# Take RRSP refund this year or defer to next taxation year?



## Ruski (Feb 21, 2014)

Looking for some alternative thinking here folks:

I deposited $20+k (bonus money) into RRSPs in Jan 2016. Based on some quick estimates, if i claim it on 2015 tax return, i am going to get a refund of $10+k.

However, since the money was earned in 2016, i will be due to pay taxes on that amount come next season, so really it's just a loan to myself until next year when i either have to match my RRSP deposit or pay up the taxes.

What should I do if i know:
1. I won't be in a position to deposit that much into RRSP's next year so unlikely to defer taxation again.
2. I am likely to have a higher taxable income in 2016 vs 2015 ($20-30k more), so based on my calculations and some assumptions on 2016 tax season, i will actually end up owing $11+k in taxes next year.

In summary, although it seems like a great idea to defer taxes for a year and give myself what might seem like a "free loan", in reality since i expect my income in 2016 to be higher than 2015, i will actually owe higher taxes as a result next year making it not a free loan at all but roughly a loan at a rate of ~10% (which makes no sense, since i can borrow for 1% from my MBNA account if needed).

Am i missing anything here?


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## Eclectic12 (Oct 20, 2010)

Do you have TFSA contribution room?
If so, how does it change if you deposit all or some of the 2015 refund into the TFSA so that it grows tax free and can help with the 2016 tax bill?

If you want to be safe ... I suspect that waiting to claim the full $20K deduction on the 2016 tax return against the higher 2016 income is the better route.


If you think you can come up with say $5K in 2016 for an RRSP contribution, you could claim $5K on the 2015 return and then use 2016 cash flow to make this up (include any TFSA free cash as well).


Cheers


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## Ruski (Feb 21, 2014)

Eclectic12 said:


> Do you have TFSA contribution room?
> If so, how does it change if you deposit all or some of the 2015 refund into the TFSA so that it grows tax free and can help with the 2016 tax bill?
> 
> If you want to be safe ... I suspect that waiting to claim the full $20K deduction on the 2016 tax return against the higher 2016 income is the better route.
> ...


Hmm didn't think about that option...thanks for the suggestion. Will have to do some spitballing about options for TFSA investing this year (kinda scared of the market in 2016/2017 haha).

My TFSA is barely existent (~$3k balance) as i just bought a condo in December so starting nearly from scratch on TFSA savings. Another reason why i don't want to contribute much more to RRSP (employer will still contribute $7k yearly for me) and just grow my TFSA from here on out.


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## Eclectic12 (Oct 20, 2010)

Well you could go mostly in HISA and put a small amount at risk in equities ... if it pans out, you might make a bit and if it doesn't, you could control how much cash is needed to top it back up.


Cheers


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## Ruski (Feb 21, 2014)

Eclectic12 said:


> Well you could go mostly in HISA and put a small amount at risk in equities ... if it pans out, you might make a bit and if it doesn't, you could control how much cash is needed to top it back up.
> 
> 
> Cheers


True...cool thanks for the thoughts and recommendations! Now let's go make some $$ :smilet-digitalpoint


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## My Own Advisor (Sep 24, 2012)

Well, my first reaction is, don't assume this is a "free loan". RRSP = tax-deferred account = pay taxes, eventually 

Your loan is correct but it's not free!

As much as you can, optimize the advantages of the RRSP. Meaning, if you know your salary will be higher next year then either defer claiming some contributions this year and/or make a larger contribution next year to offset taxes payable. You want to contribute the most to the RRSP in your high-income years and withdraw the most in your lowest income years.


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## atrp2biz (Sep 22, 2010)

Your income may be higher in 2016, but does it move you into a higher marginal bracket? If not, the higher income doesn't really matter and the deduction should still have the same value as if you take it in 2015 and may make sense to take the deduction now. Alternatively, you could further defer the claim for another year if you think you'll cross into the next bracket in 2017.


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## Eclectic12 (Oct 20, 2010)

^^^^

+1 ... though one has to keep in mind the opposite situation as well - will taking the deduction in 2015 drop one's income into a lower marginal tax rate. If so, the portion that is refunded at the lower MTR is going to generate less of a refund. Even if one transfers the full refund into a TFSA, it may not cover the full 2016 tax bill.

