Reader Mike has a question on withdrawing a recent contribution from his RRSP:

On the morning of March 1st, I contributed an extra $3500 to my TD eFunds RRSP account. However, for some reason it didn’t go through until March 2nd. So, I will not get the tax savings for tax year 2006. How annoying!

Considering that I parked the whole $3500 in a Money Market fund (due to my thought that there’s too much market risk right now), does it make sense for me to redeem the $3500 and put it on my mortgage (5.1% rate)? My thinking is that when I do my 2007 taxes, the extra tax for $3500 RRSP redemption will be exactly offset by the $3500 contribution, right?

Or do I have to pay the tax on the $3500 immediately, at time of redemption?

I am not sure about your exact situation but there are two problems with your strategy:

  1. Withholding taxes: As each withdrawal of up to $5,000 will attract a withholding tax (16% provincial tax and 5% federal tax in Quebec and 10% tax in the rest of Canada), you’ll be left with $3,150. You are correct that the $3,500 contribution for 2007 and the $3,500 withdrawal, which is treated as income, will offset exactly.
  2. Lost contribution room: The bigger problem is that $3,500 of your contribution room is lost forever.

While it is annoying that you have to wait almost an year for your refund, your strategy sounds like a lot of hassle to save, at best, a hundred dollars or so. Also, I am not a tax expert but you might be able to get a tax refund in the current year by submitting a request to reduce tax deduction at source with the CRA. Hopefully, our knowledgeable readers will have more comments on your question.

This article has 9 comments

  1. (From a different Mike)

    Mike have you called TD and see if they can backdate the depositdate of the contribution? It’s pretty common for mutual fund companies/brokerages to do this even if they don’t get the money for a contribution by Mar 1. As long as the rep got the money by Mar 1 that’s good enough. In your case you should be able to prove you transferred it on the 1st. Call tomorrow!

    If that doesn’t work then bite the bullet and just wait until next year for your return.

    Maybe you can shoot for Feb 29 next year instead of the 1st?

  2. “On the morning of March 1st, I contributed an extra $3500 to my TD eFunds RRSP account. However, for some reason it didn’t go through until March 2nd.”

    That was the problem. They need one business day to make a transaction. So you needed to make your transaction the day before. You placed your order on March 1st for the 2nd at the market close. It is clearly posted. It has caught me once as well.

  3. Don’t forget the bank will usually charge a withdrawal fee as well.

  4. @Mike
    Thanks for the recommendation to call them (I had half-heartedly planned on doing so but your comment helped convince me). After 15 minutes on hold I talked to them and they said they would send the tax receipt for this year! So no worries.

    Even though the payment from my account is dated March 2, they are going to honour the March 1 contribution date.

    CC, thanks for answering this question for me.

  5. This goes back to the concept of “you can bargain with everyone, especially banks”. Banks will listen to any suggestion, they might say NO, but they will listen. If your phone call had not worked, I would have suggested going to a branch and talking to a real human being next!

    Good on you! Remember, persistance pays off! –C8j

  6. Canadian Capitalist

    Mike, I am glad Mike’s suggestion worked for you. I didn’t realize mutual fund companies will backdate a contribution. I learnt something new today 🙂

  7. It’s amazing what you can get down with the banks if you call and ask someone.

    I’ve personally had Visa payments backdated to avoid interest fees and it showing up on my credit rating.

    My wife also got a deal on an extra DRIP share that ended up in her account. She got the normal trading fee reduced down to 50% for that single share trade.

    CD

  8. Wow, I’m really happy my comment made a difference.

  9. If i was him, i would call first thing tommorow morrning but wait to fill out any forms in person. i would also fax all pages of documents together rather than as several faxes.