REGISTERED RETIREMENT SAVINGS PLAN (RRSP)

Investments that can be held in an RRSP are called qualified investments. They include:

• Cash
• Gold and silver bars
• GICs
• Savings bonds
• Treasury bills (T-bills)
• Bonds (including government bonds, corporate bonds and strip bonds)
• Mutual funds (only RRSP-eligible ones)
• ETFs
• Equities (both Canadian and foreign stocks)
• Canadian mortgages
• Mortgage-backed securities, and
• Income trusts

Rules determine the maximum contributions, the timing of contributions, the assets allowed, and the eventual conversion to a registered retirement income fund (RRIF) at age 71. You must close your RRSP in the year you turn 71. You can withdraw your RRSP savings in cash, convert your RRSP to a RRIF or buy an annuity.

• Precious metals
• Personal property such as art, antiques and gems
• Commodity futures contracts
• Prohibited investments – Examples: debt you hold, investments in entities in which you hold an interest of 10% or more.
• Non-qualified investments – Examples: shares in private holding companies, foreign private companies and real estate.

If you buy these investments for your RRSP, you will be charged a tax equal to 50% of their fair market value. You may apply for a refund if you dispose of the investment from your RRSP by the end of the year after the year the tax applied.

Contributions to RRSPs are deductible from total income, reducing income tax payable for the year in which the contributions are claimed. No income earned in the account is taxed (including interest, dividends, capital gains, foreign exchange gains, mortality credits, etc.). Most withdrawals are taxed as income when they are withdrawn. This is the same tax treatment provided to Registered Pension Plans established by employers.

• ndividual RRSP: An individual RRSP is associated with only a single person, called an account holder. With Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.
• Spousal RRSP: A spousal RRSP allows a higher earner, called a spousal contributor, to contribute to an RRSP in their spouse’s name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.
• Group RRSP: In a group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified.

  The primary benefit with a group plan is that the employee-contributor realizes the tax savings immediately, because the income taxes his or her employer must deduct on every paycheque can be reduced.

• Pooled RRSP: legislation was introduced during the 41st Canadian parliament in 2011 to create pooled retirement pension plans (PRPP). PRPPs would be aimed at employees and employers in small businesses, and at self-employed people.

• You can contribute up to 18% of your income or a fixed limit if you have a higher income. Unused contribution room can be carried forward year after year.
• The maximum contribution amount for tax year 2021: $27,830.While it is possible to contribute more than the contributor’s deduction limit, it is generally not advised as any amount $2,000 over the deduction limit is subject to a significant penalty tax removing all benefits (1% per month on the overage amount).

  RRSP contributions within the first 60 days of the tax year (which may or may not be the calendar year) must be reported on the previous year’s return, according to the Income Tax Act. Such contributions may also be used as deduction for the previous tax year.

An account holder is able to withdraw dollars or assets from an RRSP at any age. Withholding tax is deducted by the institution managing the account. Amounts withdrawn must be included in the taxable income of that year. The tax withheld reduces the taxes owing at year end. There are two exceptions to this process – the Home Buyer’s Plan and the Lifelong Learning Plan.

Before the end of the year the account holder turns 71, the RRSP must either be cashed out or transferred to a Registered Retirement Income Fund (RRIF) or an annuity. Until 2007, account holders were required to make this decision at age 69 rather than 71.

Investments held in a RRIF can continue to grow tax-free indefinitely, though an obligatory minimum RRIF withdrawal amount is cashed out and sent to the account holder each year. At that time individuals hope to be taxed at lower tax rates, but may actually end up paying higher rates than were recovered from contributions.

On death the assets remaining in the account are withdrawn and distributed directly to the named beneficiary. They do not flow through the estate. The account is closed. Like other withdrawals, the value of the assets is included in the taxable income of the account’s owner. This large lump sum may result in much of its value being taxed at the top tax bracket. The liability to pay the tax lies with the estate, no matter who received the account’s assets.

There are exceptions. When a spouse is the named beneficiary, the account continues, without triggering taxes, in the name of the spouse. There are also provisions for the tax-free transfer of assets to minor children, grandchildren and dependents.