The RRSP program is one of the best tax deferral opportunities available to the average Canadian. Contributions, up to a maximum amount, are tax-deductible. The tax on the income earned is deferred and not taxed until the funds from the RRSP are withdrawn.
Who Can Contribute?
Canadian residents and, in certain circumstances, non-residents with earned income (as defined below) can contribute to an RRSP. Minors who have “earned income” may contribute to an RRSP, if they can find an institution willing to allow the minor’s legal guardian to establish the plan; however, an RRSP issuer may be reluctant to enter into a contract with a minor and will normally require that an annuitant be at least 18 years of age. There is no over contribution allowance for persons who have not attained the age of 18.
Timing for RRSP Contributions
You may deduct RRSP contributions, subject to your RRSP deduction limit for the year, made in the year (to the extent that they were not deducted in a previous year) and, up to 60 days after the end of the year.
Deduction Limit for 2017
Your RRSP deduction limit determines the maximum tax-deductible contributions that you may make in the year. This limit applies to both RRSP contributions made to your own plan or a spousal RRSP. A contribution you make to a spousal RRSP does not affect your spouse’s RRSP deduction limit for the year.
Your RRSP deduction limit for 2017 is determined as the total of:
- Your unused RRSP contribution room that is carried forward from 2016, if any.
- Your “annual RRSP deduction limit” which is the lesser of:
- The RRSP maximum dollar limit of $26,010.
- 18% of your 2016 “earned income,” less.
- The Pension Adjustment (PA) reported for 2016 to CRA by your employer.
- Your Pension Adjustment Reversal (PAR) for 2016, less.
- Your Past Service Pension Adjustment (PSPA) for 2016.
The PAR is reported by the RPP (Registered Pension Plan) administrator or DPSP (Deferred Profit Sharing Program) trustee so that additional RRSP contribution room can be restored for an individual who leaves the company’s RPPs or DPSPs before retirement and receives termination benefits that are less than their accumulated PAs. The PAR is added to the individual’s contribution room for the year of termination.
The PA is designed to ensure that members in either a defined benefit or money purchase RPP or DPSP, with varying benefit rates, receive equal access to the benefits under the RRSP. The PA reflects the value of benefits accruing to an employee under an RPP or DPSP, or both. The PA for the calendar year is used to determine the RRSP deduction limit for the following year.
A PSPA represents past service benefit upgrades added to the plan with respect to services after 1989 and reduces your deduction limit.
Determination of “Earned Income”
Your earned income for the immediately preceding year is an important factor in determining your current year deduction limit.
Earned income for residents
The following is the calculation of the “earned income” for an individual who is resident in Canada throughout the year. For part-year residents it applies to the period of residence in Canada.
Total “earned income” includes:
- Net remuneration from an office or employment (including all taxable benefits and excluding allowable employment-related expenses other than RPP contributions).
- Net rental income from real property, whether active or passive.
- Current year income from self-employment or carrying on a business in which one is an active member.
- Alimony and maintenance receipts included in income.
- Royalties for work or an invention for which the individual is the author or inventor.
- Net research grants received.
- Disability benefits under CPP (Canadian Pension Plan) or QPP (Quebec Pension Plan).
- Supplementary unemployment benefit plan payments received (excluding EI benefits).
Less:
- Current year losses from self-employment or business in which one is an active member.
- Net rental losses from real property, either active or passive.
- Deductible alimony or maintenance payments.
- The portion of business income from the disposition of eligible capital property in excess of recaptured tax deductions.
Superannuation or pension benefits, investment income, taxable capital gains, retiring allowances (see section on retiring allowances below), death benefits, scholarships and bursaries are not included in earned income.
Earned income for non-residents
- Individuals who are non-residents throughout the year may include income from employment performed and business carried on in Canada either directly or as an active partner, to the extent that tax treaties do not protect the income from being taxable in Canada. Business losses and alimony deductible for Canadian tax purposes reduce earned income.
- A non-resident will be entitled to make RRSP contributions in the year he/she becomes a Canadian resident to the extent that he/she has unused contribution room carried forward from previous years.
Unused RRSP Deduction Room
If you contribute less than your RRSP deduction limit for the year, you can carry forward the “unused RRSP deduction room” indefinitely (or, until the year you reach age 71). For example, if your RRSP deduction limit is $12,000, but you make a $10,000 RRSP contribution, you will be able to carry the remaining $2,000 as “unused RRSP deduction room” and make the additional deductible contribution of $2,000 in a future year.
Retiring Allowances
Retiring allowances that are received from your employer or out of a retirement compensation arrangement can be transferred directly into your RRSP. The maximum amount that can be transferred is the total of:
- $2,000 for each full or partial year of service prior to 1996 with your employer;
- $1,500 for each full or partial year of service prior to 1989 for which employer contributions to an RPP or DPSP has not fully vested.
