Depending on the size of your book, it’s possible you have at least one or two clients who turned 71 in 2023, and, hopefully, by now you’ve already taken steps to convert their RRSP into a RRIF or, in some cases, purchase a registered annuity.
But, before 2023 comes to an end, it’s important to remind you of two final planning points when it comes to your 71-year-old clients: the deadline for making that final RRSP contribution, and the possibility of a one-time deliberate overcontribution in 2023.
The deadline
As advisors, we’re conditioned to remind our clients annually that the RRSP deadline, by which we mean the deadline to make an RRSP contribution in order to be entitled to claim that deduction on the 2023 tax return, is sixty days following the end of the year. So, to be able to claim your RRSP contribution on your 2023 return, you would need to make an RRSP contribution by Feb. 29, 2024.
But clients who turned 71 in 2023 don’t have the extra sixty days this year. They must make that final contribution by Dec. 31, as they can’t have an RRSP next year. Of course, if they have a younger spouse or partner and are using a spousal RRSP, then the normal Feb. 29 deadline still applies.
Deliberate overcontribution
The other planning idea is for clients who turned 71 in 2023 (assuming there’s no younger spouse or partner) and still have earned income in 2023. In these cases, it may be beneficial for them to make a one-time deliberate overcontribution to their RRSP in December 2023, before it’s converted to a RRIF.
That’s because earned income, such as (self-)employment or rental income, in 2023 will generate RRSP contribution room for 2024. Since they can’t contribute next year, they make that contribution in December 2023. While they will face a penalty tax of 1% on the overcontribution (above the $2,000 permitted overcontribution limit) for December 2023, their new RRSP room will open up on Jan. 1, 2024, so the penalty tax will cease in January 2024. The client can then choose to deduct the overcontributed amount on their 2024 (or a future year’s) return.
For example, say Julie turned 71 in 2023 and has two rental properties that generated, in total, $100,000 of rental income in 2023. This will create 2024 RRSP room of $18,000. If she contributes this $18,000 in December 2023, just prior to converting the RRSP to a RRIF, there will be one month of penalty tax in 2023 of $160 [($18,000 – $2,000) × 1%], which will cease in January 2024 when her new RRSP room opens up. Julie can then deduct the $18,000 RRSP contribution against her 2024 rental income or any other 2024 (or future year’s) income.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.