Anyone with “earned income” in a prior year who is subject to Canadian taxation on that “earned income”, including non-residents, may contribute to an RRSP. You can make part or all of your RRSP contributions to a spousal RRSP under which you are the contributor and your spouse is the Generally, an annuitant of an RRSP or a RRIF is the person for whom the plan or fund provides a retirement income.annuitant. Accordingly, as the contributor, you are entitled to the corresponding tax deduction. For this purpose, a spouse refers to a legally married partner or a common-law partner with whom you have cohabitated for the last 12 months.
To maximize your long-term tax savings, there should be an attempt to equalize the retirement income of both spouses. Therefore, RRSP contributions should go into the name of the spouse who will otherwise have the lower income in retirement. There are, of course, exceptions to this general rule, for example where both spouses are trying to accumulate funds for the Home Buyers’ Plan or the Lifelong Learning Plan.
Your maximum RRSP deduction is based on your “earned income” in the previous year and unused deduction room from prior years.
What is “earned income”?
Common forms of earned income include employment income, income from an unincorporated business, and rental income. Losses and expenses from these sources reduce earned income. Your earned income is also increased by any taxable alimony or maintenance you receive and reduced by any deductible alimony or maintenance you pay during the year.
Earned income does not include investment income, such as capital gains, interest and dividends, retirement income, such as RRIF income, Old Age Security and Canada Pension Plan, trust income, or a retiring allowance
Your 2016 RRSP deduction limit is reported on your 2015 Notice of Assessment. The RRSP deduction limit for 2016 is generally your unused RRSP deduction room from prior years, plus 18% of your 2015 earned income (to a maximum of $25,370), less your 2015 pension adjustment as reported on your 2015 T4 or T4A slip.
The pension adjustment is designed to reduce your RRSP contribution room by the value of any contributions you or your employer have already made to a A pension plan that CRA has registered. Funds are contributed by an employer, or by an employer and employees, to provide a pension to employees when they retire.Registered Pension Plan (RPP) or An employer-sponsored plan we register, in which the employer shares the profits of a business with all the employees or a designated group of employees.Deferred Profit Sharing Plan (DPSP) in the previous year. For a Defined Benefit Pension Plan, the pension adjustment is based on a complicated formula intended to produce a number that reflects the approximate value of the future retirement benefits you are entitled to receive. For a DPSP or a Defined Contribution Pension Plan, the pension adjustment is generally equal to the contributions made to the plan by you and your employer.
There might be other adjustments to your RRSP deduction limit if there have been significant changes to your RPP or DPSP during the year.
If you have an RRSP deduction limit as shown on your 2015 Notice of Assessment and you are a BC resident, the following are the income tax savings you could realize from making an RRSP contribution:
Remember, an RRSP is a tax deferral vehicle – you will be taxed on the funds when withdrawn. That said, you would rather pay $1 of income tax in the future than $1 of income tax today. Actual tax savings will result if you are in a lower tax bracket when you withdraw the funds, or if you can save income taxes by moving taxable income to a lower income spouse through a spousal RRSP.
Look into the amount you can save with an RRSP contribution today
You can hold the majority of publically traded investments in your RRSP. However, there are certain investments that are ineligible to be held in your RRSP.
Investments that are eligible include, but are not limited to:
Note that some private company shares that used to be eligible are now prohibited under the new anti-avoidance rules referred to below.
Ineligible investments include, but are not limited to:
Anti-avoidance rules were introduced in 2011 in response to some aggressive tax planning schemes. These rules are modeled after those already in place for Tax Free Savings Accounts and include:
These rules result in special taxes ranging from 50% on the fair market value of the investments considered to be prohibited to 100% of the value of any “advantage” received in situations considered to be exploitive of the RRSP rules. The rules cover investments made after March 22, 2011. If you held an investment in your RRSP prior to March 22, 2011 that was eligible and would now otherwise be prohibited, you may still be subject to the “advantage” tax on income arising from the investment.
The rules for RRSP investments are complex and you may currently be holding investments that are subject to the restrictions. It is recommended that consult your RRSP administrator or a Chartered Professional Accountant to determine whether any of the current or future investments held in your RRSP are subject to these rules.
