What is an RRSP?
A registered Retirement Savings Plan is a government approved plan through which
you save money for your retirement years. Your contributions, within limits, are tax
deductible, and the income earned is tax sheltered. You can have any number of plans.
What Happens at Retirement?
The first stage of an RRSP is to accumulate retirement savings. The next stage is to
provide retirement income. Your accumulated savings may be invested in a variety of
options to provide a retirement income which can continue for life or to age 90. Only the
retirement income payments are taxed each year as you receive them, thus spreading the
taxation of your accumulated savings over your retirement years.
Who is Eligible to Contribute?
Anyone with “earned income” subject to Canadian taxation, including non-residents, may
contribute to an RRSP. Even if you are not taxable, you should file a tax return to report
your earned income and create RRSP deduction room.
You can make part or all of any contribution to a plan in your spouse’s or common-
law partner’s name. You, as the contributor, are still entitled to the tax deduction.
Contributions can be made until the end of the year in which the planholder’s 71st
birthday occurs.
An over-contribution (see page 9) can be carried forward beyond this year and
deducted in subsequent years providing you have earned income on which to base
the deduction.
Definitions of Spouse/Common-law Partner
Income tax legislation defines the term “spouse” to be a person who is party to a legal
marriage.
The term ‘common-law partner’ is defined as two persons, regardless of sex, who cohabit
in a conjugal relationship and who have cohabited in a conjugal relationship and who
have cohabited throughout the 12 month period that ends at that time. This period can
be less than 12 months if both partners are the natural or adoptive parents of the same
child, or if one common-law partner has a child who is wholly dependent on the other for
support and over whom the others has custody.
The term “common-law partner” does not apply if at the particular time the individuals
were separated for 90 days or more due to a breakdown of the conjugal relationship.
What is Earned Income?
Your RRSP deduction is based on your prior years’s earned income. The following
qualify as earned income:
- Salary, wages, bonuses and taxable fringe benefits (minus union or professional dues and employment claimed as deductions)
- taxable wage loss replacement or long-term disability income resulting from employment
- Canada Pension Plan disability benefits
- Amounts received under the Wage Earner Protection Program Act
- Net income from self-employment (minus current year business losses)
- Net rental income from real estate (minus current year rental losses)
- Taxable alimony or maintenance payments received
- Royalties of an author or inventor
- Net research grants
Notes:
1. Earned income must be reduced by deductible alimony or maintenance payments.
2. Interest, dividend, capital gains income and E.I. benefits, do not qualify as earned income.
3. Income which is not taxed, such as Worker’s Compensation and welfare benefits, cannot be used as
earned income.
A worksheet is provided on page 38 of this booklet to assist you in calculating your
earned income. CRA also provides a form for the calculation of earned income in its
Guide T4040 RRSPs and Other Registered Plans for Retirement.
RRSP Deduction Limits
Your notice of Assessment from CRA, received after filing tax return, will state your
RRSP deduction limit for the following year. At certain times of the year you can also
phone the CRA TIPS line listed in your telephone directory to confirm your deduction
limit. The calculation of the amount will depend on whether you are a member of a
pension plan, and if you are the type of pension plan.
Your RRSP deduction limit(preceding paragraph) does not include special transfers to
your RRSP. (see Special Transfers to your RRSP)
NOTE: The amount of RRSP contributions you can deduct from your income (“RRSP deduction limit”)
may be less than the amount you can contribute (see Over-contributions). Employer contributions made to
an RRSP on your behalf from part of your RRSP contribution.
insert worksheet on page 38 to calculate your deduction limit.
Caution: Before making any RRSP deduction make sure you will still be fully utilizing your
available tax credits for the year.
Maximum Deduction
The maximum RRSP contribution you may deduct for the current year is:
• 18% of your earned income for the prior year, up to the maximum amount
for the current year; MINUS your ‘Pension Adjustment”(PA)* for the prior
year and “Past Service Pension Adjustment” (PSPA)** PLUS Your “Pension
Adjustment Reversal” (PAR)***
After 2013, this amount will be indexed by the average increase in industrial wages as
published by Statistics Canada.
