RETIREMENT PLANNING

Chapter 5
Registered Retirement Savings Plans (RRSPs)
And Other Savings Plans
RRSPs
 RRSPs are intended to be a tax-deferred way for individuals to save for retirement
 When you contribute to an RRSP you are also entitled to a tax deduction

Withdrawal before Retirement

 Funds can be withdrawn at any time
o However, when funds are taken out of an RRSP, the withdrawal is added to
income and is taxable at the full or marginal rate
o In addition, the contribution room used to make the original contribution is
NOT recoverable and the contribution room is lost

Earned Income
 An individual's maximum contribution to all registered plans per year is the lesser of:
o 18% of the prior year's earned income or,
o 31,560 (2024)
 In addition, RRSP contribution room for a taxation year is based on earned income of
the prior year MINUS any pension adjustment (PA) from the prior year
 Earned income is:
o PLUS:
 Employment, commission and other income
 Royalties
 Net research grants
 Profits from profit sharing plans
 Unemployment benefits received
 Disability payments received from CPP and QPP and other taxable
sources
o MINUS:
 Union, professional, or other dues
 Employment expenses
o PLUS/MINUS
 Net income/loss from business earned as a sole proprietor or partner
 Minus taxable portion of gain on disposal of eligible capital property
 Net rental income / loss from real property
 Taxable support payments received/paid
DOES NOT INCLUDE:
 Investment income
 Pension benefits, including amounts received from an RRSP or DPSP
 Retiring allowances
 Severance pay
 Death benefits
 Business income earned as a limited partner

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Contribution Limit and Contribution Room
 Contributions to RRSPs for any taxation year can be made from January of that year
to 60 days after the end of the next year
 Until 1990, the unused contribution room could be carried forward for only 7 years
and was then lost
o Now it can be carried forward until the year the taxpayer turns71, when the
RRSP must be transferred to a retirement income plan to be drawn down as
retirement income
 Taxpayers start gathering contribution room as soon as they start filing tax returns

Transfers and Contributions that DO NOT Affect Contribution Room

 Some amounts can be transferred to an RRSP without affecting the contribution room
o Transfers can be made directly from a registered plan to an RRSP and these
transfers are also not subject to tax
o These transfers include
 Transfers from other un-matured RRSPs (RRSPs that are not paying
out retirement income)
 Transfers from an RPP, DPSP, or an RRSP commutation payment, and
an excess amount from a Registered Retirement Income Fund (RRIF)
 Transfers from a deceased's RRSP to the spouse's RRSP on the death
of the taxpayer (this transfer is called a Spousal Rollover)
 Retiring Allowance and/or Severance Pay
o When leaving employment individuals can use these funds to make extra
contributions to their RRSPs
o The extra contribution is based on the number of years of service with the
employer and is limited to:
 $2,000 for each full or part-year of service before 1996, plus
 $1,500 for each full or part-year of service before 1989, as long as the
employee did not earn any pension benefits from an RPP or a DPSP
from contributions made by the employer

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Pension Income Splitting
 Beginning in 2007, Canadian residents can split up to one-half of their pension
income with their married or common-law spouse if they were living together and
both were resident in Canada on December 31 or were resident in Canada on the date
of death or bankruptcy during the year
 Generally the person receiving the pension must be over 65 years of age, although
someone under 65 can split income with the spouse if the payments are from a
lifetime annuity payment from an RPP or as a result of the death of the original
annuitant
 Both must sign a form with CRA (form T1032) agreeing to both the splitting and the
percentage that is split
 The percentage can change each year
 Eligible income includes:
o Most pension income including lifetime annuity payments from RRSPs,
RPPs, DPSPs, RRIFs and Life Income Funds (LIFs)
o OAS and CPPs pension income DO NOT qualify
o Each person will be able to claim the $2,000 federal pension amount

