Issues with RRSP contributions not fully deducted.

If you are wondering how come my RRSP contribution isn’t fully deducted? You have come to the right place. This article will show why the RRSP contribution is not being fully deducted on your personal tax return, and will also guide you to other personal tax tips which can help you save a fair amount of money.

So, without any further chit-chat, let’s get to answering the commonly asked, “How come my RRSP contribution isn’t fully deducted?”

Example in Case:
In order to answer this question we have a fictional client Jane Smith, who is a single mother of two and earned employment income from her company, during the year, for 20,000 dollars. Her CPP, EI and Income Tax, by the

way, has all properly been deducted and withheld at source, from her employment income.

She indicated that on her 2010 Notice of Assessment, she had a total RRSP deduction limit for 2011, for $15,000. She has also indicated to us that she had an RRSP contribution in 2011 for $5,000, and we go ahead and enter in that information in the RRSP deduction worksheet. Based on the slip, the issuer was WorldCorp, and contributions were paid during the year in an amount totalling $5,000.

Where does the Missing Money Go?
Hypothetically, if we go to the jacket of the return, we should see the $5,000 being deducted from her total income. However as we can see this is not the case. Only $2,973.25 is being deducted. In order to answer this question we get back to the RRSP deduction worksheet.

If we scroll down to the very bottom we notice there’s been a contribution deducted amount for the amount that we previously saw. This is the amount that is needed to bring down the Net Federal Tax to Zero dollars.

As you notice, the total income has been reduced down to $17,026.75, which is the amount that lets her total net federal tax and other taxes equals $0.00; meaning that at the end of the year she’ll get a refund of the $2,000 that were withheld by her employer.

Deducting the Entire Amount (Personal Tax Tips):
Here’s one of the best personal tax tips in this regard. Let’s go ahead and say Jane wanted to deduct the full $5,000. In order to do this we go back to the RRSP worksheet and in this amount we input $5,000, and now if we go back to the jacket we will notice that she is still only getting a refund of two thousand dollars.

The Difference:
The difference between doing it this way and the way that it was originally with $2,973.25, is that when we use the lower amount the $2,973.25 we also have another benefit; the un-deducted contributions which may be carried forward. This amount will be able to deduct on the 2012 tax return without having to make any further contributions, in Jane’s RRSP.

The Bottom-Line:
What this means basically is that the $5,000 will be fully utilized in both years tax to maximize the amount of benefit we derive from the contribution. If we once again change the number to $5,000, we’ll notice that the carry forward amount is now reduced to ‘0’ and we lose that benefit that we’d have next year, and still end up getting the same $2,000.

The calculations for the contributions deducted in 2011 are usually automatically calculated by the tax preparation program that you’re using. If this is not the case with yours, then you can go through a series of trial and errors to find out what the highest refund or lowest tax payable you will get with the correct combination of RRSP contributions deducted, as well as the contributions you’ll carry forward.

This, we hope, has answered your question, “How come my RRSP contribution isn’t fully deducted,” and for more personal tax tips and tricks, do visit our website at madanca.com.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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