How To Crush Your RRSP Contributions Next Year

How To Crush Your RRSP Contributions Next Year

Many high income earners struggle to max out their RRSP deduction limit each year and as a result have loads of unused RRSP contribution room from prior years. While we can debate about whether it’s appropriate for middle and low income earners to contribute to an RRSP or a TFSA, the reality for high earning T4 employees is that an RRSP contribution is the best way to reduce their tax burden each year.

The RRSP deduction limit is 18% of your earned income from the prior year, up to a maximum of $29,210 in 2022, plus any unused RRSP room from previous years. An employee earning $125,000 per year could contribute $22,500 annually to their RRSP. While that’s straightforward enough, coming up with $1,875 per month to max out your RRSP can be a challenge. An even greater challenge is catching up on unused RRSP room from prior years. 

Related: So you’ve made your RRSP contribution. Now what?

Let’s say you live in Ontario, earn a salary of $125,000 per year, and you want to start catching up on your unused RRSP contribution room. Your gross salary is $10,416.67 per month and you have $2,858.92 deducted from your paycheque each month for taxes, leaving you with $7,557.75 in net after-tax monthly income.

Your goal is to contribute $2,000 per month to your RRSP, or $24,000 for the year. This maxes out your annual RRSP deduction limit ($22,500), plus catches up on $1,500 of your unused RRSP contribution room from prior years. Stick to that schedule and you’ll slowly whittle away at that unused contribution room until you’ve fully maxed out your RRSP. Easy, right?

Unfortunately, you don’t have $2,000 per month in extra cash flow to contribute to your RRSP. After housing, transportation, and daily living expenses you only have about $1,200 per month available to save for retirement.

No problem.

That’s right, no problem. Here’s what you can do:

T1213 – Request To Reduce Tax Deductions at Source

Simply fill out a T1213 form (Request to Reduce Tax Deductions at Source) and indicate how much you plan to contribute to your RRSP next year. Submit it to the CRA along with proof –  such as a print out showing confirmation of your automatic monthly deposits. The CRA will assess the form and send you back a letter to submit to your human resources / payroll department explaining how they should calculate the amount of tax they withhold for the year.

Note that you’ll need to fill out and submit the form every year. It’s best to do so in early November for the next calendar year so you have time for the form to be assessed and then you can begin the new year with the correct (and reduced) taxes withheld. That said, the CRA will approve letters sent throughout the year – it just makes more sense to line this up with the start of the next calendar year.

T1213 Form

Reducing taxes withheld from your paycheque frees up more cash flow to make your RRSP contributions. It’s like getting your tax refund ahead of time instead of waiting until after you file. Let’s see how that would work using our example from Ontario.

You’ve signalled to CRA that you plan to contribute $24,000 to your RRSP next year. In CRA’s eyes, that brings your taxable income down from $125,000 to $101,000. This will make a significant difference to your monthly cash flow.

Recall that you previously had $2,858.92 in taxes deducted from your monthly paycheque. After your T1213 form was assessed and approved, the taxes withheld from your paycheque each month goes down to $1,990.67 – freeing up an extra $868.25 in monthly cash flow that was previously being withheld for taxes. That’s an extra $10,419 that you can use to crush your RRSP contributions next year.

Now, to be clear, you need to follow through and make the $24,000 RRSP contributions that you promised to CRA. Otherwise you’ll face a bigger tax bill for the next tax year, and risk not getting the T1213 form approved again.

Once your T1213 form has been assessed and approved you’ll receive a letter that looks something like this to give to your employer:

CRA letter to reduce taxes withheld

The biggest advantage to reducing your taxes withheld at the source is to increase your cash flow so you can make those big RRSP contributions. Otherwise, your options are to take out an RRSP loan to help reach or exceed your deduction limit, or wait for your tax refund and then contribute that lump sum along with your smaller monthly contributions.

Back to our Ontario example, let’s say you did not fill out the T1213 form and instead just contributed your available cash flow of $1,200 per month or $14,400 per year. That would reduce your taxable income to $110,600 and give you a tax refund of $6,251. 

You could do anything with that tax refund, and a lot of surveys suggest Canadians are more inclined to spend their refunds because they’re seen as windfalls. 

Meanwhile, had you simply filled out the T1213 form and then contributed $2,000 per month to your RRSP, you’d have reduced your tax bill by $10,419 and have nearly $10,000 more saved inside your RRSP.

Who’s crushing it, now?

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17 Comments

  1. Brian on November 17, 2021 at 12:27 pm

    I always wondered about doing this. Putting the money to work right away, instead of having it tied up in government hands for a year or more. Now I know how! Thanks Robb!