Spousal RRSPs
 A taxpayer can make a contribution to their own RRSP as well as to their spouse's
 A spouse includes a married partner, an opposite-sex partner, or a same-sex partner,
with whom the contributor is living
 The total contribution CANNOT exceed the taxpayer's total contribution room
 Contributions to a spousal RRSP must remain in the RRSP for at least 2 tax (i.e.,
calendar) years before the calendar year of a withdrawal by the spouse in order for the
withdrawal to be taxed in the hands of the spouse
 Earlier withdrawals are subject to income attribution rules of the Income Tax Act
(ITA), which cause the income to be taxed in the hands of the contributing spouse
 Exceptions to Attribution Rules
o If the couple is living separately because of a breakdown in the relationship
o If they are non-residents at the time of the withdrawal
 The spousal RRSP is less important than it used to be, since spouses can now divide
their pension income equally for tax purposes

Contributions after Death

 The last year that a person can contribute to an RRSP is the year in which they turn
71
 In the case of a spousal RRSP, the last year of contributions is the year the spouse
turns 71
 No contributions may be made to a deceased's RRSP after the date of death
o However, a contribution can still be made to a spousal RRSP in the year of the
deceased's death or up to 60 days after the year of death, as long as the spouse
is less than 72 years old

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Over-contributing to RRSPs
 Because the RRSP is a tax-deferred savings vehicle, there is a yearly limit on the
contribution
 You may contribute up $2,000 more than the RRSP deduction limit without penalty
 If more than the lifetime contribution of $2,000 is contributed, there is usually a
penalty of 1% a month on the excess
 The entire over-contribution is NOT tax deductible
 If the 1% penalty is payable, the penalty must be paid no later than 90 days after the
end of the year in which the over-contribution exists

Winding Up an RRSP
 An RRSP must be wound up by the end of the year the taxpayer turns 71
 Retirees can:
o Cash in their RRSP and withdraw the savings, though this is not
recommended because they will have to pay tax on the whole amount
o Select a retirement income option for their RRSP savings
 Buy a life or term-certain annuity
 Transfer the entire amount to a RRIF or, in some provinces, a Locked-
In Retirement Income Fund (LRIF)
o A combination of the above options

Payments from an RRSP

 The purpose of an RRSP is to provide retirement income
 An RRSP that has not yet started to pay retirement income is called an un-matured
RRSP
 Unlike RPPs, taxpayers can withdraw funds from their RRSPs at anytime (except for
locked-in RRSPs)
 A matured RRSP is an RRSP that is paying an annuity to the RRSP holder or
beneficiary if the holder or annuitant has died
o This amount is fully taxable as regular income and may be eligible for
the pension income amount
 The federal pension income amount is a maximum $2,000, which is
part of the non-refundable tax credits on the personal tax return
 Only pension income, annuity income, RRIF income, and RRSP
annuity income qualify for the pension income amount

Eligible Investments
 Unlike non-registered investments, there are restrictions on the investment options for
RRSPs
 An RRSP can hold a variety of investments, but they must be qualified investments as
defined in the Income Tax Act
 The purchase of non-qualified investments causes any taxable capital gains that result
from these investments to be included in taxable income
 Property such as stocks and bonds can be transferred into an RRSP at fair market

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 value (FMV), leading to a deemed disposition, meaning the property is considered to
have been sold even though there has not been an actual sale
BORROWING FROM AN RRSP
 Withdrawals from RRSPs are taxed as regular income at full rates
 However, individuals can borrow from their RRSPs to buy their first home or go back
to school without paying tax on the withdrawals and without paying interest on the
"loan" from the RRSP
 There are two plans for borrowing from an RRSP (Home Buyers’ Plan and Lifelong
Learning Plan)

