# Optimizing When To Claim A RRSP Contribution



## 0xCC (Jan 5, 2012)

There was this thread at the beginning of the year that made the argument that it is best to claim a RRSP contribution in the year it was contributed.
http://canadianmoneyforum.com/showthread.php/31585-Delay-claiming-RRSP-contribution-s-tax-deduction 

I think that there is a case that was missing in that argument. Is it possible to optimize the timing of claiming a RSP contribution when making the claim bumps the taxable income down a tax bracket or two?

For example let's look at the case where an Ontario resident earns say $47,000 of taxable income. They realized some capital gains in a non-registered account during the tax year and contributed the proceeds to their RSP in the same tax year. The proceeds were $10,000 and I don't think it matters how much of that was capital gains but lets say that $1000 of it was (and that is already included in the $47,000 taxable income).

So in this case for 2014 it seems as though they should get a refund of 31.15% for every dollar of RSP contribution between $43,953 and their taxable income of $47,000 (so $3,047 contribution = $1071 refund) . Then they should get a 24.15% refund for every dollar from $40,102 to $43,953 (the next $3,833 = $925.66 refund). Finally the remaining piece of the RSP contribution will only generate a 20.05% refund. (Based on Ontario 2014 tax rates here - the right hand side of the table, the left is 2015 tax rates: http://www.taxtips.ca/taxrates/on.htm )

So looking at this it seems like after the first $3,047 is claimed the refund on every dollar is reduced from 31.15 cents to 24.15 cents which is a 22.4% reduction. Would it make more sense for this taxpayer to delay claiming more than $3,047 of their contribution until the following tax year if they don't think they get get a return better than a 22.4% return on that refund amount during the year?

I am working though the final bits of my and my wife's tax returns for this year and I am trying to optimize how much of our RSP contributions to claim this year as opposed to next year. Does this reasoning make sense? If I can increase the amount of the per-dollar refund by waiting until next year by more than I think I can generate in investment returns over the year does it make sense to wait to claim the deduction until next year?


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## Guban (Jul 5, 2011)

Thanks for bringing back bad memories. That thread was rather painful.

I think that your logic is generally sound. It'll be pretty hard to beat those guaranteed returns, though. That's 7% and 11.1% of after tax money. Guaranteed (so long as your wife has the income to deduct against).

Sure hope that both of your TFSAs are maxed out, though. Remember, tax free beats tax deferred if you are not claiming the tax deduction immediately!


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## 0xCC (Jan 5, 2012)

Yes, TFSA's are maxed out but we haven't added the extra $4,500 yet. There is still cash sitting the the TFSA accounts so we aren't in a big rush to add to that and are happy to wait until the budget has been passed.

Thanks for confirming my logic. I'm open to anyone else that sees a hole in it though. Especially now that we have a few extra days to debate before filing our 2014 taxes.


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## behappytoday (Sep 16, 2011)

Similar task right now. Thanks for starting this thread!

The refund of 31.15% - how did you come to this figure please?


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## 0xCC (Jan 5, 2012)

behappytoday said:


> Similar task right now. Thanks for starting this thread!
> 
> The refund of 31.15% - how did you come to this figure please?


Sorry, didn't see this until now. The 31.15% comes directly from marginal tax rates. I linked to the www.taxtips.ca marginal rates for Ontario. They have personal tax rates for every province there. So you can look up your province and then your income and see what the tax rate for that income level is and at what income level it drops down to the next lower marginal tax rate.


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## fraser (May 15, 2010)

We used the deduction in years when we were in the highest tax bracket.

When you move from one tax level to another ONLY that portion of your income above the new threshold is taxed at the higher rate. 

Many people seem to assume tha when you move to a higher tax bracket all income is taxed at this higher rate. It is not so. Hence the argument that using this to move you to a lower tax bracket is slightly misleading.


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## 0xCC (Jan 5, 2012)

I think that people can get confused by the tax bracket terminology. I used the term "marginal tax rate" in my post to try to stay away from the "tax bracket" phrasing.

As fraser points out you need to pay attention to at which income level each tax rate starts and stops. In the example I went through in the original post I work through the impact of the different tax rates as claiming the RSP contribution reduces taxable income.


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