Working group looks at longer RRSP window

IFIC’s tax working group is considering lobbying the Department of Finance to move the RRSP contribution deadline to April in order to bring it closer to the filing date for tax returns, which is normally April 30 for individual taxpayers and June 15 for those who are self-employed.

Currently, to be tax deductible, RRSP contributions must be made in the taxation year or in the first 60 days of the current year. This year’s cutoff date was March 1.

The logic is bringing the cutoff forward will foster savings by allowing people to make RRSP contribution decisions after they know their full tax picture, Craig Webster, a partner at Borden Ladner Gervais LLP, told IFIC’s annual conference in Toronto last week.

The current system requires taxpayers to make, at best, an educated guess, and could be preventing some cash from being socked away. Moving the RRSP contribution date to April, by contrast, may allow taxpayers to calculate their tax picture and then know how much money they can free up for their RRSP.

Webster also noted that the T-4 distribution deadline is too close to the RRSP contribution deadline. The tight timing results in employees placing pressure on their companies’ accountants to prepare tax information more quickly. Worse, it prevents employees from using annual retirement plan contributions to reduce their own tax owing by putting money into a deductible RRSP prior to filing a return. Webster said this option could encourage further savings, “but they can’t do this if they don’t know that they have tax owing.”

Likewise, if a taxpayer knew a refund was en route, he or she could allocate that money for an RRSP contribution. Webster said the government has shown itself to be pro-savings, but that the level of receptivity by Ottawa will hinge on how much potential savings the plan could foster. He added the current low-interest rate environment means people have to start saving for retirement earlier, so a longer contribution window just makes sense.

There is, however, a potential downside for advisors. If the deadline is moved back, some clients may decide to allocate cash for their RRSPs that they might otherwise have put into stocks, mutual funds, or insurance. If that happens, advisors could lose some time with assets under management.

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com