* Your PA for the prior year should be on your T4 slips for that year. It reflects the value of future
benefits arising from membership in a registered pension plan (RPP) or deferred profit sharing plan
(DPSP).
If you were not a member of a RPP or DPSP, in respect to the prior year your PA is zero. If you were a
member of a “money purchase” RPP or a DPSP, the PA is the total contributions to the RPP or DPSP, in
respect to the prior year by you, or on your behalf by your employer, union, etc. If you were a member of
a “defined benefit” RPP, the PA is determined by a complex formula. You may wish to ask your employer
how it is calculated.
** Uncertified PSPA, or an upgrade to a pension plan, affects RRSP deduction limits o for the following
year. “Certified PSPA”, or a pension buyback for an individual, affects the year of buyback or the year the
information is sent to CRA.
*** A Pension Adjustment Reversal (PAR) may arise if you are a member of a defined benefit RPP and the
pension is not vested when you terminate your employment.
The greater the future benefits provided by your pension plan, the less you will be able
to deduct as RRSP contributions. This addresses the main objective of the Retirement
Savings legislation- to create equality in the tax sheltered retirement benefits available to
all taxpayers, regardless of their type of pension plan, or whether they are self-employed,
or employed but have no pension plan.
Special Transfers to Your RRSP
In addition to your RRSP deduction limit, there are a number of special deposits you can
make to your RRSPs.
Lump Sum Transfers
You can transfer lump sums DIRECTLY from a Registered Pension Plan or a Deferred
Profit Sharing Plan (DPSP) to your RRSP.
You can transfer amounts DIRECTLY from another of your RRSPs or from your RRIF
to your RRSP.
The Income Tax Act allows you to transfer your RRSP tax free between issuers at any
time. However, if your RRSP investments are non-redeemable, the issuer may not permit
a transfer until the term expires. The transfer must be made directly from one issuer to
the other.
RRIF Payments in Excess of Minimum
Until the end of the calendar year in which you turn 71, you can transfer DIRECTLY to
an RRSP in your own name up to 100% of any payment from your RRIF in excess of
the mandatory minimum payment amount for the year. CRA form T2030 can be used for
this purpose. The RRIF carrier must provide a T4RIF to report the amount transferred
from your RRIF and the RRSP issuer must provide an Official Receipt for the amout
transferred to your RRSP.
Retiring Allowances
A retiring allowance is a lump sum or sums paid to you by your employer, at or after termination, in recognition of your loss of employment. Accumulated sick leave credits paid qualify under this definition, but holiday pay, death benefits do not. The portion of a retiring allowance eligible for sheltering in your own RRSP can either be transferred directly (no income tax deducted), or up to 100% can be contributed in the year of receipt or within 60 days thereafter. No portion of retiring allowance can go an RRSP in your spouse’s name.
The maximum retiring allowance which can be sheltered is:
- $2,000 for each full or partial calendar year of service with your current employer prior to 1996, plus
- An additional $1,500 for each full or partial calendar year of service prior to 1989 with your current employer, in which you were not a member of a pension plan or DPSP, or years for which your employer’s contributions to such plans have not vested in you.
- The transfer of a retiring allowance to an RRSP does not affect your RRSP deduction limit for that year.
RESP Accumulated Income
Provided the RESP subscriber has sufficient RRSP contribution room and is a Canadian
resident, she/he can transfer up to $50,000 of accumulated income from an RESP to an
RRSP in the name of the subscriber or to a spousal RRSP in the name of the subscriber’s
spouse.
Any of the following conditions must be met:
- The RESP must have been in existence for at least 10*years and all beneficiaries of the Plan are deceased, or all living individuals who are or were beneficiaries under the RESP have attained the age of 21 years and are not pursuing post- secondary education, or
- The payment must be made in the 35th year following the year the plan was entered into, or
- Each individual who was a beneficiary under the Plan must be deceased when the payment is made.
Only amounts transferred within the subscribers RRSP deduction limit and deducted in that year will avoid taxation.
There is a special 20% surtax on excess accumulated income withdrawn by the subscriber.
* The “10 year” and “age 21” rules maybe waived in special circumstances.