Where one is going to take the RRSP deduction in 2015, I suspect one is better off to take the deduction to the bottom of the MTR but not cross over to the lower MTR. 


Another thought would be to submit a T1213 - Request to reduce withholding at source for 201x (tax year 2016 in your case). If approved, that would give you the tax refund spread across the pay cheque during the year instead of having to wait until the 2016 tax return is filed.

http://www.cra-arc.gc.ca/E/pbg/tf/t1213/README.html


Cheers


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## Ruski (Feb 21, 2014)

My Own Advisor said:


> Well, my first reaction is, don't assume this is a "free loan". RRSP = tax-deferred account = pay taxes, eventually
> 
> Your loan is correct but it's not free!
> 
> As much as you can, optimize the advantages of the RRSP. Meaning, if you know your salary will be higher next year then either defer claiming some contributions this year and/or make a larger contribution next year to offset taxes payable. You want to contribute the most to the RRSP in your high-income years and withdraw the most in your lowest income years.


For sure not free, i realize that. Partially why i posted here, just probably wasn't clear enough. 




atrp2biz said:


> Your income may be higher in 2016, but does it move you into a higher marginal bracket? If not, the higher income doesn't really matter and the deduction should still have the same value as if you take it in 2015 and may make sense to take the deduction now. Alternatively, you could further defer the claim for another year if you think you'll cross into the next bracket in 2017.


I certainly put me in a high bracket and that difference is why my estimates show that even though a return of $10+k this year is nice, it will result in a $11+k tax bill next year...so essential nearly a 10% interest loan. I had to make some assumptions since I didn't have the 2016 tax rates handy but generally speaking that higher bracket will cost me $900-$1100 roughly, which seems like a silly things to do.



Eclectic12 said:


> ^^^^
> 
> +1 ... though one has to keep in mind the opposite situation as well - will taking the deduction in 2015 drop one's income into a lower marginal tax rate. If so, the portion that is refunded at the lower MTR is going to generate less of a refund. Even if one transfers the full refund into a TFSA, it may not cover the full 2016 tax bill.
> 
> ...


Thats exactly whats happening, dropping me down into lower bracket for 2015 tax bill and then getting stuck in much higher bracket in 2016 has almost a double negative effect and that's what creates that $900-$1100 gap in my estimates. Since making a return even on some speculative investments of ~10% just to cover that cost is unrealistic, i will probably just defer the claim to next year. 

Not to mention the cost of borrowing money these days is so low so if i needed cash, my lines of credit are fairly cheap and the MBNA 0% for 12months with 1% transfer fee is an easy way to carry fairly large balances for years 


Either way, its been a fun discussion and I learned a bit about the T1213 which i didn't even know of until today so thanks for that!


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## Spudd (Oct 11, 2011)

I think the best idea that was raised here is the idea to claim as much this year as needed to bring you down to the bottom of your current tax bracket. Then next year, claim the rest. That way you win percentage-wise both years.


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## Eclectic12 (Oct 20, 2010)

Ruski said:


> ...Thats exactly whats happening, dropping me down into lower bracket for 2015 tax bill and then getting stuck in much higher bracket in 2016 ...


This is why I was suggesting the T1213 could be useful.

The T1213 is to have the RRSP deduction taken against the 2016 income to deal with the bonus income paid in 2016. The T1213 means the rrsp deduction is known to CRA long before the April 2017 deadline to file the 2016 tax return. If CRA approves, they direct your employer to withhold less taxes, bumping up your take home pay.

Assuming no other factors come into play, this should mean the 2016 T4 reporting less taxes paid where the RRSP deduction drops the taxable income which includes the bonus by a matching amount on the 2016 tax return. The two cancel out so that the taxable income and with holding taxes are pretty much as it would have been, with no bonus paid.

The timing is all that is changing, not what year the RRSP deduction is applied to. It will keep the taxable income deduction in the tax year it is needed.


Cheers


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