    • Robb Engen on November 17, 2021 at 4:08 pm

      Hey Brian, exactly – this is your money. You might as well put it to work sooner, rather than wait for a tax refund. Plus, as the example in the article showed, you get more money back and put more of it to work this way.

      • Ron Sigal on November 17, 2021 at 4:17 pm

        Thanks Robb. This looks interesting and pertinent; I will read it.

  2. Ron Sigal on November 17, 2021 at 12:48 pm

    My accountant told me it is more advantageous to leave as much money in my professional corporation as possible rather than maximizing RRSP contributions. My professional income is much lower than the $500,000 cutoff for small businesses. Maybe this could be a topic for one of your future blogs?

    • Grant on November 17, 2021 at 3:28 pm

      Unfortunately, your accountant is not correct on this. Your registered accounts are better tax deferral accounts than your Corp, so should be maxed out and the remainder of your income invested in your Corp. Give him this paper to review

      https://www.pwlcapital.com/wp-content/uploads/2017/07/2017-07-20_Felix_A-Taxing-Decision-Update_Final.pdf

      • Robb Engen on November 17, 2021 at 4:04 pm

        Thanks Grant!

      • Ronald Sigal on November 17, 2021 at 4:15 pm

        Thanks Grant, this looks like a very informative article and I will read it.

        Ron

    • Robb Engen on November 17, 2021 at 4:04 pm

      Hi Ron, this particular article was aimed at the T4 employee but I understand where you’re coming from as a business owner.

      Jamie Golombek has a pretty widely read paper on this topic which suggests that RRSPs may be a better choice for business owners: https://www.jamiegolombek.com/media/RRSPs-for-business-owners.pdf

      This is a bit tongue in cheek but accountants love to tell their clients to leave all of their business income inside the corp, without considering important items like RRSPs, CPP, and even paying yourself a small amount so you can eat.

      It could be a good strategy to pay yourself a salary up to the CPP YMPE, or enough salary to get the RRSP maximum deduction limit. Lots of factors to consider.

      My wife and I own our business and pay ourselves dividends right now to meet our personal living expenses. But we also have about $300k invested in our RRSPs from prior years.

      We may consider paying ourselves a salary up to the CPP YMPE and then topping up our income with dividends in the future. A blog for another time, for sure.

  3. Brenda on November 17, 2021 at 12:56 pm

    This is something that our family has been doing for years. It’s a great tax planning and investing/savings strategy but be prepared to educate your employer’s payroll department. The T1213 and the CRA letter is not something that many payroll people know about. The most common response we’ve personally encountered is “What’s this?” 😀

    • Robb Engen on November 17, 2021 at 4:05 pm

      Hi Brenda, good point. I bet smaller organizations rarely, if ever, see these forms.

  4. Tim T on November 17, 2021 at 1:05 pm

    Thank you for the reminder! I just filled mine out and plan on submitting it this week. So helpful with tackling that remaining RRSP room. Look forward to chatting with you again soon.

    • Robb Engen on November 17, 2021 at 4:06 pm

      Nice, Tim! Glad you found the article helpful. Looking forward to catching up soon.

  5. Dan on November 18, 2021 at 10:53 am

    My workplace does this automatically. Besides low cost index fees, this is a big reason why I save through my employer as I can maximize those contributions while minimizing the cash flow hit. On a net/net basis I think you’re further ahead and the only way to keep it consistent with after tax dollars would be to take out a loan to top up the contributions (otherwise the math dictates a lower % contribution all things being equal).

    This strategy has allowed me to supercharge my savings and I still get a small tax refund at the end of the year as the math is never quite exact given other deductions, donations, etc

  6. Erik on November 18, 2021 at 5:16 pm

    Thanks, Robb. I actually sent mine in early October and have yet to receive mine. Get’em in quick!

  7. Martin on November 20, 2021 at 9:42 am

    I see the annual RRSP max amount on CRA website, how do we find out what the total available contribution room from previous years is?
    Thanks

    • Robb Engen on November 20, 2021 at 11:08 am

      Hi Martin, you can see your total available RRSP room on your Notice of Assessment or you can go to your My CRA Account online and click on the RRSP details.

  8. Matthew on November 25, 2021 at 9:07 am

    I work for a company with a few hundred employees in Canada and evidently only 2 of us use these according to HR. Worth a mention is that if you end up with other unexpected income from investments, consulting, etc the CRA will get a bit grumpy if you end up owing more then 3k. You can make them happy by them paying in installments but that starts to feel like it’s defeating the purpose. I’ve stopped using the form because side income keeps pushing me over. For anyone with just T4 income though it’s a genius move!

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