1. Home Buyers' Plan (HBP)

o First introduced in 1992, the HBP was created to help Canadians buy or build
homes for themselves
o By participating in the plan, taxpayers may borrow up to $35,000 each from their
RRSPs to buy or build a qualifying home
o These funds are not taxable when withdrawn but must be repaid in no more than
15 years
o The withdrawals are non-interest bearing, and there is no withholding tax on them
o RRSPs such as locked-in RRSPs and group RRSPs do NOT allow this withdrawal
o Funds may also be withdrawn to acquire a qualifying home for a related disabled
person or to provide funds to a related disabled person to make their home more
accessible to them
o Requirements
 Before the withdrawal, the taxpayer must:
 Have signed a written agreement to buy or build a "qualifying"
home
 Plan to live in the home as the principal residence
 Be considered a "First-Time Buyer"
 Have an HBP balance at the beginning of the year of purchase of
zero if the taxpayer has participated in this plan before
 Qualifying Home must be:
 Located in Canada
 A single-family dwelling; a semi-detached home; a townhouse; a
mobile home; a condominium unit; a share of the equity in a co-op;
or an apartment in a duplex, triplex, fourplex or an apartment
building
 The taxpayer must intend to move into the home within 12 months
of the withdrawal
 However, there is no minimum occupancy period
 First-Time Buyer is:
 Someone who, with or without a spouse, or common-law partner
did NOT own a home and occupy it as a principal residence during
the time period beginning January 1 of the fourth (4th) year before
the year of the withdrawal and ending 31 days before the
withdrawal
 If the taxpayer lived in an owner-occupied home for only part of

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 this time period with a spouse, one or the other may qualify as a
first-time buyer
BORROWING FROM AN RRSP (continued)

 Home Buyers' Plan (HBP) continued

o Requirements

 At the time of Withdrawal, the taxpayer and spouse must:

 Not have owned the home for more than 30 days before the first
withdrawal (they must make the first withdrawal within 30 days of
buying the home
 Be residents in Canada
 Fill in form T1036
 Receive all the withdrawals in the same year
 Not withdraw more than $25,000 each

 After the Withdrawal

 The taxpayer must buy or build the qualifying home before
October 1 of the year after the withdrawal
 A home is built when it becomes habitable
 If the taxpayer does NOT buy or build by this date, they will still
be considered to have met the deadline if either of the following
two situations exists:

1. First situation requires that the taxpayer

 Has had in place a written agreement to buy by the deadline
 Purchased the home by October 1 of the second year following
the withdrawal
 Be a Canadian resident at the time of purchase

2. Second situation
 The taxpayer must have paid an amount at least equal to the
withdrawal to the builders or suppliers of the home before
October 31 of the year following the withdrawal
 The transaction with the builder or supplier must be one at
arm's length

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 Home Buyers' Plan (HBP) continued
o Requirements
 Repayments
 Under the Home Buyers' Plan, repayments of withdrawals from the
RRSP are spread equally over 15 years
 The taxpayer can pay it back faster, but no less than 1/15 of the
borrowed amount must be paid each year
 Even if the taxpayer declares bankruptcy, the loan must be repaid
to avoid being taxed
 The repayments start the 2nd year following the year of withdrawal
 Repayments are not RRSP contributions and are therefore NOT
tax-deductible
 The unpaid balance becomes due if the HBP participant dies,
becomes a non-resident, or turns 71 years of age
 At death, any HBP balance must be included on the participant's
final tax return as taxable income unless the surviving spouse
elects to make the repayment in lieu of the participant
 If the borrower becomes a non-resident, the unpaid balance must
be paid within 60 days of becoming a non-resident
 Any unpaid balance is included in taxable income in the
year the person became a non-resident
 Since contributions cannot be made to an RRSP after the year in
which a taxpayer turns 71, the outstanding repayments are included
in income each year that they would have been due
Effect on Contribution Room
 Any RRSP deduction for a contribution made 89 days before the first
withdrawal can affect RRSP contributions
 If the withdrawal reduces the fair market value of the RRSP balance to
less than an RRSP contribution made within 89 days before the
withdrawal, the excess of the contribution over the market value of the
RRSP after the withdrawal is NOT tax deductible
 For example: Janet had $7,000 in her RRSP before she made a
$6,000 RRSP contribution on February 28, 2014. On May 15, (76
days later), she withdrew $9,000 to help make the down payment
on a new home.
 She forgot that she had planned to take the funds out on May 29,
which would have been 90 days after the RRSP contribution. She
is upset to learn that her oversight has cost her almost $2,000
worth of deductions (see below)

RRSP balance as of January 1, 2014 = $7,000

RRSP contribution made on February 28, 2014, for 2013 = $6,000
Income earned in RRSP between January 1, 2014 and May 14, 2014 = $325
HBP withdrawal on May 15, 2014 = (9,000)

