# Previous RRSP Contibution room and only dividend income



## amacneil

Hi there,

I have a question. Up until 2009, I was earning salary. Over the course of my career, I have $60,000 of available RRSP contribution room accumlated. 
I've since become a contractor, and in 2010, will only be dividends (which I know do not allow RRSP contributions)

However, I am receiving a partial inheritance from my parents, for $25,000. I would like to deposit this into my RRSP this year, and use it for a downpayment on a house in a couple years.

My question is this. Does this $25,000 into an RRSP still lower my taxable income for 2010 due to my previous contribution room even though for 2010 I'm only drawing dividend income from my company.

Thanks very much for any advice offered.


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## tradervic

If you have $60,000 contribution room than that is the maximum you can contribute.It has nothing to do with what your current income situation is, but rather it will not increase your contribution room because it is not considered "earned income" used to calculate your contribution room If you are only receiving dividends you may not be in a taxable situation and the deduction may not be of any benefit to you in the current year because you will receive the dividend tax credit to offset your tax liability on your dividends. If you do decide to contribute and you are not taxable make sure you carry forward the deduction to a year in which you can use it to your benefit.


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## GeniusBoy27

The RRSP benefits reduce income, so if this isn't a year that you're making lots of income, then I wouldn't put the money into a RRSP this year.


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## FrugalTrader

Also note that if you want to deposit into your RRSP this year, you can carry forward your tax deduction to a future year when your "other income" is higher.


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## amacneil

Thanks for the responses. I'm still a little confused.

If I'm receiving dividends which will total $80,000 this year, I understand my RRSP contribution room will not increase. However, I will have to pay some tax on the dividends, and I think I estimated it at $14,000. If I do contribute the money to an RRSP...your saying that I still have to pay the $14,000 , and not say....$6000-$7000...
I can only get the tax benefit when in years which I draw salary?


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## stardancer

amacneil said:


> Thanks for the responses. I'm still a little confused.
> 
> If I'm receiving dividends which will total $80,000 this year, I understand my RRSP contribution room will not increase. However, I will have to pay some tax on the dividends, and I think I estimated it at $14,000. If I do contribute the money to an RRSP...your saying that I still have to pay the $14,000 , and not say....$6000-$7000...
> I can only get the tax benefit when in years which I draw salary?


No, it's confusing:
1. you have $60,000 worth of RSP contribution room built up. You can contribute up to $60,000 whenever you want with no over-contribution penalty, and irregardless of what your other income is.

2. sometimes, when you contribute a large lump sum, you don't need the whole reduction in other income for tax purposes. The above posters are just saying that if you don't have a lot of other income, the contribution might be wasted for tax purposes.

3. however, if you do contribute a large amount, you must report the whole contribution on a schedule 7. BUT, you also can use only the amount you need to reduce your taxable income to a more acceptable level, and you can carry forward the balance of the contribution to another year(s).

4. you state that your dividend income will be $80,000. I would suggest making the full contribution, then using a tax software program to try out different scenarios. You may have to use up the full contribution, or you may be able to use part and carry forward the rest. At any rate, whatever amount you use of the contribution, it WILL reduce your taxable income, thereby reducing whatever tax you have owing.

Clear as mud??


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## kcowan

If your total income tax is $14000, contributing to your RRSP may not be tax efficient.


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## Young&Ambitious

If you're looking to use the funds as a downpayment in a couple of years I would not bother putting them into an RRSP, interest rates are so low that the amount of income you will defer will be extremely low. And then you're left paying back money into your RRSP from the Homebuyer's Plan in addition to mortgage payments. I personally don't think the amount makes it worth it...


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## MoneyGal

Young&Ambitious said:


> If you're looking to use the funds as a downpayment in a couple of years I would not bother putting them into an RRSP, interest rates are so low that the amount of income you will defer will be extremely low. And then you're left paying back money into your RRSP from the Homebuyer's Plan in addition to mortgage payments. I personally don't think the amount makes it worth it...


Depends on his tax rate now, and his expected future tax rate. Using the HBP can be an effective form of tax arbitrage if you contribute in a higher-bracket year, then take 1/15th of the withdrawn funds into income in a lower-bracket year - and that's without considering the time value of money, too, as all repayments are nominal.


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## Mike59

amacneil said:


> Thanks for the responses. I'm still a little confused.
> 
> If I'm receiving dividends which will total $80,000 this year, I understand my RRSP contribution room will not increase. However, I will have to pay some tax on the dividends, and I think I estimated it at $14,000. If I do contribute the money to an RRSP...your saying that I still have to pay the $14,000 , and not say....$6000-$7000...
> I can only get the tax benefit when in years which I draw salary?


I think there may be an error in your favor...

Double check your tax calculations, but with $80k in dividends (assuming from a CCPC), you're looking at a gross up to $100k, but then tax credits that significantly lower the taxation. My calculation shows tax owing of: $6968 (total tax, federal and provincial). 

It should be even lower if this is an eligible dividend from a larger company.


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## amacneil

Thanks everyone for the responses, I understand it now!


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## OhGreatGuru

amacneil said:


> Thanks for the responses. I'm still a little confused.
> 
> If I'm receiving dividends which will total $80,000 this year, I understand my RRSP contribution room will not increase. However, I will have to pay some tax on the dividends, and I think I estimated it at $14,000. If I do contribute the money to an RRSP...your saying that I still have to pay the $14,000 , and not say....$6000-$7000...
> I can only get the tax benefit when in years which I draw salary?


As Stardancer points out, no.

You earn RRSP contribution room with employment income.
But contributions made to an RRSP are deductible from "Total Income", which includes Dividend Income.

As others have pointed out, you could contribute $60,000, and then deduct enough each year to either minimize or eliminate your taxes, until you have used up your deductions. Others have pointed out that, since CDN Dividends are already a pretty tax efficient form of income, it might not be the best strategy in your case.


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## Financial Cents

*$80 K in dividends?*

If you're receiving $80 K in dividends, why contribute to an RRSP at all?


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## patmanz

I am in the same boat, have some RRSP room left. Now only paying myself in dividends.

I decided to puts XBB in my RRSP and forget about it.


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