Registered Retirement Savings Plan
The Registered Retirement Savings Plan (RRSP), or Retirement Savings Plan (RSP) as they are sometimes called, is a type of Canadian account for holding savings and investment assets. RRSPs are tax advantaged accounts. Deductible RRSP contributions can be used to reduce your tax.
Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.
RRSPs were introduced in 1957, at a time when pensions were largely the domain of private companies. Without a pension or private savings, a retiree would have had to rely on the means-tested Old Age Pension, introduced in 1927, a $20 a month benefit for those 70 and over. It was replaced by Old Age Security (OAS) in 1952, which doubled the benefit and dropped the means test. The Canada Pension Plan and its Québec counterpart (Québec Pension Plan or QPP) did not yet exist; they were introduced in 1966. At the time of their introduction, RRSP investors could contribute $2,500 or 10% of income, whichever was smaller.
Taxpayers can contribute 18% of their earned income to a RRSP, up to a maximum of $24,270 (2014 limit), until the end of the tax year in which they turn 71, or if using a spousal RRSP, the year your spouse turns 71. Contribution room is reduced if a taxpayer is also a member of a Registered Pension Plan. Since 1991, unused contribution room is carried forward and may be used in future tax years.
Under the rules, you have up to 60 days after the end of the year to make a contribution and have it deductible from taxable income for the previous tax year. There are a number of ways you can determine your RRSP deduction room:
- from line (A) of the RRSP Deduction Limit Statement, which is part of the Notice of Assessment you receive when you filed your previous year tax return.
- using CRA's My Account for Individuals service.
- using CRA's Quick Access service.
- using CRA's Tax Information Phone Service (TIPS).
Still, only 25% of taxfilers make a contribution, out of the 93% who are eligible because they had earned income, and the median contribution is $2,790. Since 1991 – when carryforwards were first allowed – Canadians have accumulated more than $700 billion in unused contribution room, despite adding $34 billion as of the most recent report by Statistics Canada (or just 5% of their contribution room) for the 2010 taxation year.
For those who don't make use of Form T1213, which directs employers to reduce automatic tax deductions at source (which include tax pre-payments, but also CPP and EI premiums) to reflect RRSP contributions made at the beginning of the year, a RRSP contribution may create a tax refund.
The RRSP rules allow an excess contribution of up to $2000 without penalty. Should your excess contributions be above this amount, a 1% per month penalty will apply until the excess contributions is below the limit.
A RRSP, like all registered plans, is a means to defer taxes, quite unlike an explicit tax shelter such as a Tax-Free Savings Account (TFSA). There are three primary tax advantages to a RRSP. The first is to allow gains on investments to compound tax-free until they are withdrawn. The second is that the tax refund, if reinvested, can augment savings. The third, however, depends on some calculations.
Here's why: Savings in an open account are taxed in different ways. Income and interest payments are fully taxable. Certain dividend payments receive a credit, while only half of capital gains are treated as income. RRSP withdrawals are taxed as income, even if, inside the RRSP account, they were earned as dividends or capital gains.
An important consideration in evaluating whether to maximize a RRSP is whether post-retirement income will be taxed at a lower rate than pre-retirement income. Ironically, this is a conundrum that cuts two ways: it affects very low income-earners (whose Guaranteed Income Supplement (GIS) – the supplement to OAS for seniors with few savings – might be clawed back) and very high income-earners.
Because the GIS will be clawed back based on RRSP withdrawals, holders of very small RRSPs (a few thousand dollars) who will be eligible for GIS after age 65 should consider withdrawing the entire RRSP before the year in which they reach age 65.
A spousal RRSP is one where your spouse owns the plan, but you make the contributions. This is an income splitting strategy that aims to reduce family taxes by shifting retirement income from high income earners to low income earners. The spousal RRSP contributions are deductible by the contributor. Taxation on withdrawals from a spousal plan depends on their timing; this is known as the three-year rule. The rule says "any withdrawals will be taxed in your hands to the extent you made a contribution to a spousal RRSP in the year your spouse makes a withdrawal or the previous two years."
Ideally, RRSP funds aren't needed until a person retires, at which point they can be rolled into an annuity or a Registered Retirement Income Fund. But the ideal is not reality; sometimes people need access to funds before retirement, particularly in years of low income. There is a staggered schedule for withholding taxes on RRSP withdrawals. It is 10% on the first $5,000, 20% on the next $10,000, and 30% on amounts over $15,000. (In Québec, withholding rates are 21%, 26%, and 31%.)
The funds are withheld by the financial institution and transferred to governments. This is not a special tax on RRSP withdrawals, but rather a crude estimate of what the final income tax bill may be. The actual tax on the RRSP withdrawal will be calculated later, when filing your tax return, and could be more, or less, than the withheld amount, depending on your total income for the year.
In contrast, there is no withholding tax when the minimum amount is withdrawn from a RRIF.
Special withdrawal plans
Home Buyer's Plan
The Home Buyers' Plan (HBP) is a program that allows you to withdraw funds from your Registered Retirement Savings Plan (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability. You can withdraw up to $25,000 in a calendar year. Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year.
If you buy a home together with your spouse, and both of you qualify for the program, each one can withdraw up to $25,000 from their own RRSP. A spousal RRSP is eligible for the annuitant (owner), not the contributor.
