How To Crush Your RRSP Contributions Next Year

How To Crush Your RRSP Contributions Next Year

*Updated for October 2022*

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 $30,780 for the 2023 tax year, 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 now (late October, 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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33 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!

  9. Anu on October 19, 2022 at 1:50 pm

    How does the calculation change if you have an employer matched RRSP?

    • Robb Engen on October 19, 2022 at 3:24 pm

      Hi Anu, you’ll want to find out if your employer is already reducing your taxes at the source based on those RRSP contributions. The clue is if you typically get a big tax refund or not.

      If it doesn’t match up, like if your employer reduces your taxes based on their contribution but not yours, then you’d fill out the T1213 form with your contributions to get the full upfront tax savings on each paycheque.

  10. Markus Muhs on October 19, 2022 at 3:14 pm

    Some good discussion here. Pardon if it’s already been mentioned (didn’t see it while skimming): I file a T1213 every year (yes, you gotta do it every year) and with around a 2 month turnaround time with CRA, right now is when you want to be filing it for 2023. You get the form back, that Robb mentioned, sometime in December and can pass it along to your company HR to reduce your withholding.

    Thanks Robb for reminding me to file my T1213. Gonna do that right now, hah!

  11. Craig on October 19, 2022 at 8:14 pm

    Comment removed. Covered in post. Thanks!

  12. Shanna on October 19, 2022 at 9:26 pm

    I’m a bit confused about the ON example showing the CRA proof they contributed $2k/month before they had $2k/month to contribute. Does a printout with upcoming scheduled deposits into your rrsp qualify as proof? I’ve been interested in this idea and think this might be the year it happens. Thanks!

    • Robb Engen on October 19, 2022 at 11:40 pm

      Hi Shanna, yes – a print out showing your automatically scheduled recurring deposits would suffice.

      I’m not 100% sure that’s even necessary but it probably helps. I had one client just include a handwritten note about his intention to contribute $xx amount a month to his Wealthsimple RRSP and that was accepted just fine.

      • Brenda on October 20, 2022 at 10:32 am

        Wow I’ve never heard of a handwritten note being accepted. I’ve only ever filed after the contributions were made but based on this article and the reader comments, I’ll try filing the T1213 differently this time.

  13. Brenda on October 19, 2022 at 9:54 pm

    Do you have a recommendation for people who max out their registered accounts partway through the year and are trying to decide between investing in a taxable account for the remainder of the year versus setting the money aside for next year’s registered account contributions? That is, do the tax advantages of maxing out next year’s contribution room in January outweigh the opportunity costs of investing in the market now? I’d be filing a T1213 early next year and using the reduced withholding tax to invest the difference. (I understand that the investing best practice and mathematically optimal answer is to invest money in the market as soon as it’s available. I’m with a brokerage that doesn’t support the transfer of securities in-kind from a taxable account to a registered account though so I’d have to sell to cash, withdraw from taxable, deposit to registered, and buy again. Hoping to avoid this long round trip.) Thanks in advance!

    • Robb Engen on October 19, 2022 at 11:45 pm

      Hi Brenda, if you’re able to max out your registered accounts early with regular 2022 cash flow, then I would assume you could do the same in 2023.

      That tells me you have extra cash flow that you can direct to another goal (like investing in a non-registered account, or paying down your mortgage faster if you have a mortgage, or saving towards some upcoming one-time expense).

      So rather than pre-saving for your 2023 RRSP and TFSA contributions, start contributing to a new goal for the remainder of the year.

      That said, if you just love the idea of having $6,000 already saved up so you can max out your annual TFSA limit on January 2nd then go ahead and do that.

      • Brenda on October 20, 2022 at 10:41 am

        Hi Robb, thanks for the input. I’m self employed so my cashflow is irregular but yes you’re right, I have historically been able to max out contributions. I’m on a SlowFI/CoastFI path so my primary goal is FI. I’ve been able to start re-prioritizing travel this year as things have opened up and have taken multiple smaller trips already. Perhaps it’s time to start planning trips for next year. Your revenge travel and credit card rewards posts have gotten me thinking too.

  14. Jim on October 25, 2022 at 2:13 pm

    Robb, another great article!!! – He my scenario and wondering if you could advise.
    I have a child with a TFSA value of $50,000.00. Who presently earns 75K/yr.
    They also have 25k of unused RRSP contribution room.
    I am thinking of suggesting to my child to withdraw 25k from TFSA and putting that into their RRSP. Claim the tax refund
    Put the tax refund (which is a must to be reinvested ) back into their RRSP as well as their TFSA (max 6k/yr). When they go to withdraw RRSP at retirement, I am sure they will be in a far lower tax bracket or should they do nothing and just leave money in TFSA
    Thank you for taking the time to read. I just hope I was able to explain my thoughts onto paper

    Regards
    jim

    • Robb Engen on October 25, 2022 at 3:27 pm

      Hi Jim, thanks for the kind words. Really tough to say if this is a good idea without knowing more details. What province does your child live in? Do they expect to be in a higher tax bracket later in their career, which may be a better time to take advantage of unused room? Did they have other plans for the TFSA money, or is it retirement savings?

      Remember, if you have $75k in taxable income, and then make a $25k RRSP contribution, your taxable income is reduced to $50k. It’s certainly not a given that they would be in a lower tax bracket than $50k in retirement.

      • Jim on October 26, 2022 at 5:11 am

        Live in Ontario
        I believe is in a DC pension plan and has about 28yrs to retirement. Retirement funds not as good as a DB plan. So in 28yrs I cant see being in to high a tax bracket
        Salary is steady with usual annual increase of 2%
        Also plans to start a family soon, so by dropping their salary by cashing in TFSA and buying RRSP before birth of child, would this increase amount of CCB received

        • Jim on October 26, 2022 at 9:30 am

          Sorry Robb my mistake all information above is correct except it is a DB plan and not a DC plan

  15. Kerry on November 3, 2022 at 5:41 pm

    I used to do this when I had a T4.
    Now I just have diversified income.

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