In 2017 my boyfriend and I bought a house. In order to make the down payment I sold most of my stocks and index funds and have a resulting capital gain. While obviously this is a great problem to have I don’t want to pay tax on it come April 2017 so I will make an offsetting RRSP contribution.
I am most concerned about the capital I incurred for the house. Dividends and a few sales here and there are a predictable part of my finances and taxes each year so I will leave them out of this calculation. My goal is to set off all the capital gains I incurred. Capital gains are taxed at 50% so I need to move half of the capital gains into my RRSP. And luckily I have enough room for that in my RRSP.
I have mixed feelings on my RRSP. There is a ton of math that you can do to convince you of weather to contribute to your RRSP or not but I try to keep my decision pretty simple. Will I make more income in retirement than I do now? When I first started working I only contributed so I could get employer matching. My rationale is that I would be making more during retirement so deferring taxes didn’t make sense. For this year I decided to contribute to my RRSP as my retirement income is very unlikely to be greater than 2017’s income. Therefore it makes sense to contribute to my RRSP and avoid the taxes now.
If you want to calculate the RRSP contribution you need to make to offset your capital gains keep reading
Figure out your tax efficient RRSP contribution:
Step 1: Find out how much your can contribute to your RRSP for 2017
- Find your 2016 notice of assessment (you get this in the mail or online after filing your taxes)
- The last page will have a section titled ‘RRSP/PRPP deduction limit statement’
- The final line will show your contribution room for 2017. It will read ‘Available contribution limit for 2017’
- This is the total amount you can deposit into your RRSP. Note: if the number is negative you have over contributed.
Step 2: Calculate your 2017 Capital gains
- Look at the 2017 history of each of your accounts
- Find the purchase price and the sold price – the difference is your capital gain
- If you bought the stocks/ETFs in another currency use the exchange rate at the date of purchase and sale
- If you bought your stocks/ETFs over days/weeks/years (which I highly recommend) you will need to find the adjusted cost base (ABC) or book value
- Add all your capital gains (when the sale price is greater than the purchase price) and subtract all your capital losses (sale price is less than the purchase price)
- Include any commissions you paid – for example if you paid $10 to buy your ETF add this to the purchase price and vise versa if you paid $10 to sell your ETF subtract it from the sale price
Step 3: Find money to move to your RRSP
- Now that you know how much you need to contribute how do you find the money
- I keep my RRSP contributions in a high interest savings account until I am ready to contribute them
- You can move money from a non-registered account into your RRSP.
- Move your money into your RRSP by March 1, 2018 to count for 2017. I plan to move all my money by mid-February at the latest so I have time to check it has moved and fix any problems
- Include your contribution in the right year on your taxes. RRSP contributions made in January and February can be counted in either the current year or the previous one. You need to make this clear in your taxes.
There is a lot of technical information about RRSPs and limits. For any numbers I always refer to the Canadian government – they make the rules so best to go to the source.
RRSP contributions are limited to the lesser of 18% of your income or a set limit ($26,010 for 2016).
RRSP, and other registered account, limits listed by year.
When you get to filing your taxes here is exactly how to enter your capital gains and losses.