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tax matters

Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.

We all make mistakes. I think about Joseph O'Callaghan, who robbed the guard of an armoured car in 2011. He stole the guard's cash box, was caught, and was sentenced to nine years in prison by a court in Belfast. As it turns out, the box contained no money because Mr. O'Callaghan stole it while the guard was on his way into the bank, not on his way out.

I'm not sure what the greater mistake was: Stealing an empty box, or getting caught. Rookie mistakes, for sure.

Canadians often make "rookie mistakes" when it comes to their registered retirement savings plans (RRSPs). Now that 2014 has arrived, many are turning their attention to RRSPs since the 2013 contribution deadline is March 1, 2014 – not far off. Because March 1 falls on a Saturday, Canadians have until March 3 to make a contribution this year.

Making mistakes can cost you thousands if you're not careful. Today, I want to share some common mistakes to avoid when it comes to your RRSP.

Mistake No. 1

Consider Jack. Jack sold some stocks at a profit in 2013 and decided that he'd like to offset these capital gains.

So, Jack identified some investments in his portfolio that have dropped in value, and he plans to transfer those to his RRSP as a contribution in-kind.

His thinking is that this transfer will trigger the capital losses on those investments, and an RRSP deduction to boot, which would then offset all the tax on his capital gains.

The problem? If you transfer an investment directly to your RRSP, it's considered to be a disposition at fair market value, but any losses on the transfer will be denied.

Jack should, instead, sell the losers on the open market, then contribute the cash to his RRSP. This will provide him with both capital losses he can use and an RRSP deduction.

By the way, the capital losses in this case will be realized in 2014 (not 2013), but he'll be able to carry those losses back to 2013 when he files his 2014 tax return next year.

He'll be able to claim an RRSP deduction in 2013, however, provided he makes a contribution within his contribution limits on or before March 3, 2014.

Mistake No. 2

Janice's husband contributed $30,000 to a spousal RRSP for Janice in 2011 and 2012.The investments in that RRSP declined in value to just $5,000 by mid-2013.

In order to simplify her life and eliminate this smaller spousal RRSP account, Janice decided to combine this spousal RRSP with her own RRSP to which she contributes each year. Since Janice was not working in 2013, she then decided to withdraw $20,000 from her RRSP to supplement her income.

The problem? When you combine spousal RRSP dollars with regular RRSP dollars, the entire plan becomes a spousal RRSP subject to the rules around spousal plans (most notably, any withdrawals from a spousal plan can be taxed in the hands of the contributing spouse to the extent that spouse made contributions in the year of the withdrawal or the preceding two years).

The result is that the full $20,000 Janice withdrew from her RRSP will be taxed in the hands of her husband, who is in the highest tax bracket.


Janice should have avoided combining her spousal and regular RRSPs. Then she, and not her husband, would have paid tax on withdrawals from her regular RRSP.

As an aside, you can avoid this "tainting" of your regular RRSP when combining spousal and regular RRSP assets in the case of a separation or divorce.

Mistake No. 3

Michael and his wife, Marnie, are saving for retirement. Marnie has significant unused RRSP contribution room, but has no cash to make contributions. Michael, on the other hand, does have some cash, so he plans to give Marnie $50,000 so that she can contribute to her RRSP before the March 3 deadline.

The problem is that Michael could face tax on all or part of the withdrawals that Marnie makes from her RRSP later. How so? The Canada Revenue Agency has said that an RRSP is considered to be "property" under our tax law. Therefore, any withdrawals from an RRSP are considered to be "income from property."

The attribution rules found in subsection 74.1(1) of our tax law apply to income from property and will attribute that income back to the spouse who gave the cash to acquire the property. Michael would be better to contribute to a spousal plan for Marnie, or lend her the money at the prescribed rate (currently 1 per cent) to avoid this attribution.

The original newspaper version of this story stated that the RRSP deadline is March 1, 2014. This online story has been corrected to explain that because March 1 falls on a Saturday, Canadians have until March 3 to make a contribution this year.