The HBP rules require that the funds must be repaid to your RRSP over the next 15 years. It does not matter if the original HBP withdrawal came from a regular RRSP or from a spousal one; the funds must be repaid to a regular RRSP. If you do not repay on schedule, the required amount is added to your taxable income for the year.
Critics of the HBP point out that RRSPs are supposed to help Canadians save and invest for retirement, not buy real estate, and that using your RRSP to buy real estate decreases your overall diversification, as well as hurting your portfolio returns (see Mortgage: HBP).
Lifelong Learning Plan
The Lifelong Learning Plan (LLP) allows you to withdraw amounts from your RRSPs to finance full-time training or education for you or your spouse or common-law partner. You cannot participate in the LLP to finance your children's training or education, or the training or education of your spouse's or common-law partner's children. You can withdraw up to $10,000 for yourself and $10,000 for your spouse or common-law partner, for a total LLP withdrawal limit of $20,000. Like the Home Buyer's Plan, RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the LLP. Under the program rules, the amount withdrawn from a LLP must be repaid over the next ten years.
There is sufficient anxiety about high tax rates in retirement that many investors seek ways to prematurely collapse their RRSPs. There are a number of ways to do it; many involve leverage, i.e., taking out a deductible investment loan that lessens the tax on RRSP withdrawals. They are often referred to generically as the Singleton shuffle but involve a body of tax law that is still evolving.
An RRSP must be wound up or terminated before the end of the year in which the holder reaches age 71. The plan holder must choose between purchasing an annuity, transferring the RRSP to an Registered Retirement Income Fund (RRIF), or withdrawing the entire amount. Since the latter option would result in the entire amount of the RRSP being fully taxed in the year it is withdrawn, it is not usually recommended unless the RRSP is fairly small.
The calculation of contribution limits has changed considerably since RRSPs were first introduced in 1957.  Until 1990, limits were based on earned income in the current year and annual dollar limits were changed only occasionally. If a taxpayer made no contribution, the contribution room was lost. In 1991, after a study of how best to harmonize RRSP rules with those governing pension plans, the rules changed. Contribution room became cumulative, additions were based on the previous year's earned income less an adjustment for pension plan participants, and annual dollar limits increased substantially.
Contributions were on a "use it or lose it" basis. Percentage limits were based on the current year's earned income. Dollar limits for pension plan members were further reduced by the amount of their RPP contributions.
|Years||No pension plan||Pension plan|
|1957-1964||10% up to $2,500||10% up to $1,500|
|1965-1971||20% up to $2,500||10% up to $1,500|
|1972-1975||20% up to $4,000||20% up to $2,500|
|1976-1985||20% up to $5,500||20% up to $3,500|
|1986-1990||20% up to $7,500||20% up to $3,500|
Since 1991, RRSP contribution room is a cumulative account. Every year, 18% of the previous year's earned income is added to the account, subject to the dollar limit specified below. The account balance is reduced by contributions and a pension adjustment calculated by employers for RPP members. The annual dollar limits for additions to the account are in the table below (please note the above-mentioned 18% calculation still applies).
|Year||Contribution Limit||Year||Contribution Limit||Year||Contribution Limit|
After 2010, the contribution limit is indexed to the annual increase in average wages.
- Canada Revenue Agency, Registered Retirement Savings Plan (RRSP), viewed February 23, 2014.
- Human Resources Development Canada The History of Canada's Public Pensions.
- Sarah Dougherty "RRSPs have come a long way since introduction in the 1950s",The Gazette, 2008-02-11.
- Canada Revenue Agency, How much can I contribute and deduct?, viewed February 23, 2014.
- Canada Revenue Agency, Contributing to your spouse's or common-law partner RRSPs, Viewed February 9, 2012
- Statistics Canada, Table 111-0040 RRSP Room, viewed March 3, 2012
- Statistics Canada, Registered retirement savings plan contributions ,The Daily, 12-2-2011.
- Canada Revenue Agency, T1213 Request to Reduce Tax Deductions at Source for Year(s).
- CRA, Excess contributions, viewed February 17, 2012.
- Tim Cestnick, Please your partner (and yourself) with a spousal RRSP - The Globe and Mail, viewed February 9, 2012.
- Tim Cestnick, Withdrawing from your RRSP, The Globe and Mail, March 9, 1999, viewed January 26, 2017.
- Camillo Lento, Understanding The RRSP Withdrawal Withholding Tax, Canadian MoneySaver, Nov/Dec 2016 issue(subscription required), viewed January 26, 2017
- Home Buyers' Plan (HBP), viewed February 17, 2012.
- Lifelong Learning Plan, viewed February 17, 2012.
- ADVISOR’S EDGE REPORT, April 2007, Tax Abuse, Viewed July 3, 2009
- Wikipedia, Registered Retirement Savings Plan, viewed March 6, 2009.
- Statistics Canada, RRSPs: Tax assisted retirement savings, viewed March 3, 2012.
- RBC Economics, RRSP Contributions, viewed March 3, 2012.
- Canada Revenue Agency, MP, DB, RRSP, DPSP, and TFSA limits and the YMPE, viewed Jan. 6, 2017.
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