 LOWER TAX BRACKET

Do you expect your 2017 income level to be a whole lot lower than it was in 2016?

It could be due to the spike in income from receiving a severance package after a job loss in 2016. If you sold a rental property, your 2016 income could be much higher due to recaptured capital cost allowance as well as a capital gain.

Maybe you are going on a maternity leave in 2017. Perhaps you have decided to semi-retire and work only part-time. Maybe 2017 is the year you’ll have big startup costs for a brand new business.

Contributing to your RRSP before March 1 can be an easy way to shift income from a highbracket year to a lower-bracket year. Claim a deduction at your higher 2016 tax bracket rate and then you might even make an RRSP withdrawal early in 2017 to take advantage of your lower tax bracket. Ask your professional adviser about this strategy.

SPOUSAL RRSP AFTER D E AT H

Did your spouse die in 2016? As the surviving spouse, you have a special RRSP opportunity if you’re age 71 or younger. Consider making a post-mortem spousal RRSP contribution to give your deceased spouse a tax deduction, especially if the deceased was in a high tax bracket in 2016.

Check the deceased’s 2015 Notice of Assessment for unused RRSP room. Ask your accountant to do a preliminary estimate of the 2016 taxable income. When the deceased was married or living common-law, the surviving spouse has one last chance to make use of the deceased person’s unused RRSP room by making a post-mortem RRSP contribution to the survivor’s spousal RRSP.

Money from a life insurance death benefit, for example, can be used to make the spousal RRSP contribution.

Act now because the window of opportunity closes March 1.