RRSPs can be tax-effective investment vehicles, especially if you are many years from retirement. If you do decide to take advantage of an RRSP, it is better to contribute at the beginning of the year to start the tax-free compounding of earnings within the RRSP earlier. Also consider monthly contributions to your RRSP throughout the year, instead of a lump sum contribution at the end of the year or in the first 60 days of the following year.
You can make an RRSP contribution in a year and not claim a tax deduction in the same year if you think your marginal tax rate will be higher in a later year; you will still benefit from the tax-deferred growth of the investments in the RRSP. Provided your undeducted RRSP contributions do not exceed your RRSP deduction limit plus $2,000, your undeducted contribution can be carried forward indefinitely, without penalty, for deduction in future years. This could be a substantial advantage if you claim the tax deduction in a year or years when you are in a higher tax bracket.
For your RRSP contribution to be deductible for a particular tax year, the contribution must be made by the 60th day following the end of the year. For the 2016 tax year, the contribution deadline is March 1, 2017.
You can borrow to make an RRSP contribution, but any interest you pay on the borrowed money will not be tax deductible. For this reason, it is generally better to make your RRSP contribution using available cash rather than borrowing. If you have to borrow to make your RRSP contribution, try to repay the loan as soon as possible to minimize the non-deductible interest you are paying. Before borrowing, seek professional advice to ensure that the benefits of making an RRSP contribution outweigh the costs of borrowing.
If you hold investments outside of your RRSP, it would be more appropriate to borrow to acquire these investments, as the interest on such borrowing would likely be tax deductible.
If you borrowed to buy investments outside of your RRSP and you transfer those investments into your RRSP, the interest on the borrowed funds will no longer be tax deductible.
Do you have a loan with non-deductible interest? There might be ways to restructure your loans and investments to allow the interest to be deducted. Speak to your Chartered Professional Accountant about the possibilities.
Over-contributions to an RRSP is calculated as the total of all of your undeducted RRSP contributions in excess of your current RRSP deduction limit and the allowable over-contribution of $2,000. Generally, you have to pay a tax of 1% per month on contributions that exceed your RRSP deduction limit and the allowable over-contribution amount, unless you withdrew the excess amounts or contributed to a qualifying group plan.
You will need to file a special tax return (a T1-OVP) to report your excess contributions and calculate the tax payable. The Canada Revenue Agency may waive the tax on your excess contributions if certain conditions are met. Further, with prior Canada Revenue Agency approval, you can generally withdraw any over-contributions from your RRSP without taxation within certain time limits.
The Notice of Assessment for your 2015 personal income tax return reports your RRSP deduction limit for 2016 as well as the undeducted RRSP contributions that you previously reported. These are referred to as “unused RRSP contributions” on the Notice of Assessment.
Keep in mind that the penalty situations are complex. Consult a Chartered Professional Accountant for advice if you are in this situation.
Provided your RRSP is not in a non-redeemable investment or a locked-in RRSP, you may withdraw any portion of your RRSP at any time. In most circumstances, you will pay tax on the amount withdrawn from an RRSP as it is considered income in the year you make the withdrawal. Withdrawals do not affect your RRSP deduction limit; therefore, you will permanently lose that contribution room.
When you make your withdrawal, the financial institution administering your RRSP will withhold 10 to 30% for taxes. You will get a credit for the tax withheld when you complete your income tax return for the year. You might owe additional income tax at that time, or be entitled to a tax refund of part or all of the tax withheld, depending on your marginal income tax rate and other income tax withheld for the year.
Funds withdrawn from an RRSP for the Home Buyers’ Plan or the Lifelong Learning Plan are not taxable income in the year withdrawn and are not subject to withholdings. They are, however, subject to repayment or income inclusion requirements over time. Speak to your Chartered Professional Accountant if you are thinking about a withdrawal from your RRSP.
The primary objective of an RRSP is to save for retirement by permitting tax deductions for current period contributions, and tax-deferrals on investment earnings, with the goal of creating a retirement nest egg. Ideally, tax deductions occur during periods of higher income and withdrawals occur during periods of lower
income. With this in mind, it might sometimes make sense to withdraw funds from your RRSP prior to retirement.