Contributing to RRSP’S in Your Spouse’s Name
– the term spouse in the locked-in pension information also includes other individuals who have been given
similar rights under applicable pension legislation
– reference to spousal plan includes common-law partner plan.
Part or all of your RRSP deduction limit can be contributed to RRSP’s for your spouse
Any amounts you contribute to RRSP’s for your spouse are subject to an attribution
period.
To set up a spousal RRSP, your spouse applies for a plan in his or her name, even though
your spouse may not have any earned income. Although you make the contributions to
the plan, the assets of the plan belong to your spouse.
Even if you are over 71, you can contribute to an RRSP for your spouse until the end of
the calendar year in which your spouse turns 71.
If your spouse also wishes to contribute to an RRSP based on his or her own income, a
plan separate from the spousal plan is strongly recommended.
One final note – having RRSP fund in both spouses’names will ensure that both of you
can qualify for the pension income credit by age 65
Removal of Contributor Detail Following Breakdown of Marriage/Common-law
Partnership
CRA will permit the removal of the contributor detail following relationship breakdown.
You must request the removal of the contributor’s name on your RRSP contract. In
addition, you are required to provide written confirmation that:
- you are no longer living with the contributor due to relationship breakdown;
- there were no spousal contributions made to any spousal RRSP in the calendar year you are making the request, nor in the two immediately preceding calendar years; and
- you have not withdrawn funds from the particular RRSP in the current calendar year.
Carry Forward Unused Deduction Room
If you don’t claim your maximum RRSP deduction, you can carry forward the unused
deduction room indefinitely. This applies whether or not you actually make contribution.
Your Notice of Assessment from CRA records any cumulative deduction room in
determining your maximum RRSP deduction for the current year.
If you don’t have the cash to contribute now, you can make larger catch-up contributions
in future years when you have the cash available. But remember, you maximize your
retirement savings by making each RRSP contribution as early as possible.
Carry Forward of Undeducted Contributions
If you have the cash to contribute now, but expect your income to be taxed at a higher
rate in the future, you can contribute now and claim the deduction in a future year or
years. This strategy is not penalized as an over-contribution as long as your contributions
are within your deduction room. And it has the advantage of tax-sheltering the earnings
on your contribution.
The official tax receipt should be filled with your tax return in the year of contribution,
even if not deducted, the amount reported on Schedule 7 of your tax return.
Contribution Deadline
You may contribute at any time during the year. Contributions made during the first 60 days of any year maybe deducted for the current or the immediately preceding taxation year.
CRA has confirmed that if the last day of the 60-day period falls on a Saturday or
Sunday, the deadline will be extended to the following Monday.
If you are contributing by mail, your application and/or deposit must be received by the
plan issuer on or before the contribution deadline.
Over-contributions
Over-contributions are contributions that exceed your deduction room. An over-
contribution of up to $2,000 can be made by an individual who was 18 years of age or
over in the prior year, and can be carried forward indefinitely.
If you make contributions which increase your over-contribution above $2,000,you will
pay 1% penalty tax per month on the amount in excess of $2,000.
Non-voluntary (normally employer) contributions to group RRSP’s based on current
earnings are not taken into account until after the end of the year which they are made.
At that time, your additional deduction room for the current year will reduce the excess.
Any excess contribution you cannot deduct may be refunded without additional taxation.
You must receive a refund subject to the above penalty in the year you over-contributed,
in the year the Notice of Assessment for that year is issued, or in the following year.
However, if CRA can prove that at the time you made the contribution you had no
reasonable prospect of being able to deduct it for that year or for the prior year, and that
you made part or all of the contribution with the intent of withdrawing it tax-free, they
can deem the refund of the over-contribution to be taxable to you. Therefore you should
not intentionally make an over-contribution unless you are sure you will be able to
use it as your RRSP deduction in one or more future year, based on earned income.
You can carry forward an over-contribution beyond the year in which you turn 71. You
can deduct part or all of it in any subsequent year within your deduction limit.
Can You Borrow for an RRSP?
