by Gordon Pape
Anyone who withdrew money from a RRIF, LIF, or LRIF last year can recontribute a portion of the money and claim a tax deduction.
Believe it or not, there's still time to reduce your tax bill for 2008 if you received income from a RRIF or similar plan last year. In some cases, you may be able to knock thousands of dollars off your tax payable.
You may recall that back in December Finance Minister Jim Flaherty responded to pressure from the Canadian Association of Retired Persons and other groups representing seniors by announcing a one-time only reduction of 25% in the minimum RRIF withdrawal requirement. However, because the announcement came so late, financial institutions had trouble retooling their software to reflect the reduction and few people were able to take advantage of it.
As a result, the government decided to allow people to repay up to 25% of their 2008 RRIF minimum withdrawal and claim a tax deduction for that amount. This has never happened before - normally no new money can be contributed to a RRIF - and it may never happen again. So this is probably a once-in-a-lifetime opportunity.
And there is still time to take advantage of it, if you move quickly. Because of the tight time frame, the legislation allowed for recontributions to be made up to 30 days after the law was approved by Parliament. That happened on March 12. Since April 12 is Easter and April 13 is a holiday that means you have until April 14 to put money back into your RRIF.
Here's how it works. Suppose your normal minimum withdrawal requirement in 2008 was $20,000. But the 25% reduction means you only had to take out $15,000. If you withdrew the full $20,000, you can recontribute $5,000 to the plan before April 14 and deduct that from your taxable income. (Note that any withdrawals above the minimum are not eligible for this treatment.)
Because the recontribution will be treated as a deduction, those in the higher tax brackets will get the biggest break. For example, an Ontario taxpayer in the highest bracket had a marginal tax rate of 46.41% in 2008. So a $5,000 RRIF repayment would reduce that person's tax payable by $2,320.50. However, someone with taxable income of only $25,000 would have a marginal rate of 21.05% so that same $5,000 repayment would only produce tax relief of $1,052.50. So do the math before deciding whether you want to take advantage of this opportunity.
You can make the payment to your RRIF or to an RRSP if you are still eligible to have one (e.g. under age 72). However, the two brokerage firms I deal with (RBC Dominion Securities and CIBC Wood Gundy) both said that recontributions could not be made directly to locked-in plans such as LIFs and LRIFs. Anyone who does business with those firms and received payments from a locked-in plan would have to recontribute to a regular RRIF or an RRSP. This appears to be an administrative problem rather than a legal one. A document published on the Canada Revenue Agency website states: "This amount can be re-contributed to any of the annuitant’s RRIFs, life income funds or other locked-in RRIFs". (http://www.cra-arc.gc.ca/E/pub/xi/08-121/08-121-e.pdf)
If you made withdrawals from a locked-in plan and want to recontribute, check with your broker or financial institution for their policy in this regard. Time is short so any delay in processing could cost you dearly.
You'll find more details on the CRA website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrif-feer/q-eng.html and at http://www.cra-arc.gc.ca/whtsnw/tms/rrf-fq-eng.html
Gordon Pape's latest book is Tax-Free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich. Buy your copy at 27% off the suggested retail price by going to http://astore.amazon.ca/buildicaquizm-20