It might make sense to withdraw funds from your RRSP or a spousal RRSP in the first year you become self-employed if your net income is low as a result of start-up costs, or income is deferred as a result of tax planning.
For example, if you are starting a business in 2017, you could contribute $10,000 to your RRSP by March 1, 2017, deduct it on your 2016 tax return, and receive a tax refund. You could then withdraw the $10,000, net of withholding taxes from your RRSP later in the year, include it in your 2017 income, and pay little or no tax if you had little or no other income for the 2017 year.
That said, since the purpose of an RRSP is to save for retirement, you should think very carefully about the future impact on your retirement wealth before withdrawing funds from your RRSP, especially since RRSP contribution room is finite. Also be careful about withdrawing from a spousal RRSP because the income could be attributed to the contributing spouse if a spousal RRSP contribution had been made in the prior three years.
Under the Lifelong Learning Plan (LLP), you may withdraw up to $10,000 per year from your RRSP over a four-year period, as long as the total amount withdrawn does not exceed $20,000. The funds must be used to finance full-time training or post-secondary education in a qualifying education program for you, your spouse, or a common-law partner. A qualifying education program is one that is not less than three consecutive months in duration and requires students to spend at least 10 hours on course-related “work” per week, excluding study time. Note that having 10 hours of course-related “work” per week does not necessarily constitute full-time status.
The qualifying education program also needs to be taken at a A designated educational institution includes most universities, colleges, and educational institutions within Canada.designated educational institution , the same institutions that allow a taxpayer to be eligible to claim an education credit amount on their tax return. If you are attending school outside of Canada, then the institution will only qualify if it is a university and the course leads to a degree. A disabled student can qualify with part-time enrolment.
You cannot withdraw more than $20,000 each time you use the LLP. In order to use the LLP again, you need to fully repay any existing LLP withdrawals to your RRSP. Withdrawals are not allowed from locked-in RRSPs.
You will be required to repay the amount withdrawn to your RRSP, without interest, in equal payments over a 10-year period. Repayments start with the earlier of the second consecutive year in which you or your spouse are not enrolled in full-time studies and 60 days after the fifth year following the first LLP withdrawal.
Repayment must be made in the year or within 60 days of the end of the year. Of course, you do not get an RRSP deduction for LLP repayments.
Any amount not repaid as required will be added to the income of the LLP planholder for that year. If a required LLP repayment is not made you will permanently lose that contribution room. An excess repayment made in one year will reduce the minimum amount that must be repaid in a subsequent year.
Special rules will apply if RRSP funds are withdrawn under the LLP and the educational program is not completed, or if the LLP participant dies, or emigrates from Canada.
You cannot deduct an RRSP contribution if you make the contribution to your RRSP or spousal RRSP and within 90 days of the contribution being made the funds are withdrawn under the LLP. As always, consult with your Chartered Professional Accountant and your investment advisor, because your RRSP is an important investment, and while an LLP withdrawal will save you interest personally, it will negatively affect the investment growth in the RRSP. Be sure the LLP is right for you.
The Home Buyers’ Plan allows first-time homebuyers to borrow up to $25,000 from their RRSPs to purchase their own residential property. The home that is purchased needs to be your principal residence – a rental property will not qualify.
First-time homebuyers are defined as persons who have not owned a home in any of the prior five years. You are not considered a first-time home buyer if you, your spouse or common-law partner, or your former spouse or common-law partner, owned a home that you both occupied as your principal place of residence at any time during the prior five years.
If you qualify for the Home Buyers’ Plan, you must withdraw the funds from your RRSP within 30 days of completing the purchase. You are required to repay the Home Buyers’ Plan withdrawal to your RRSP, without interest, in equal instalments for up to 15 years beginning in the second year after the year you withdrew the funds. You can repay the full amount into your RRSP at any time. A repayment to the RRSP must be made in the year or within 60 days after the end of the particular year. You do not get an RRSP deduction for Home Buyers’ Plan repayments. You will be taxed on any required repayments you do not make or to the extent the repayment is less than the required amount to be repaid. You will also permanently lose the ability to contribute the amount of the missed repayment to your RRSP.
Interest on funds borrowed to make Home Buyers’ Plan repayments is not tax deductible.
