RRSP Over Contribution Limit And Carry Forward Rules

By Robb Engen | December 17, 2021 |
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RRSP Over Contribution Limit and Carry Forward Rules

Your current year’s RRSP contribution limit is 18% of your previous year’s earned income, to a maximum of $27,830 (2021) plus any unused contribution room carried forward from previous years.

There’s some confusion around the RRSP over contribution limit and RRSP carry forward rules. This post explains both of these rules.

RRSP Over Contribution Limit

You are allowed to over contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax. An RRSP over contribution is not deductible from your current year’s income, but the advantage is that you can add extra cash into your RRSP, where it can grow on a tax-deferred basis.

RRSP over contributions can be deducted in a subsequent year when your actual RRSP contribution is less than the maximum allowed.

A penalty tax of 1% per month applies to the amount of an RRSP over contribution exceeding $2,000. If you think you may have over contributed to your RRSP, contact an accountant to determine the steps you need to take.

The calculation of the penalty tax and filing of forms to withdraw the excess amount is not part of the normal personal tax return process.

An RRSP over contribution can be an effective tax strategy; however you are usually better off paying down non tax deductible debt first, like your credit card or mortgage. If you decide to over contribute to your RRSP, work with your accountant or financial advisor to ensure you stay within the allowable limit.

One of the reasons the government allows an RRSP over contribution is to provide you with a cushion against possible errors and unforeseen events, like a pension adjustment (PA).

Consider using your $2,000 RRSP over contribution when you quit working. The earned income you have in your final year of employment will entitle you to an RRSP deduction in the following year.

RRSP Carry Forward Rules

For most Canadians, it’s not always possible to make a full RRSP contribution in any given year. If you don’t contribute the maximum allowable to your RRSP in any year, you can carry the unused portion forward indefinitely.

This means that if you were eligible to contribute $10,000 each year from 2010 to 2020, but you only contributed $5,000 each year, you will be able to contribute an additional $50,000 over and above your annual maximum limit.

If you are expecting a change in your income in the near future that will bump you into a higher tax bracket, it might make sense to delay your RRSP contributions until then. In this case, it’s important to consider the loss of tax-sheltered investment growth by putting off your contributions.

To accumulate RRSP contribution room, you must file an income tax return. If you have earned income for RRSP purposes, but you are not required to file an income tax return, you should consider filing anyway.  While an RRSP may not be a significant consideration at this point, there will likely be a time when you have enough cash to make a contribution and can benefit from the deduction.

If you had low taxable income in 2020 and enough cash to make an RRSP contribution, consider making the contribution before the RRSP deadline but don’t claim the deduction for 2020.

As long as the amount isn’t claimed as a deduction, your unused contribution room remains intact. You can still claim the deduction in a future year, preferably when your taxable income is higher. In the meantime, the investments inside your RRSP will grow on a tax-deferred basis.

TFSA Contribution Limit And Overview

By Robb Engen | December 8, 2021 |
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TFSA Contribution Limit And Overview

The federal government kept the annual TFSA contribution limit at $6,000 for 2022 – the same annual TFSA limit that we had since 2019. It’s still good news for Canadian savers and investors, who as of January 1, 2022, will have a cumulative lifetime TFSA contribution limit of $81,500.

The Tax Free Savings Account (TFSA) was introduced in 2009 by the federal conservative government. The TFSA limit started at $5,000 that year – an amount that “will be indexed to inflation and rounded to the nearest $500.” The TFSA limit is expected to increase to $6,500 in 2023.

TFSA Contribution Limit Since 2009

The table below shows the year-by-year historical TFSA contribution limits since 2009.

YearTFSA Contribution Limit

Note that the maximum lifetime TFSA limit of $81,500 applies only to those who were 18 or older as of December 31, 2009. If you were born after 1991 then your lifetime TFSA contribution limit begins the year you turned 18.

You can find your TFSA contribution room information online at CRA My Account, or by calling Tax Information Phone Service (TIPS) at 1-800-267-6999.

TFSA Overview

The Tax Free Savings Account is a flexible vehicle for Canadians to save for a variety of goals. You can contribute every year as long as you’re 18 or older and have a valid social insurance number.

That means young savers can use their TFSA contribution room to establish an emergency fund or save for a down payment on a home. Long-term investors can use their TFSA to invest in ETFs, stocks, or mutual funds and save for the future. Retirees can continue to save inside their TFSA for future consumption or withdraw from their TFSA tax-free without impacting their Old Age Security or GIS.

