How to 'find' cash for your RRSP contribution

RRSP to pay down debt — RRSP Contribution

You don’t necessarily need new money in order to come up with the cash to maximize your 2017 RRSP contribution.

That should come as welcome news after all the holiday spending. January makes some big demands on cash flow as credit-card bills come due. Add to that the opportunity to top up your TFSA (as detailed last column), and you probably don’t want to be reminded that the annual RRSP deadline is already looming if you wish to minimize taxes for the just-completed 2017.

First, a quick fact check and reminder on deadlines. This year’s deadline is March 1^st, which falls on a Thursday. The maximum you can contribute for 2017 is $26,010 (it will be $26,230 for calendar 2018), assuming you earned sufficient income to get that much room, and that you’re not in a good employer pension plan that chops RRSP room down by the amount of the Pension Adjustment (PA) shown on your T-4. Yes, Virginia, tax time is looming, so brace yourself for the annual blitz of T-4 slips, T-3s and T-5s.

READ: Why you should invest early in the year and not at the last minute

OK, now back to some tips on getting at money to make your RRSP contribution and let’s start with seniors. Seniors are most likely to have a good amount of money sitting in “open” or non-registered investment accounts, which means any securities can be “transferred in kind” to your RRSP, thereby generating the required receipt to generate a tax refund come tax filing time in April.

You don’t have to be a senior of course: any Canadian of any age can transfer-in-kind securities from their open accounts to their RRSPs; it’s just that many younger folks may not have a lot of money housed in non-registered accounts. Most tend to maximize the RRSP first and since 2009, the TFSA as well. Older investors, on the other hand, missed out by not having the TFSA option for decades before they were introduced; plus, if they had good corporate pension plans to boot, they may have maxed out on their RRSP room and therefore felt “forced” to put excess savings into non-registered plans.

To be sure, non-registered plans are a poor second to TFSAs, since the above-mentioned T-3 and T-5 slips are all generated by taxable accounts, faithfully reporting to the Canada Revenue Agency just how much taxable dividend, interest and capital gains you received in 2017. Happily, TFSAs (and RRSPs) don’t generate these tax slips.

So just as it makes sense to move as much of your non-registered money into TFSAs, so too can it makes sense to do the same into an RRSP, with the added bonus of a tax refund. Otherwise, the mechanics are similar to our description of TFSA transfers-in-kind.

MORE: How seniors can use TFSAs to have more money in retirement

For starters, even though an RRSP transfer-in-kind may be motivated by tax, keep in mind there can also be a tax hit if the securities you transfer to the RRSP have enjoyed significant capital gains since the original purchase in your non-registered account. Once it moves into your RRSP (or TFSA for that matter), then the transaction is deemed by the CRA to be a “deemed disposition,” which means Ottawa will have its hand out for capital gains tax.

So job one is to scour your non-registered portfolio for securities that do not show significant rises in value since you first purchased then. For example, I recently discovered that my shares in a Canadian dividend ETF were roughly where I had purchased them. That’s sad from the perspective of hoped-for gains that didn’t materialize. But it’s good if you’re looking for a candidate to transfer into an RRSP. If there’s a small gain, then yes, you’ll have a small bit of tax to pay but keep in mind you’ll be generating a larger tax refund and once the security has been transferred into the RRSP, that portion of the investment will no longer generate those T-3 and T-5 slips in future years, at least for as long as they’re held in the RRSP.

But what if you’re such a brilliant investor that all your securities show significant gains? Then you might not want to use the transfer-in-kind strategy but resort instead to using actual new money (cash) or borrow the money with an RRSP top-up or catch-up loan, which we will address in a future column.

However, if you’re like me, you may have some gains here and there but also have suffered the odd loss. If that’s the case, then you may be able to offset the gains with losses, in which case it might still be tax-effective to use the transfer.

Be careful, though. Matthew Ardrey, Wealth Advisor and vice president of Toronto-based TriDelta Financial cautions that with non-registered losses, you have to sell the security and then transfer in the cash. This crystalizes the loss and to avoid the superficial loss rules you should avoid repurchasing the same security in your RRSP within 30 days; nor should you have bought the security 30 days before the sale. Either of those mistakes will cost you.

Mutual fund distributions often occur in December, which can create superficial loss problems if sold in January, Ardrey says. But even then, the superficial losses can be prorated. Ardrey cites the example of Jim, who owns 1,000 in XYZ Mutual Fund and receives a 100-unit distribution on December 31. Now he has 1,100 units: if he sells them for a $5,000 loss on January 3, he could claim a $4,545 loss, calculated as $5,000 minus $5,000 multiplied by 100/1/100. This can also impact someone with a pre-authorized contribution (PAC) plan in place for a fund sold at a loss and contributions continue to the fund in an account they own or are connected to under the superficial-loss rules.

Clearly, the tax rules are tricky here: speak to a tax professional if you’re unsure about how the rules apply to taking superficial losses or transfers-in-kind generally. Indeed, some financial advisors prefer to keep things simple because of this complexity: “I don’t do transfers-in-kind,” says Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management Inc.

All else being equal, Ardrey reminds investors they should strive to keep equities outside the RRSP and fixed income inside. And with fixed income lagging equities on returns in recent years, it may be an opportune time to rebalance portfolios to the target mix by selling some equities and adding fixed income to your RRSP. There are no superficial loss impacts in this situation.

Sadly, here at Retired Money, we don’t make the rules; we just observe them and try to find ways to play within the system to our advantage. Happy new year!

Jonathan Chevreau is founder of the Financial Independence Hub and co-author of Victory Lap Retirement. He can be reached at [email protected].

MORE FROM A RETIREMENT EXPERT:

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.