Yes, but you cannot deduct interest on money you borrow to contribute to an RRSP. You
should not use an RRSP as security for a loan. If you do, you could be taxed on the value
of the plan.
Who Sells RRSPs/RRIFs?
Credit unions, trust companies, life insurance, mutual fund companies, banks
and investment dealers all sell RRSPs/RRIFs(including locked-in plans such as
LIRA,LIF,etc.) While all RRSPs/RRIFs provide the same tax deduction, not all plans
are the same. each issuer/carrier offers one or more ways to invest your money, and the
growth rates, terms, conditions and fees vary.
How Safe are RRSP/RRIF Investments?
Before you invest in any RRSP/RRIF, ask about deposit insurance protection. There is
no insurance on mutual funds, nor on most investments commonly held in self directed
RRSPs/RRIFs.
Creditor Protection
In addition to RRSPs issued by insurance companies, there are a number of other options
available to provide creditor protection of RRSPs and RRIFs held with other financial
institutions.
- Federal legislation
The Bankruptcy and Insolvency Act protects bankrupt individual’s RRSPs and RRIFs
from creditors. To prevent abuse, RRSP contributions made in the 12-month period prior
to bankruptcy will not be protected.
It is important to note that this legislation will not prevent creditors in most provinces
from claiming against RRSP and RRIF funds in cases where the annuitant has not filed
for bankruptcy.
- Provincial legislation
The Manitoba Registered Retirement Savings Protection Act provides protection of RRSP/
RRIF funds, held by annuitants residing in Manitoba, from creditors with the exception
of enforcement under The Family Property Act or The Family Maintenance Act.
Enforcement in process prior to November 1, 2007, is not protected.
The Newfoundland and Labrador Judgement Enforcement Act provides protection
of RRSP/RRIF funds held by annuitants residing in Newfoundland and Labrador from
creditors with the exception of enforcement under the Support Enforcement Act or the
Support Orders Enforcement Act , 2006. Enforcement in process prior to April 5,
2007, is not protected.
The Prince Edward Island Designation of Beneficiaries Under Benefit Plans Act
provides protection of RRSP and RRIF funds from execution or seizure, held by
annuitants residing in Prince Edward Island, where a designation in favour of a spouse,
child, grandchild or parent of an annuitant is in effect.
The Saskatchewan Registered Plan (Retirement Income) Exemption Act provides
protection of RRSP/RRIF funds from creditors with the exception of enforcement
under the Enforcement of Maintenance Orders Act, 1997. If the court determines the
jurisdiction of the RRSP/RRIF annuitant to be Saskatchewan, the RRSP/RRIF will be
protected from creditors.
What Types of RRSP’S are Available?
There are three basic types of individual plans available. Deposit Type Plans, Mutual
Funds, and Self-Directed Plans. The following is a short description of each plan-but
remember that plan features will vary among issuers.
Deposit-Type Plans
Deposit-type RRSPs are the most common plans. They offer familiar savings options
including saving accounts, term deposits or guaranteed investment certificates.
The rate of interest may be variable, fixed or index-linked. Key choices include the term
of the deposit (ranging from daily to multi-year); and frequency of interest calculations
and payments to the RRSP (daily, monthly, annually or end of term). Key considerations
include the issuer’s policy regarding early withdrawals (your investment may be non
redeemable for the term); and deposit insurance coverage.
Mutual Funds – (Available through dealers conveniently located in many credit
unions)
There are many types of funds available. Common types are money market funds,
income funds and equity funds. The first is invested in short-term securities such
as treasury bills, and government and corporate notes. Income funds have the same
investments from time to time, but predominantly invest in longer term bonds and
mortgages. An RRSP-eligible equity fund invests primarily in Canadian Stocks. There
are also balanced funds which hold all three types of investments.
The funds are divided into units. Unit values are updated frequently based on the market
value of the investments.
When mutual funds are held in an RRSP, income or capital gains distributions are
commonly used to purchase additional units.
Since mutual investments do and will fluctuate in value, they don’t provide a guaranteed
rate of return. Mutual funds are not covered by deposit insurance. Sales fees, called
front-end or back-end loads, can be charged on the acquisitions or redemption or units.