Unlike an RRSP, any amount contributed to your TFSA is not tax deductible and so it does not reduce your net income for tax purposes.

  • Your contribution room is capped at your TFSA limit. Excess contributions will be taxed at 1 percent per month
  • Any withdrawals will be added back to your TFSA contribution room at the start of the next calendar year
  • You can replace the amount of your withdrawal in the same year only if you have available TFSA contribution room
  • Any income earned in the account, such as interest, dividends, or capital gains is tax-free upon withdrawal

How to Open a TFSA

Any Canadian 18 or older can open a TFSA. You are allowed to have more than one TFSA account open at any given time, but the total amount you contribute to all of your TFSA accounts cannot exceed your available TFSA contribution room.

To open a TFSA you can contact any bank, credit union, insurance company, trust company or robo-advisor and provide that issuer with your social insurance number and date of birth.

The most common type of TFSA offered is a deposit account such as a high interest savings account or a GIC.

You can also open a self-directed TFSA account where you can build and manage your own savings and investments.

Qualified TFSA Investments

That’s right – you’re not just limited to savings accounts and GICs. Generally, you can put the same investments in your TFSA as you can inside your RRSP. These types of allowable investments include:

  • Cash
  • GICs
  • Mutual funds
  • Stocks
  • Exchange-Traded Funds (ETFs)
  • Bonds

You can contribute foreign currency such as USD to your TFSA. Note that your issuer will convert the funds to Canadian dollars. The total amount of your contribution, in Canadian dollars, cannot exceed your TFSA contribution room.

If you receive dividend income from a foreign country inside your TFSA, the dividend income could be subject to foreign withholding tax.

Gains Inside Your TFSA

Some investors may be tempted to put risky assets inside their TFSA account to try and earn tax-free capital gains. There are two advantages to this strategy:

  1. Earn tax-free capital gains
  2. Potentially increase your available TFSA contribution room

For example, I maxed out my annual TFSA contributions in 2009, 2010, and 2011. That meant contributions of $15,000. I invested these funds in dividend paying stocks, which, over time, increased the total portfolio value to $19,500.

I withdrew the entire amount in mid-2011 to top-up the down payment on our new house. When the calendar turned to 2012, I had a new lifetime TFSA contribution limit of $24,500.

How did I have $24,500 in unused TFSA contribution room available even though most other Canadians had $20,000?

Any TFSA withdrawals are added back to your available TFSA contribution room at the beginning of the next calendar year. That amount was $19,500. In addition, the 2012 TFSA limit of $5,000 was added to my overall TFSA contribution room for a total of $24,500.

Losses Inside Your TFSA

The risk cuts both ways, though.

Let’s say the dividend stock picks inside my TFSA incurred a loss of $4,500. I contributed $15,000 but they’re only worth $10,500 when I need to withdraw the money for my house down payment.

The next calendar year, after I withdrew the funds, I would have only saw $10,500 added back to my TFSA contribution limit, plus the new 2012-dollar limit of $5,000 – for a total TFSA limit of $15,500.

The other downside to an investment losing money inside your TFSA is that you cannot claim a capital loss.

“In kind” TFSA Contributions

You can make “in kind” contributions to your TFSA – for example transferring stocks or funds held in your non-registered account to your TFSA.

According to the CRA, you will be considered to have disposed of the security at its fair market value at the time of the contribution. If that value is more than the original cost of the security, you will have to report the capital gain on your income tax return. However, if the value is less than the original cost, you cannot claim the resulting capital loss.

The amount of the contribution to your TFSA will be equal to the fair market value of the property.

This can be an excellent strategy for seniors and retirees to transfer securities from their taxable investment account and into their sheltered “tax-free” TFSA.

Transfer from your RRSP

You can also transfer an investment from your RRSP to your TFSA. Again, according to the CRA, you will be considered to have withdrawn the investment from the RRSP at its fair market value.

This amount is reported as an RRSP withdrawal and must be included in your income for that tax year.

“The tax withheld on the withdrawal can be claimed at line 437 of your income tax and benefit return.”

If the transfer from your RRSP to TFSA takes place immediately, the same value will be used as the amount of the contribution to the TFSA. If the contribution is delayed or deferred, the amount of the contribution will be the fair market value of the investment at the time of that contribution.