For spouses and common-law partners planning to jointly purchase their first home, each person can withdraw up to $25,000 for a total of $50,000 from their own RRSPs. Repayments must likewise be made to
their respective RRSPs. If there is a spousal RRSP, the RRSP funds are considered to belong to the spouse who is the annuitant of the RRSP, not to the spouse who is the contributor.
For example, where a person has made a contribution to both her RRSP and to a spousal RRSP for which her spouse is the annuitant, that person can make a Home Buyer’s Plan withdrawal from her RRSP and her spouse can make a Home Buyers’ Plan withdrawal from the spousal RRSP, provided all the other conditions and requirements under the Home Buyers’ Plan are met.
You cannot deduct an RRSP contribution if you make the contribution to your RRSP or to a spousal RRSP and within 90 days of the contribution the funds are withdrawn under the Home Buyers' Plan.
Special rules apply where amounts are withdrawn from an RRSP under the Home Buyers’ Plan to purchase a home but the purchase is not completed, or the Home Buyers’ Plan participant dies or emigrates from Canada.
If you are planning to buy your first home and you have sufficient funds in your RRSPs, consider the Home Buyers’ Plan. As always, consult with your Chartered Professional Accountant and your investment advisor before doing so, because your RRSP is making an important investment, and while a Home Buyers’ Plan withdrawal will save you interest personally, it will negatively affect the investment growth in the RRSP. Be sure the Home Buyers’ Plan is right for you.
Yes, you can transfer your RRSP from one financial institution to another. In order to transfer an RRSP account without triggering any taxes, the transfer must be made between the institutions in trust for you – you cannot touch the funds. Your new RRSP administrator generally arranges the transfer.
Note that the administrator or trustee of your RRSP might charge a fee for the administrative work involved in the transfer, and this fee is not tax deductible.
Also be aware that certain investments might be unique to a particular RRSP administrator or trustee. Moving the RRSP or the RRSP investment might require the liquidation of the particular investment, potentially resulting in various types of early redemption costs or administrative costs.
You should consult with your investment advisor as well as your RRSP administrator or trustee before moving your RRSP to be fully aware of all costs associated with the move.
A spousal RRSP is an RRSP in which one spouse is the contributor and the other spouse is the Generally, an annuitant of an RRSP or a RRIF is the person for whom the plan or fund provides a retirement income.annuitant. Spousal RRSPs can help shift future income from a higher income spouse to a lower income spouse. This can provide tax savings when the annuitant withdraws funds from his or her RRSP, RRIF,or annuity. It might also reduce the clawback of Old Age Security from the higher income spouse and allow the lower income spouse to claim the pension income tax credit.
There is no limit to how much a person can contribute to a spousal RRSP, provided that the contributor does not exceed his or her RRSP deduction limit for the year.
Spousal RRSPs can even provide more immediate tax savings, since the contributor gets the tax deduction while the annuitant is taxed on any withdrawals. However, where the annuitant withdraws an amount from a spousal RRSP, and the contributor has made a contribution to any spousal RRSP for the annuitant in the same year or in any of the two previous years, the income inclusion may be attributed back to the contributor. The two year rule does not apply to funds withdrawn from a spousal RRSP for the Home Buyers’ Plan or the Lifelong Learning Plan.
The ability to split pension income may provide you with additional opportunities for income splitting.
Look into spousal RRSPs – you could reduce your taxes now and in the future.
If you received eligible pension income during 2016, you can transfer up to half of your eligible pension income to your spouse or common-law partner. This could allow you to reduce your overall taxable income by using tax credits that would otherwise be unavailable.
Eligible pension income includes the taxable portion of annuity payments from a superannuation or pension plan and, if you are over 65, payments from your RRIF and annuity payments from your RRSP.
If your spouse would not otherwise receive pension income, you can make an election to split up to 50% of your pension income for tax purposes. Upon making the election, your reportable pension income will decrease by the split amount and your spouse's reportable pension income will increase by that same amount. Pension income splitting will result in tax savings if you pay tax at a higher marginal tax rate than your spouse as it will reduce your income that would be taxed at that higher tax rate. Pension income splitting may also reduce the Old Age Security clawback while transferring income to your spouse who is taxed at a lower tax rate. In addition, your spouse can access the pension income credit of up to $2,000 for federal tax purposes and $1,000 for BC tax purposes, which would otherwise be unavailable without pension income.
