Is it better for me to carry forward my RRSP deduction?

Jamie Golombek, vice-president of taxation and estate planning at AIM Trimark Investments, has the answer.

Jamie Golombek 15 January, 2004 | 2:00PM
Dear Expert:

I lost my job last fall and have earned a small amount of consulting income since then. I received a small severance payment (about $20,000), which was rolled directly into a locked-in RRSP. The good news is I have just signed a six-month consulting contract that I likely will be able to renew, the income from which would be roughly the same as the salary in my old job--although that depends on how much in home-office expenses and other costs I can deduct this year. The bad news is I don't know how to handle my 2003 RRSP contribution. Since my taxable income for 2003 will be much lower than what I expect to earn this year, would I not be better off holding off my RRSP contribution and carrying forward the unused deduction to use on my 2004 tax return, and thus gain a greater tax advantage? Or am I better off putting the money into my RRSP now, and then withdraw it later this year if my contract is not renewed? In addition to the $20,000 in severance, I earned about $42,000 last year and my six-month contract will pay me approximately $40,000 between now and the end of August. I am a resident of British Columbia.

Expert Answer:

The timing of an RRSP contribution need not coincide with the timing of the deduction in respect of that contribution. If you have the funds available, it is probably a good idea to make an RRSP contribution to the extent of your RRSP limit as soon as possible, thus ensuring that any future income and growth on that money is tax-sheltered inside your RRSP until you need it upon retirement. If you expect to be in a higher tax bracket in 2004 than in 2003, then you certainly do not have to take the deduction in respect of that contribution on your 2003 tax return and, in fact, you can delay claiming the deduction until 2004 (or a future year) when it may be worth more to you since you will be in a higher tax bracket.

To find out how much an RRSP contribution may save you, try Morningstar's RRSP Calculator.

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Jamie Golombek

Jamie Golombek