RRSP Myth #2: Annual RRSP deductions are mandatory

By Gail Vaz-Oxlade on February 4, 2011
Estimated reading time: 2 minutes

The second of the big myths in RRSP Land is the idea that you have to claim your RRSP deduction each year. Some experts cite the fact that young’uns won’t get a real tax break because they’re not making enough money to make that deduction sing.

So this myth often gets in the way of young people who aren’t yet making a ton of money starting down the right road. Since they believe they have to claim the deduction, and they’re in a low tax bracket, they don’t see the point in using an RRSP and opt instead for a TFSA, the newer kid on the block.

While many people do take the deduction for their RRSP contribution from the get-go, there’s no rule that says you can’t hold off. In fact, holding off makes sense when you’ll end up getting more money back from the Tax Man by delaying your deduction gratification. So if you’re just starting out and earning not-so-much, don’t bother claiming the deduction… save ‘em up until you’re in a higher tax bracket when you’ll get a bigger bang for your buck.

Life changes are another reason to pause and think… Think…THINK…Take the case of a woman who goes off on maternity leave in the middle of the year. Since her income is dramatically reduced for that year, her marginal tax rate will also be lower. Claiming the deduction for her RRSP would mean frittering away a perfectly good deduction on a low-income year. Better to hold the deduction for a year when her taxable income is back up. Then, even though her RRSP contribution limit would be less (based on the previous year’s earned income, which may have been smaller because she was on mat leave), giving her little room to maneuver when trying to minimize her taxes, her undeducted contribution from the previous year will come in very handy.

Whether you’re having a baby, just starting off in your career, taking a year off to get an MBA or planning a sabbatical, knowing you can delay claiming your deduction without losing it means you can plan to make those RRSP contributions work even harder in terms of the deduction you’ll eventually receive. They also eliminate the excuse, “What’s the point, I don’t pay that much tax now anyway.”