Year End Tax Planning Tips for TFSAs and RRSPs

Most Canadians are aware that the deadline for contributing to one’s registered retirement savings plan (RRSP) is 60 days after the calendar year end. Many also know that contributions to a tax-free savings account (TFSA) can be made at any time during the year. Consequently, when Canadians start thinking about year-end tax planning or saving strategies, RRSPs and TFSAs aren’t often top-of-mind. The fact is, however, that there are some situations in which planning strategies involving TFSAs and RRSPs have to be put in place by the end of the calendar year; some of those are outlined below.

Accelerate any tax-free savings account withdrawals into 2015

Each Canadian aged 18 and over can contribute up to $10,000 per year (as of 2015) to a Tax-Free Savings Account (TFSA). Where amounts are withdrawn from a TFSA, the withdrawn amount is added to the taxpayer’s TFSA contribution limit for the following year.

Consequently, it makes sense, where a TFSA withdrawal is planned within the next few months, perhaps to pay for a winter vacation or to make an RRSP contribution, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA before December 31^st, 2015 will have the amount withdrawn added to his or her TFSA contribution limit for 2016. If the same taxpayer waits until January of 2016 to make the withdrawal, he or she won’t be eligible to replace the funds until 2017.

Make spousal RRSP contributions before December 31

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals from a spousal RRSP taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2015, the contributor can claim a deduction for that contribution on his or her return for 2015. The spouse can then withdraw that amount as of January 1, 2018 and have it taxed in his or her hands. If the contribution isn’t made until January or February of 2016, the contributor can still claim a deduction for it on the 2015 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2019. It’s an especially important consideration for couples approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the case, making the contribution before the end of the calendar will ensure maximum flexibility if an unanticipated withdrawal becomes necessary.

When you need to make your RRSP contribution before December 31^st

While most RRSP contributions to be deducted on the return for 2015 can be made any time up to and including February 29, 2016, there is one important exception to that rule.

Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71—usually by converting the RRSP into a registered retirement income fund (RRIF) or purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31^st is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31^st.