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RRSP

Registered Retirement Savings Plan

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RRSP

(Registered Retirement Savings Plan)

What is an RRSP?

A Registered Retirement Savings Plan(RRSP) 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 does an RRSP mean to you?

An RRSP allows you to invest money when you can most afford it – during you peak earning years – to build up a comfortable tax-sheltered retirement fund.

Not only do you invest some money that would otherwise be paid in taxes, but the earnings of your plan are not taxed until you withdraw them. Since 100% of these earnings can be reinvested and compounded, the growth of your RRSP increases rapidly over the years.

Your retirement savings will also increase significantly if you make each RRSP contribution as soon as allowed, for example, early in the year.

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 ways to provide a retirement income. 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 have an income below the taxable threshold, you should file a tax return to report your earned income and create RRSP deduction room.

You can make part of 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 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 throughout a minimum 12 month period. 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 other has custody.

The term “common-law partner” does not apply once the individuals have been 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 year’s earned income. The following qualify as earned income:

  • Salary, wages, bonuses and taxable benefits(minus union or professional dues and employment expenses claimed as deductions).
  • Taxable wage loss replacement or long-term disability income resulting from employment.
  • Canada Pension Plan/Quebec Pension Plan disability benefits.
  • Amounts received under the Wage Earner Protection Program Act.
  • Net income from self-employment(minus current year business losses).
  • Taxable alimony or maintenance payments received.
  • Royalties of an author or inventor.
  • Net research grants.
  • Income that is contributed to an Amateur Athlete Trust.
RRSP Deduction Limits

Your Notice of Assessment from CRA, received after filing your tax return, will state your RRSP deduction limit for the following year. At certain times of the year, you can also phone the CRA Tax Information Phone Service to confirm your deduction limit. This information is also available in MY CRA Account.

 

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.

Contributing to RRSPs in Your Spouse's Name

Part of all of your RRSP deduction limit can be contributed to RRSPs for your spouse.

Any amount you contribute to RRSPs for your spouses are subject to an attribution period.

If one spouse will be in a higher tax bracket in retirement, as much of the RRSP funds as possible should be accumulated in the name of the spouse who will be in the lower bracket. The income eventually created from the funds will then be taxed a that spouse’s lower tax rate.

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 funds 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 a Marriage/Common-law Partnership

CRA will permit the removal of the contributor detail following a relationship breakdown. You must request the removal of the contributor’s name on you 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 a 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 Undeducted Contributions

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 a contribution.

Your Notice of Assessment from CRA records any cumulative deduction room in determining you 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.

Contribution Deadline

You may contribute at any time during the year.

Contributions made during the first 60 days of any year may be 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 a 1% penalty tax per month on the amount in excess of $2,000.

Non-voluntary(normally employer) contributions to group RRSPs based on current earnings are not taken into account until after the end of the year in which they are made.

At that time, your 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 a over-contribution unless you are sure you will be able to use it as your RRSP deduction in one or more future years, based on earned income.

You can carry forward an over-contribution beyond the year in which you turn 71. You can deduct par of all of it any subsequent year within your deduction limit.

Borrowing for an RRSP

You can borrow funds to make a contribution to an RRSP, however you cannot deduct the interest on money you borrow. You should not use an RRSP as security for a loan. If you do, there are tax consequences.

SCU RRSP Loan
Official Receipt

After your RRSP contribution has been processed by the RRSP issuer, you will receive an official receipt. This must be reported with your tax return for that year even if you choose not to deduct it until a later year. Financial institutions are required to report all RRSP contributions to CRA. If you do not report the contribution on your tax return for that year, the CRA will contact you.

Can you Transfer 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 trasfer must be made directly from one issuer to another.

Sources: Canadian Credit Union Association