I just did a web search on the topic. I found 18 articles all promoting the idea that this is a good idea. If they present any argument it boils down to (i) because a larger tax refund is better than a smaller one, and (ii) in the mean time your after-tax savings are growing with profits protected from tax. Only

**one site**posts a warning flag without any specifics. On this forum as well as other Canadian financial forums, this belief that you benefit from a delay has now become received wisdom. Is it true?

Example:

You have $1,000 in after-tax savings. You are now in the 33% tax bracket but expect to be in the next at 39% in 5 years. Your investments earn 8%, (or 6.68% after-tax assuming profits are half-taxed). Do you ...

(a) Stash the cash in a taxable account for 5 years?

$1,000 is invested for 5 years at 6.68% after-tax.

That grows to

**$1,382**

(b) Put the savings, plus the Contribution Credit into an RRSP normally?

$1,493 is put in an RRSP generating a tax reduction at 33% of $493.

That grows for 5 years at 8% to $2,193.

The withdrawal tax at 39% costs $855.

Leaving

**$1,338**

(c) Put the savings into an RRSP but delay claiming the refund for 5 years?

$1,000 is put in an RRSP without claiming any refund..

That grows for 5 years at 8% to $1,469.

The withdrawal tax at 39% costs $573.

The tax refund for the original $1,000 contribution is claimed at 39% = $390.

Leaving

**$1,286**

(d) Stash the cash in a TFSA for 5 years?

$1,000 is invested for 5 years at 8% after-tax.

That grows to

**$1,469**

The decision will always favour using a TFSA, because it offers the tax-free-profits without any penalties from rising tax rates. So lets assume you have no extra TFSA contribution room. The choice is between (a), (b) and (c). In this example the choice to contribute to the RRSP but delay claiming the tax deduction (c) was the WORST outcome. The received wisdom was wrong.

The reason the advice is wrong is because it fails to acknowledge the existence of a penalty that grows with a growing time delay in claiming the deduction. This penalty essentially equals the profits that are NOT earned by the Contribution Credit that is NOT received because the tax deduction was NOT claimed. You can get an understanding of this penalty on the

**RRSP Nitty Gritty**webpage and the 3rd video of this

**YouTube series**. You probably have to read/watch from the top to understand it though.

You can input your own variable assumptions into a

**worksheet**that models the (a), (b), (c) choices above. Use the 2nd tab. The decision choices are discussed at the

**Delay Claiming Tax Deduction**section. The conclusions of that modelling show that that ...

**The RRSP-delayed-deduction choice is NEVER the best option.**- It may SOMETIMES be better than using an RRSP normally, but in all those situations using the Taxable account gives better outcomes than either.
- If you don't have the option to use a Taxable account for the interim, then consider those limited possibilities in (4).
- The RRSP-delayed-deduction choice is only better than using the RRSP normally when the higher tax rate is realized relatively quickly.

.... If your income is within the Personal Exemption, then always delay claiming the deduction - which would pay you $0 anyway.

.....If in the 22.5% tax bracket only delay a maximum of 6 years.

.....If in the 33% or 39% tax bracket only delay a maximum of 3 years.

This is because the penalty from the delay grows with time, while the penalty from moving up one tax bracket stays static.