We are getting close to the March 1 deadline for your RRSP contribution, so it’s time to share some of my best strategies to save money on taxes.

File tax returns for children

Here in Alberta, where there is a labour shortage, I am constantly surprised by how young some employees are. Parents of a child under age 18 who is legally employed often do not file a tax return for him or her because the income is below the tax threshold. But one advantage of filing a return for income-earning children is that even though they won’t have to pay tax, they can start to build RRSP contribution room early, which can be saved up to use at a later date and in a higher tax bracket. By the time they enter the adult working world, they will have a head start on how much they can put into a tax-sheltered RRSP.

Save contribution room

Many people make their RRSP contribution at the last minute to save money on taxes now. However, it is important to be aware of situations where saving the deduction for later may be a better strategy. Consider Peter, who owns his own company and is enjoying a growing income. Because he has extra cash flow, he is able to catch up on unused RRSP room and maximize his plan by contributing $20,000. His income in 2006 was $82,000 after expenses, putting him in a 36-per-cent marginal tax rate. Deducting the entire $20,000 would bring his income down to $62,000 — well below the tax bracket cutoff at $72,756, which means that about half the contribution would produce a 36-per-cent tax savings, and the other half would only get a 32-per-cent tax savings.

Because Peter expects to earn more than $82,000 in 2007, he is better off deducting only $10,000 of his $20,000 RRSP contribution in 2006 and saving the rest for the 2007 tax year. This way, he gets a 36-per-cent deduction on the $10,000 worth of contribution room he has saved, compared with the 32-per-cent deduction he would have earned if he used the entire $20,000 in one tax year.

Lower tax deductions at source

A growing number of people like to get ahead of the game, making their 2007 RRSP contributions early or making monthly investments. If you are in this group, consider applying to have less tax deducted at source. Otherwise, if you contribute early and get a tax refund at the end of the tax year, you are giving the government an interest-free loan during the year. Although it’s nice to get a fat tax refund, it really represents an overpayment of tax, which is not a smart financial strategy. You can apply to have less tax deducted at source using the CRA T1213 form. Once the government approves the form, it will send a letter you can give to your employer that will result in getting your tax refund with every paycheque, instead of a lump sum after you file your tax return.

Pension income tax credit

If you are at least 65 and do not have pension income from your employer, you should take advantage of the $2,000 Pension Income Tax Credit. This credit essentially allows you to make a tax-free withdrawal of $2,000 a year from your RRSP. Even if you don’t need the money, getting it out tax-free is the ideal situation. There are two ways to structure your RRSPs to qualify for the Pension Income Tax Credit. One way is to roll over part or all of your RRSP into a RRIF to generate a minimum $2,000 per year of income. Another option is to roll over enough money into an annuity that will generate $2,000 in annual income. For example, a 65-year-old male would need to move about $27,400 into an annuity to generate $2,000 a year in income.

Put low-interest assets in plan

I run into many investors who have their RRSPs in higher-risk equity-based investments because their plans are longer-term investments. But they also have savings outside their RRSP in GICs, savings accounts or bonds. If this is your situation, consider swapping your investments. Consider holding GICs and savings inside the RRSP, because they generate inefficient taxable-interest income, but hold any equity mutual funds outside the plan, because they are much more tax-efficient by generating investment income in the form of dividends and capital gains.

Make one final contribution

By the end of the year in which you turn 69, you are required to convert your RRSP to a registered retirement income fund if you want to keep deferring tax. If you earn income during that year, you will end up with RRSP contribution room for your next year’s tax return, when you are 70, but you won’t have an RRSP to contribute to. So you may want to consider making that next year’s contribution in December, when you are 69, just before that conversion deadline. The penalty for the resulting “over-contribution” will be 1 per cent, per month. But, as of Jan. 1, your over-contribution disappears and you will get a tax deduction on your next year’s tax return. That 1-per-cent penalty can be worth it when you offset it against the resulting tax deduction.

Remember, you don’t have a 60-day grace period with your final RRSP contribution. You have to make that final RRSP contribution by Dec. 31 of the year in which you turn 69, not March 1 of the following year.

Borrow to buy RRSPs

At the end of 2006, Statistics Canada reported that Canadians had $437-billion worth of unused RRSP contribution room. “People with huge amounts of unused RRSP contribution room should think about borrowing to use up some of their contribution room,” says financial adviser Darrell Starrie of Strategic Financial in Edmonton. Canadian demographics suggest a lot of money will be passing down between generations, he says, and the government may grow concerned that some of this inheritance money will end up in RRSP contributions. “It would not take much for the government to change the rules and take this unused portion away,” he notes. With current low interest rates, considering borrowing money to fill unused space in your plan.

James Yih is an Edmonton-based financial adviser and author of Mutual Fundamentals and Seven Strategies to Guarantee Your Investments.