Borrowing to Finance an RRSP Contribution
Interest on funds borrowed to make RRSP contributions is not tax-deductible.
Fees Charged for an RRSP
Several types of fees may arise in connection with an RRSP. Annual administration fees and investment counselling or management fees are not tax-deductible, whether paid inside or outside the plan.
Brokerage fees incurred in connection with the purchase and sale of assets held in an RRSP should be paid by the RRSP.
Spousal Plans
You can make deductible RRSP contributions for the benefit of your spouse whether or not your spouse makes his/her own RRSP contributions. A spousal RRSP is an RRSP that names your spouse as the annuitant, but to which you made the contribution.
Your total contributions for the year, to both your plan and your spousal, plan cannot exceed your annual RRSP deduction limit. You may not transfer your own RRSP or RPP to a spousal RRSP or rollover certain termination payments.
If your spouse makes a withdrawal from an RRSP to which you have contributed in the year or either of the two preceding calendar years, the withdrawal will be taxed as though it was your income. An exception is permitted where you and your spouse are separated and living apart by reason of marriage breakdown.
Withdrawals For Education Lifelong Learning Plan
Eligible individuals can make tax-free withdrawals from an RRSP of up to $10,000 per year, but not exceeding $20,000 overall, over a period of up to four calendar years to pursue qualifying educational studies.
An eligible individual includes the recipient or a spouse enrolled as a fulltime student in a qualifying educational program of at least three months’ duration at an eligible educational institution. These terms appear to have the same content as those used for the education tax credit.
RRSP withdrawals under this plan must be repaid in equal instalments over a period of 10 years.
Withdrawals For A Home Purchase
The Home Buyer’s Plan (HBP) permits a home buyer, who has not owned and occupied a home in the last 5 years, to borrow up to $25,000 from an RRSP to finance the purchase of a home. The home must be acquired by September 30th of the year following the year of withdrawal. Special rules apply to a disabled individual moving into a home that is more accessible.
The withdrawals under the HBP must be repaid within a 15-year period, with annual repayments required to be made within the year or the first 60 days of the following year. The 15-year period commences in the second calendar year after the year of withdrawal.
CRA will provide an annual statement informing you of the minimum repayment required. To the extent that the minimum payment is not made, the shortfall will be included in your income for that year.
A contribution to an RRSP made 90 days prior to a HBP withdrawal is generally not tax deductible unless certain specific conditions are met. Please contact your HLB advisor.
Self-directed RRSPS
A self-directed RRSP provides you with a high degree of control over the investment of your RRSP contributions. It allows you to choose from a full selection of allowable investments such as: bonds and debentures of the Government of Canada, a province, municipality, or Crown corporations, shares and debt obligations of Canadian public companies, shares of Canadian private companies, units of a mutual fund trust and a mortgage secured by real property inside Canada.
You cannot invest more than $25,000 of RRSP funds in a qualifying active business company in which you or your family members hold an interest of 10% or more.
Self-directed RRSPs carry an annual administration fee that is not tax deductible, whether paid inside or outside the plan.
Maturing The Plan
You must mature the RRSP by the end of the year in which you turn age 71. If you are age 71 at the end of the current year, you must mature the RRSP by the end of the calendar year. Any final-year RRSP contribution must be made by December 31st of the current year, and not 60 days after the end of the year.
You do not have to wait until you reach age 71 to obtain retirement income from your RRSP. If you have no other sources of pension income, taking early retirement allows you to take advantage of the $2,000 non-refundable pension income credit.
There are several options to provide you with retirement income in varying amounts:
- RRIFs are a continuation of your RRSP except that you are required to withdraw a minimum amount each year;
- Life Annuities; and
- Fixed Term Annuities are described under annuities.
Registered Retirement Income Fund
At the maturity of your RRSP, a RRIF can be a continuation of your RRSP: you can keep the same investments held in the RRSP and transfer them to a RRIF plan.
A minimum amount must be withdrawn each year and included in the annuitant’s income. The minimum amount is determined by a fixed percentage set out in government regulations.
Withdrawals from the RRIF in excess of the minimum amount are subject to withholding taxes, which are credited against your taxes payable for the year.
All amounts earned in the RRIF continue to be tax-free until the funds are withdrawn.
You may also operate a self-administered RRIF, continuing your investments from your self-directed RRSP.
Annuities
The alternative to an RRIF is an annuity. An annuity leaves investments in the hands of the issuer, usually a life insurance company, who guarantees to pay a fixed amount.
There are two types of annuities: life and term-certain.
Under a life annuity, you must receive periodic payments at least once a year, until you die. The amount payable is based on factors that include the average life expectancy for someone your age and current interest rates.
Term-certain RRSP annuities are payable to age 90, or to the year your spouse turns age 90. Payments will cease after your 90th year. The amount payable is based on current interest rates.