*Updated for October 2024*
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 $32,490 for the 2025 tax year, plus any unused RRSP room from previous years.
An employee who earns $125,000 per year can 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 $2,627.08 deducted from your paycheque each month for taxes, leaving you with $7,789.59 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.
New: You can now submit the T1213 form online by scanning your form and supporting documents and sending them through the “Submit document online” service in your CRA My Account.
Note that you’ll need to fill out and submit the form every year. It’s best to do so now (mid 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.
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 $2,627.08 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 $1,831.08 – freeing up an extra $796 in monthly cash flow that was previously being withheld for taxes. That’s an extra ~$9,552 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:
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.
**Optimize Your RRSP**
I have a general savings philosophy that goes something like this:
- Utilize employer matching savings plan – basically take advantage of your employer match, it’s free money!
- Optimize your RRSP contributions – contribute enough to bring your taxable income down to the bottom of your highest marginal tax rate
- Maximize TFSA – max out your TFSA, eventually.
- Prioritize short-term goals – once the first three goals have been funded, extra cash flow should be allocated to short-term goals such as buying a new vehicle, taking a dream vacation, renovating your home, funding a parental leave or early retirement, etc.
On the RRSP front, I use EY’s excellent tax calculators & rates page (updated annually) and the Canadian personal tax rates by province sections to determine what those marginal tax brackets are for my clients.
What does optimizing mean? For instance, in the example we’ve been using above (Ontario worker with $125,000 gross income) it might make sense to only contribute $13,266 to their RRSP to bring their taxable income down to $111,734 – the bottom of the 43.41% marginal tax bracket).
That way, every single dollar contributed to the RRSP is going to save 43.41 cents in taxes.
Contribute one more dollar, and that dollar will only receive 37.91 cents in tax relief.
Of course, it might be perfectly sensible to contribute more and get a blended tax deduction (some at 43.41% and some at 37.91%). Maybe you’d want to bring down your income to the bottom of the 37.91% marginal tax bracket, but no further.
Final Thoughts
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 $6,189.
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 $9,552 and have nearly $10,000 more saved inside your RRSP.
Who’s crushing it, now?
I swear half my job is to convince my frugal clients to spend a bit more money. I’m not talking about making a complete 180 degree turn to become a different person. But if you’ve always stayed at a Best Western, then an upgrade to the Ritz every once in a while won’t kill you. Heck, you might even enjoy it!
Part of this push to spend more comes from my work with hundreds of retirees who don’t (or cannot bring themselves to) spend up to their capacity. After years of frugal living, never exercising those spending muscles, it’s next to impossible to turn off the savings taps and turn on the spending taps in retirement.
Seeing this firsthand caused me to reevaluate my own priorities. I always prided myself on a high savings rate without necessarily looking down the road at what I was saving for. How much money was enough? As John D. Rockefeller famously quipped, “just a little bit more.”
We’re also fortunate as business owners to get to decide (for the most part) how much we pay ourselves. It’s common advice for business owners to shelter as much income inside their corporation as possible and pay themselves just enough to pay their personal expenses.
That’s pretty much what we were doing until 2022, when we decided to make a big change and upgrade our house. Our larger mortgage payments, increased desire to travel, and our growing children meant life was more expensive on the personal side of our ledger.
We needed to give ourselves a raise, and so that’s exactly what we did last year and again this year.
We also needed a system to strike the right balance between enjoying life today and having a comfortable retirement.
Very loosely, we’re saving about 20% of our personal income (TFSAs and RESP), setting aside 20% for taxes (paid in quarterly instalments), spending 20% on total housing costs, 20% on daily living (groceries, transportation, health, kids’ activities, etc.), and 20% on travel and guilt free spending.
Yes, the 20-20-20-20-20 budget. I should patent that!
In the past, it was tempting to limit some of the spending categories by either allocating more to personal savings, or by simply paying ourselves less and leaving more in the corporation to invest. In fact, it was typical for us to invest 25% of our business income.
The problem was that trajectory was reducing our standard of living today while kicking a big ol’ tax can down the road in retirement when income sources like corporate dividends, RRIF and LIF withdrawals, and CPP and OAS collided.