TFSA Over-Contribution Penalty

Unlike the RRSP Over-Contribution limit of $2,000, TFSAs have no such room for error.

Some Canadians have run afoul of the CRA for over-contributing to their TFSA. The excess contributions are subject to a 1 percent penalty tax per month. For example, if you’ve over-contributed $1,000 you would have to pay $10 per month.

If you receive a TFSA excess amount letter from the CRA you should remove the excess amount immediately. Go to CRA My Account for your room limit as of January 1, or complete Form RC343, Worksheet – TFSA contribution room if you have contributed to your TFSA in the current year.

TFSA Impact on Government Benefits

The TFSA has been a tremendous boon for seniors and retirees. The main advantage is that any income earned inside your TFSA, or amounts you withdraw from your TFSA, won’t impact means-tested government benefits such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).

That means retirees could get a portion of their retirement income from their TFSA and not have that amount increase their total net income. This is beneficial to either preserve GIS benefits or to avoid the dreaded OAS clawback.

TFSA income or withdrawals will also not affect employment insurance benefits, or your eligibility for other credits such as the Canada child benefit (CCB), the working income tax benefit (WITB), the GST credit, or the age amount.

TFSA Beneficiaries and Death of TFSA Holder

There are two types of TFSA beneficiaries:

  1. A survivor who has been designated as a successor holder
  2. Designated beneficiaries, such as a survivor who has not been named successor holder, a former spouse or common-law partner, children, and qualified donees

A successor holder is a spouse or common-law partner of the holder at the time of death and is named by the deceased as the successor holder of the TFSA.

The successor holder acquires all of the rights of the holder, including the right to revoke any beneficiary designation. This spouse or common-law partner becomes the new TFSA account holder.

The TFSA continues to exist and both its value at the date of the original holder’s death and any income earned after that date continue to be sheltered from tax under the new successor holder.

The successor holder can make tax-free withdrawals from the deceased holder’s TFSA account. He or she can also make new contributions to that account, subject to their own unused TFSA contribution room.

Investing Ideas for your TFSA

The TFSA is an incredible savings tool. Low income earners should primarily use their TFSA to save for retirement, while higher income earners should maximize their RRSP contributions first, but ideally contribute to both their RRSP and TFSA.

Related: A Sensible RRSP vs. TFSA Comparison

Here are my recommendations for the best TFSA investments for long term savers:

Invest with a Robo Advisor: Robo-advisors offer Canadians an easy and hands-off way to automatically invest for the future. Open a TFSA at a robo-advisor like Wealthsimple and you can invest in a diversified portfolio of index ETFs for a management fee of 0.50 percent, plus the MER of the ETFs, for a total cost of about 0.65 percent.

DIY Invest with ETFs: Investors who are more inclined to take the wheel themselves can open a self-directed TFSA account at a discount broker like Questrade and build their own investment portfolio. With the introduction of one-ticket asset allocation ETFs from the likes of Vanguard, iShares, and BMO, it’s never been easier to build a globally diversified portfolio on the cheap. Vanguard’s VBAL, for example, represents the classic 60/40 balanced portfolio and comes with a MER of just 0.25 percent.

Invest in bank index funds: Maybe you’re more comfortable staying at your home bank and investing through an advisor. Know that every bank offers its own suite of index funds, which are considerably cheaper than their actively managed cousins and tend to outperform. Open a TFSA account at your bank and insist on getting a portfolio of index funds. TD’s popular e-Series funds are the most highly rated and lowest cost of the bunch and will cost around 0.45 percent. Expect the other banks’ index funds to cost closer to 1 percent.

As for me, I’ve explained before exactly how I invest my own money, holding Vanguard’s All Equity ETF (VEQT) across all accounts – including inside my TFSA at Wealthsimple Trade. I prefer to use my TFSA for long-term investing rather than as a place to stash cash in a high interest savings account. Tax free growth for the win!

Weekend Reading: Money Like You Mean It Edition

By Robb Engen | December 4, 2021 |
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Weekend Reading: Money Like You Mean It Edition

Erica Alini quickly became one of my favourite personal finance writers when she joined Global News as a national money and consumer reporter. Her columns and Money123 newsletter tackle a breadth of financial topics and are must-reads each week.

That’s why I was excited when I heard that Erica planned to write a book. I was even more excited when Erica reached out to me to help contribute to chapters on earning more income and on retirement planning.