The pension income splitting rules do not make spousal RRSPs obsolete, since spousal plans still have income splitting benefits for the years before you turn 65 or if you have not yet converted your RRSP to a RRIF or annuity. In addition, taking advantage of spousal RRSPs can increase your potential for withdrawals under the Home Buyers’ Plan and the Lifelong Learning Plan.
In 2009 and 2012 the federal government introduced a number of changes to the Canada Pension Plan (CPP) that were designed to ensure the fund’s sustainability, as well as to accommodate modern realities in terms of working life and life spans. These changes are being phased in over time, and for the most part, they simply come into effect. However, for some changes, you’ll have to make some decisions as to what you want to do in 2017 or future years.
The default age to claim CPP pension benefits is 65. However, you can choose to begin receiving your pension benefits as early as age 60, at a cost of reduced monthly benefits, or you can choose to delay receiving your pension benefits until after age 65 to receive increased monthly benefits.
For 2017, the reduction of the monthly benefit for early utilization will be 0.60% for each month before the age of 65. So if you turn 60 in 2017 and you apply to start receiving pension benefits immediately, your monthly benefit will be reduced by up to 36%.
For every month after age 65 that you delay receiving your pension benefits (up to age 70), your monthly benefit will be increased by 0.7%; so if you turn 70 in 2017, and you apply to start receiving benefits once you turn 70, your monthly benefit will be increased by 42%.
Keep these rate changes in mind when deciding when to apply for CPP pension benefits.
Prior to 2012, individuals stopped contributing to CPP once they reached age 65 or once they started receiving pension benefits, whichever came first. You are now required to make CPP contributions on any employment or self-employment income until age 65, even if you are receiving CPP retirement pension benefits. If you are between the ages of 65 and 70, you can elect to not make contributions on employment and self-employment income. To stop contributing to the CPP, you must fill out Form CPT30. This election is revocable, but keep in mind that only one change can be made per year.
In both cases, both the employee and employer portion of the CPP contributions are required and the contributions do increase your CPP monthly benefit starting the year following the year of the additional contributions.
Is the increased monthly benefit worth the extra years of contributions? While there are a number of factors playing into the decision, Service Canada has an online calculator to help you look at the dollars and cents.
Contact a Chartered Professional Accountant to help you review your retirement strategies, and to see how you might be affected by the changing CPP rules.
When an annuitant of an RRSP dies, the entire fair market value of the RRSP immediately before death will be included in income in the calendar year of the annuitant’s death. If this income inclusion is made, then the beneficiary who receives these funds will not have to pay tax on the funds. Generally, the value to be included in income for a matured RRSP will be the fair market value of the remaining annuity payments while an unmatured RRSP will be the fair market value of all property held inside the RRSP. An RRSP matures when the plan commences payment of retirement income to the annuitant.
There is an exception to this income inclusion when the spouse or common-law partner is named as the sole beneficiary of the RRSP in the RRSP contract. If 100% of the underlying RRSP property is transferred to an RRSP or RRIF of the spouse or common-law partner by December 31 in the year following the annuitant’s death then there will be no income inclusion for the deceased annuitant. Similarly, if it is a matured RRSP then the spouse or common-law partner would become the successor annuitant and receive all future payments from the plan. Note that if this exception applies, then the spouse or common-law partner will pay tax on the funds when they are withdrawn from the RRSP or the annuity payments are received.
If the exception above is not met, but there is a spouse, common-law partner, or financially dependent child or grandchild named as the beneficiary to the RRSP then another option is available to reduce the total tax payable. The legal representative and the person named above can jointly elect to have a portion of the transferred RRSP funds taxed in the hands of the beneficiary rather than on the final tax return of the deceased.
If the deceased annuitant made a withdrawal from the RRSP for either the Home Buyers’ Plan or the Lifelong Learning Plan, the outstanding unpaid balance from these plans will be included in income on the final return of the taxpayer. The spouse or common-law partner can elect to continue these repayments if they do not want the balance applied to the final tax return of the deceased.
The rules around an RRSP and the death of a taxpayer are complex. See your Chartered Professional Accountant to help you plan for the unexpected.