And, as I’ve learned, if I didn’t start exercising those spending muscles a bit now there’s a good chance I couldn’t bring myself to live it up in retirement.
I decided it would be better to introduce some lifestyle creep now to make sure we could maximize our life enjoyment today, tomorrow, and throughout retirement.
So, we’re paying ourselves more while still investing 15% of our business income. That allows us to meet our desired spending needs on the personal side while also investing 20% of our personal income to catch-up on our TFSA contributions.
It’s a nice balance, and it’s freeing to know that we can enjoy life to the fullest today and still have a secure retirement.
Don’t get me wrong, I’m still a saver at heart. But tomorrow is never promised. My wife has MS. Our kids are getting older. If we have the chance, we’re going to take the trip, attend the concert, eat at the restaurant, splurge on the nice Airbnb, and still try to max out our TFSAs.
The trade-off? We might take 15 years to pay off our mortgage instead of 10. We’ll have a smaller corporate investing account balance and may have to work part-time as a way to ease into retirement. That’s okay, I might have done that anyway!
Perhaps no book has influenced people’s behaviour when it comes to money and lifestyle creep more than Bill Perkins’ Die With Zero.
And while I’d take the advice of a multi-multi-millionaire energy trader with a grain of salt, the concepts of building memory dividends and maximizing life enjoyment will truly cause you to reflect on what really matters, and whether it’s about enjoying life or watching numbers go up on a spreadsheet.
To summarize, we’ve had some intentional lifestyle creep over the past two years and I don’t regret it one bit. We’re still saving appropriately for retirement with a good system in place – and this trajectory strikes a better balance between living for today and saving for the future.
Promo of the Week:
There are still a few days left to take advantage of Wealthsimple’s 1% transfer bonus. I’ve spoken with several readers and clients who have already taken advantage. One deposited $500,000 from the sale of a rental property and secured a $5,000 cash back bonus. Another transferred $2M(!) from Questrade to secure a $20,000 cash back bonus.
Note that the bonus is paid into a Wealthsimple Cash account (their high interest savings account) in 12 monthly instalments to encourage you to keep your funds at Wealthsimple. Still, it’s an incredibly lucrative offer if you’re in the mood to move your savings and/or investments.
Open your Wealthsimple account today, and download the mobile app. Login and in the upper righthand corner you’ll see a picture of a present. Click on that and you can enter my referral code: FWWPDW to tell them Robb sent you and we’ll each get another $25.
Then, register before October 1st and you’ll have 30 days to transfer or deposit a minimum of $15,000 to get a 1% cash back matching bonus.
It’s that easy!
Weekend Reading:
Short and sweet this week.
A Wealth of Common Sense blogger Ben Carlson compares this bull market run against the epic bull market of the 80s and 90s. Pretty close!
Here’s how to move Locked-In Retirement Account (LIRA) funds to another institution without tax consequences.
Mark Walhout answers the top 10 probate and estate planning questions in Canada:
Here’s a surprising fact. The most common outcome from buying a stock is that you lose all your money:
“The stock market is NOT a rising tide lifts all ships story. It is a haystack with unknown, but required, needles story. So buy the damn haystack.”
How will Canada’s new mortgage rules affect your plans to buy a home? Erica Alini and Rachelle Younglai answer your questions.
In many ways, index funds have effectively “solved” investing. Yet many people continue to delegate their investment management and financial decision-making to financial advisors. PWL Capital’s Ben Felix answers the question of why you’d hire a financial advisor:
You might be surprised to hear that if something happened to me, my wife has been instructed to hand everything over to PWL Capital. That’s how much I believe in the good work that group is doing.
Finally, Shawna Ripari couldn’t resist a spending spree, so she tried a no-buy challenge. Here’s what she learned.
Have a great weekend, everyone!
Canadians are nuts for home ownership, but with real estate prices soaring to unaffordable levels in many areas of the country it has become increasingly difficult to buy a home.
Still, the prevailing narrative around renting vs. buying is that renting is throwing away money and buying is a surefire path to building wealth. That has young Canadians in particular stretching their finances to buy a home, and relying more and more on the bank of mom and dad to help fund the down payment.