The end result is a personal finance book designed to help young Canadians navigate their way through an ever-changing world. Money Like You Mean It: Personal Finance Tactics for the Real World is not your parents’ personal finance book. 

It tackles money management and the new ways we can get into debt, not just from excessive borrowing but through behavioural traps like Buy Now, Pay Later and insidious monthly subscriptions.

Erica discusses Canada’s sky-high housing prices and offers readers a framework to help people decide whether to rent or buy. She writes about the stigma of receiving help from the bank of mom and dad, but also how these monetary supports can perpetuate wealth inequality.

The topic of earning income often gets ignored in personal finance books. This is a mistake, and in Money Like You Mean It Erica looks at the issues of working in the gig economy, whether side-hustles are worth the effort, how to negotiate a raise, and why job hopping might lead to better pay raises.

On retirement, Erica says it’s time to let go of the old-fashioned concept of retirement. Instead, she says, “retirement is becoming less and less of a black-and-white pivot from work to non-work.

Increasingly, retirement is more of a slow and gradual downshifting from working all the time to working less. Perhaps that means trading the office for some freelance consulting, giving you longer vacations and more time to smell the roses while still earning an income.

Erica also looks at what she calls nest-egg inequality for women and people of colour – a topic that does not get enough attention in personal finance.

I enjoyed the investing chapter as it aligns with my views on keeping your portfolio simple with low cost index funds or ETFs.

Young parents will get a lot out of the chapters on how to manage finances as a couple, as well as saving for a baby.

The best part of the book is how Erica took a journalistic approach to writing it. The book is incredibly well researched, and I don’t recall ever reading a personal finance book with so many expert quotes on such a wide range of topics.

Money Like You Mean It is a fantastic read. I think Erica did a tremendous job putting together a comprehensive and entertaining guide to managing your finances. It will make a great stocking stuffer for the young adults in your life.

Pre-order a copy today. The book will be officially released on December 9th.

This Week’s Recap:

I’ve updated some of my most widely read articles on CPP to keep the numbers fresh and up-to-date:

Last week I also shared my 2022 financial goals.

Promo of the Week:

I moved my RRSP and TFSA from TD Direct Investing to Wealthsimple Trade in 2019 to take advantage of their commission-free trading platform. Unlike the meme stock investors that have flocked to the app during the pandemic, I use WS Trade to simply buy more units of Vanguard’s VEQT and hold for the long-term.

Related: Exactly How I Invest My Money

Their latest promotion will give you two free stocks to trade when you sign up and join Wealthsimple

It sounds like a stock trading gimmick, but in reality you’ll get the cash equivalent of two random stocks (ex. I got Clover Health, Capstone Mining, and Blackberry – but really just got $43.65 deposited into my account). Do with it what you will. 

The stocks, and therefore the cash equivalent, will have a value between $5 and $4,500, with an average of $15. Around 95% of people will receive less than $50 based on the stock value at the time of selection.

Again, use this referral link, open and fund a new Wealthsimple Trade account, and your cash bonus will be applied within 24 hours: 

Weekend Reading:

Our friends at Credit Card Genius share the best credit card offers, sign-up bonuses, and deals for December 2021.

My Own Advisor Mark Seed shares his financial independence update.

Michael James on Money shares a conversation about wealth inequality.

An interesting debate on whether it’s smarter to buy a vacation home or stick to short-term rentals

Millionaire Teacher Andrew Hallam explains why you may be happier buying less stuff:

“If you’re tempted to buy something unnecessary, ask yourself if you would still buy it if nobody else could see it.  If the answer is yes, go ahead and buy it.  But be ruthless with this assessment. Most people buy things, in part, to be seen having them.  And the truth is, nobody will love you any more or any less based on the stuff you own.”

Here’s a great podcast interview with author Ramit Sethi on how couples can make peace over money.

Of Dollars and Data blogger Nick Maggiulli explains how difficult it can be to have a truly objective point of view if you never escape your own bubble.

Something I’m getting asked about more and more lately by parents of young teens. Jason Heath explains how to invest as a teenager in Canada.

Active fund managers have a long history of underperforming their benchmarks, but in a pack of laggards Canada’s active managers have been the worst.

Finally, we know that managing longevity risk can be a challenge in retirement but these new products aim to close the retirement income gap.

Have a great weekend, everyone!

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