In addition, all mutual funds pay management fees.
Self-Directed Plan
With this kind of plan, you can make all your own investment decisions within a wide
range of qualified investments. A trustee does all the administration work for you. A
self-directed plan maybe uneconomical for those with limited RRSP funds, because of
the normal administration and transaction fees.
Self-directed plans are suitable for those with considerate investment experience and
ample time to manage the funds, or for those who want all their RRSP investments within
one plan.
Plans involving mortgages usually incur substantially higher fees. It is permissible to
hold within your self-directed RRSP a mortgage on any property you own (non-arm’s
length mortgage) that is eligible for mortgage insurance. This will result in additional
mortgage insurance, legal and possible appraisal fees. Generally, you should only do this
with more than $25,000 of RRSP funds, and should plan for the mortgage to exist for
more than 3 years.
More than one self-directed RRSP can invest in the same mortgage. Only in certain
pension jurisdictions can Locked-in RRSPs, LIRA, and RLSPs be invested in a non-arm’s
length mortgage.
Group (Employer-Sponsored) Plans
Group RRSPs have become popular in recent years as more as more and more employers
make them available to their employees. They can have all the same investment options
as the other types of plans. An individual account is maintained within the group RRSP
for each participating employee. A group RRSP can also provide for an employee to
contribute to an account in their spouse’s name.
Contributions to a group RRSP by an employer form part of the employee’s deduction
limit.
They are also taxable income to the employee, offset by receiving an RRSP contribution
receipt. You may not be able to withdraw the employer’s contribution and/or your
own contributions and the income thereon, as long as you remain in that employment.
Additional restrictions (such as requiring that the employer’s portion be used to provide a
pension at retirement) are not allowed.
Contributions to group RRSPs by employers and employees are usually voluntary.
Employer contributions vest immediately. If employees contribute through payroll
deduction, the income tax deducted from their pay cheque is reduced at the same time,
recognizing the reduction in their taxable income.
When the employment terminates, any restrictions imposed by the employer on
withdrawal or transfer of the funds from the group RRSP cease.
Income Tax Considerations
Capital gains or dividends earned in an RRSP increase its value. All off the funds
eventually coming out of an RRSP must be declared as income for tax purposes.
Therefore, you will eventually pay tax on 100% of any capital gains and a full rate
of tax on any dividends realized within an RRSP. Compare this to an investments
held outside an RRSP. Only one half of capital gains would be taxed, and you would
pay a reduced amount of tax on the dividends by being able to claim the dividend tax
credit. A Tax-Free Savings Account (TFSA) is a registered plan that is available to tax
shelter investment income and capital gains. Contact your credit union for additional
information on this new registered product.
What Does an RRSP Cost?
Always be sure to ask about fees before deciding on an RRSP. Not all issuers charge
fees, many do. Here are a few of the most common charges:
Front-End-Load
Many issuers sell RRSPs through commissioned salespeople. The sales costs are often
deducted from your contribution. Only the net amount is actually invested for you.
Back-End Load
Instead of a front-end load, many mutual funds offer the option of a deferred sales fee
if you close out the plan within a certain numbers of years. This can be a percentage of
the original contributions or the value at redemption. The percentage usually decreases
for each year you stay invested in the same group of funds, and reaches nil within a
maximum of 10 years.
Management Expense
This is an annual fee paid by the mutual fund to cover administrative costs including
trustees fees, investment advisor fees and the cost of government reporting. Over a
number of years, this can represent a significant reduction in the net yield from your plan.
Other Fees
Many issuers charge a flat fee on RRSP withdrawals, or if you transfer an RRSP to
another issuer.
What Should You Look for an RRSP?
Look for the plan that has the best potential return for the risk you are prepared to take.
If there are fees involved, take them into account in comparing the anticipated annual
growth. Remember, a front-end load reduces the amount invested.
It for any reason you prefer a short term investment, make sure that your plan can be
terminated quickly and at little or no cost.
To compare the earnings on guaranteed type RRSPs don’t look just at interest rates. Ask
for the net annual yield.
The more you know about your RRSP before you invest, the better.