Speaking of mom and dad, where do you think this real estate obsession is coming from? Many parents put pressure on their young adult children to buy a home – citing their own anecdotal evidence of price appreciation from the time they bought their first home.
The problem is, we can’t go back in time and buy a house in 1984, or even 2004. Aspiring home owners need to buy at today’s prices, which are exceedingly unaffordable.
Meanwhile, there are approximately 5 million rental households in Canada (representing one-third of Canadians). Are they really throwing money away? Hardly.
PWL Capital’s Benjamin Felix tackled the problem of renting vs. buying in Canada in the latest episode of the Rational Reminder podcast, and then bravely shared the findings in a Globe & Mail article (read the comments if you dare).
“In perfect equilibrium, renting and owning should cost the same because house prices and rents adjust such that the cost of paying for housing is the same either way. But it doesn’t work like that in the real world. A 2012 paper in Real Estate Economics suggests that demand for homeownership, fuelled by perceptions that renting is throwing away money, may make renting even more economically attractive.”
Predictably, criticism included someone who bought a house for $40,000 in 1974 and sold it for $2M. But while the dollar amount sounds impressive, it’s an 8% annualized return before factoring in all the phantom costs that went into owning that home for 50 years (namely maintenance and transaction costs). Meanwhile, the TSX returned 9.36% annualized during that time, and the S&P 500 returned 12.09% per year.
Ok, so I read some of the comments.
I couldn’t get through all of them, but here are some I found interesting.https://t.co/WWkuw5qIWn
— Benjamin Felix (@benjaminwfelix) September 21, 2024
I think one of the major takeaways is to answer the question of whether renting is “throwing money away” and the clear answer is no. Buying then becomes more of a personal lifestyle / happiness decision.
For some, renting provides a sense of freedom and lack of stress. For others, renting is a source of anxiety due to the threat of eviction and lack of control.
Homeowners, on the other hand, often feel a sense of pride and may benefit from the forced savings (mortgage payments). But others feel stress over maintenance and upkeep, and may find the total cost of home ownership leaves little cash flow left over for retirement savings and enjoying life.
Your mileage may vary.
This Week’s Recap:
Last weekend I shared four retirement mistakes to avoid.
The US Federal Reserve slashed its target interest rate by 0.50%, and Canada’s inflation rate for the month of August slid in under target at 1.95%.
The market widely expects similar rate cuts from the Bank of Canada when our central bank makes its next decision October 23rd.
With the inflation dragon slayed (or at least tamed), central banks have turned their attention to employment and will try to stave off a recession. Time to stick this soft landing.
Promo of the Week:
Well, well, well. Wealthsimple extended its 1% transfer bonus promotion. Register before October 1st and you’ll have 30 days to transfer or deposit a minimum of $15,000 to get a 1% cash back matching bonus. Incredible!
Don’t forget to tell them I sent you. Use my referral code: FWWPDW and open your Wealthsimple account today.
Seriously, folks. If you’ve got a few hundred thousand dollars (or more) at another brokerage platform, you’ll get a few thousand dollars (or more) just for moving it over to Wealthsimple – where you can buy and sell stocks and ETFs for free. It’s a no brainer.
Weekend Reading:
Mortgage rates are falling fast and furious – including 5-year fixed rates that start with a 3.
Yes, a cottage is an investment property—here’s how to minimize capital gains tax.
Seniors seeking a decumulation strategy may be asking the wrong questions. Start with your spending plan, then model how you’re going to pay for it. Agree 100%.
The CPP death benefit of $2,500 is ripe for broader reform, like an increase or indexation.
Now for something I disagree with – Industry groups call on the feds to reduce or ditch RRIF mandatory withdrawals. Why?!?
Two recent CRA disputes show Canadians still don’t know TFSA contribution rules.
Morningstar’s personal finance expert Christine Benz says retirement is not a math problem:
“People might be surprised to see a book from me that is half nonfinancial — maybe not even half. But I feel like people are overly focused on the financial and not enough on the nonfinancial.”
After being told Freedom 55 was out of reach, this retiree changed his financial trajectory and retired at 51.
Finally, a great post by the Loonie Doctor on CIPF coverage and whether you should use more than one brokerage to mitigate risk.
Have a great weekend, everyone!