Weekly Tax Tip - Remember to collapse your RRSP if you will turn 71 this year

September 2017

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You can’t have an RRSP past December 31, 2017 if you’re 71 or older at year-end. So, prior to December 31, 2017, you must collapse your RRSP and pay tax on the fair market value of the plan’s assets at that time, purchase an annuity or transfer your RRSP assets to a RRIF. No tax is paid at the time of the purchase of an annuity or at the time of a conversion to a RRIF.

If you will generate RRSP contribution room for 2018 because you have earned income in 2017, but you have to collapse your RRSP before the end of 2017, consider making an overcontribution to your RRSP in December, immediately before collapsing it. The amount of the overcontribution should equal $2,000 plus the 2018 contribution limit. A 1% penalty tax on the overcontribution in excess of $2,000 will apply for December 2017 — however, this will end on January 1, 2018 when the new contribution room becomes effective. The basic $2,000 overcontribution will become deductible when you generate additional RRSP room in the future and will never attract the 1% overcontribution penalty tax. If you won’t have earned income after 2017, then you may not want to make an overcontribution. Ask your BDO advisor if this type of planning makes sense for you.

If you must collapse your RRSP this year, you can still contribute to your spouse’s RRSP if you have contribution room and your spouse has not reached age 71 by December 31, 2017. This is an excellent way to build up your spouse’s RRSP.

This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of September 11, 2017.