Unlike the tax year for personal returns that runs from January 1st to December 31st, the RRSP contribution year is not a calendar period.
In this short post, you’ll learn about the contribution year, why it is important to understand it and how it affects your contributions.
What is the RRSP contribution year?
The RRSP contribution year is the period that starts on the 61st day of a year and ends on the 60th of the following year.
But there are a few rules to note.
If the 60th day ends on a weekend, the contribution year will end on the following business day. And the new contribution year starts on the next day after the first business day.
Let’s illustrate with the 2020 contribution year
The 60th day of 2020 was February 29th but the date fell on a Saturday. So the last day for the 2019 contribution year was Monday, March 2nd, 2020 – the next business day.
Tuesday, March 3rd , 2020 then becomes the start of the 2020 contribution year that ends on the 60th day of 2021 – March 1st, 2021.
The end of an RRSP contribution year is the RRSP deadline – the last day you can contribute to your RRSP to claim the deduction on your tax returns.
RRSP Contribution Periods
RRSP contribution year is made up of 2 contribution periods:
- 1st contribution period covers the last 10 months of a year (March to December)
- 2nd Contribution period starts January 1st and ends on the 60th day of the year.
Normally, the 60th day of the year is March 1st except for leap years when it is February 29th. But if the dates fall on Saturday or Sunday, the next business day will be used instead.
Effectively, we always know the end of the first contribution period (December 31st) and the beginning of the second one (January 1st). But the 2 other ends vary from year to year.
Your RRSP provider would provide you with tax slips covering each contribution period and also report your contributions to CRA.
Why is it important to understand RRSP contribution year?
Understanding how the RRSP contribution year works can save you from having to deal with penalties for RRSP over-contributions.
The important thing to note is that any contributions made during the first 60 days of the year will count towards the previous year’s RRSP deduction limit – not the current.
Here is an example:
Sam’s available contribution room for 2020 was $12,000. He made a series of contributions through out 2020 totaling $11,000. In January, he received a cash bonus of $7,000 from his employer and decided to contribute the entire amount to his RRSP account with Questrade.
Going into the second contribution period, he only has $1,000 available contribution room. By contribution $7,000, he has exceeded his RRSP contribution limit by $6,000.
But CRA allows an excess contribution buffer of $2,000 so the 1% per month penalty will be due on only $4,000.
In his 2020 tax returns, he can only deduct $12,000 and not the total contribution of $18,000.
RRSP Contribution Period Vs TFSA Contribution Period
Unlike an RRSP, TFSA contribution period is a calendar year. It starts on January 1st and ends on December 31st every year.
You’ll automatically get the annual TFSA dollar limit on January 1st – no tax filing required. So any contributions you make from that date starts counting towards your available contribution room.
I hope you have a better understanding of the RRSP contribution year and how it affects the RRSP deadline.
You can check the other posts below to learn more about RRSP, the contribution limits and deduction limits.