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RRSP balance after withdrawal - market value = $4,325
Contribution disallowed for 2013 ($6,000 - $4,325) = $1,675
BORROWING FROM AN RRSP (continued)

2. Lifelong Learning Plan (LLP)

o LLP was introduced by the federal government in 1999 to help taxpayers who
want to return to school to further their education by allowing interest-free loans
from their own RRSPs
o The LLP allows RRSP holders to borrow up to $10,000 a year (annual LLP limit)
to a maximum of $20,000 (the total LLP limit) from their RRSPs to finance full-
time training or education for themselves or their spouses, but NOT their children
 Disabled students can be enrolled on a part-time basis
o Both spouses or partners can withdraw from their RRSPs, under the LLP at the
same time
 In addition, in the year after the LLP withdrawal has been repaid and has a
balance of $0, funds can be withdrawn to participate in the LLP program
again
o The withdrawal can also be cancelled by repaying the amount withdrawn
o Withdrawals can be made over four years and up to January of the 4th year after
the first withdrawal
o If more than $10,000 is withdrawn a year, the excess amount must be included in
taxable income and is not considered part of the LLP interest-free loan from the
RRSP
o There is NO withholding tax on the withdrawals, and the amounts are non-interest
bearing
o The withdrawn amount amounts are repayable over 10 years

Qualifying Educational Program

o To participate in the LLP, the individual must be under the age of 71 and enrolled
in a qualifying educational program at a designated educational institute
(university, college or other post-secondary institute)
o The program must last three months, and the student must be in class or at work at
least 10 hours per week
o Courses and work include lectures, practical training, labs, and research but does
not include study time

Tax Deductible
o As with the HBP, if the withdrawal reduces the RRSP balance to less than an
RRSP contribution made within 89 days before the withdrawal, the excess of the
contribution over the market value of the RRSP after the withdrawal is NOT tax
deductible

Repayments
o Repayments are 1/10 of the total amount taken and can start as late as the 5th year
after the year of the first withdrawal, on the condition that the student is in school

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 o If the student finishes school, the repayments start in the 2nd of the two years
o The same rules for failing to make the minimum payments to the Homer Buyers'
Plan apply here also
TAX FREE SAVINGS ACCOUNT (TFSA)

Introduction
 Became available on January 2, 2009
 Are savings accounts whose earnings are never taxed
 Are offered by the same financial institutions which provide RRSPs

Who Can Open a TFSA

 Anyone over the age of 18, except a Trust can open a TFSA
 A person can hold more than one TFSA within a financial institution or various
financial institutions
 It is available to any Canadian residents

Contribution Room

 The maximum annual contribution was:

o $5,000 from 2009 – 2012
o $5,500 from 2013 – 2014
o $10,000 in 2015
o $5,500 from 2016 – 2018
o $6,000 from 2019 – 2022
o $6,500 in 2023
o $7,000 in 2024
 Going forward, this maximum will be indexed annually and rounded to the nearest
$500 annually
 Contribution room begins to accumulate when a person turns 18
 Any unused contribution room can be carried forward indefinitely to future years
 Any withdrawals can be replaced in the following year
o Therefore, the contribution room is not lost when funds are withdrawn
o Contribution room for withdrawals is added back to contribution room at the
beginning of the year following the withdrawal

Taxation

 As mentioned before, TFSAs are savings accounts whose earnings are never taxed
 There is no "Income Attribution" on funds given to a spouse or common-law partner
to make a contribution

Death

 Generally, if a person holding a TFSA dies, the balance in the fund can be transferred
tax-free to a surviving spouse

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TAX FREE SAVINGS ACCOUNT (TFSA) continued

Withdrawals
 Can be used for anything and since withdrawals are NOT taxable income, they do not
affect income-tested benefits, such as:
o Canada Child Tax Benefit
o Working Income Tax Benefit
o Goods and Services Tax credit
o Age credit
o Old Age Security (OAS)
o Guarantee Income Supplement (GIS)
o Employment Insurance benefits (EI)

Excess Contributions
 Are subject to a penalty of 1% a month as long as the excess remains in the plan

Purpose of TFSA
 While the TFSA is ideal for short-term savings, such as saving for a car, a down
payment, a renovation, a cottage, additional education savings, emergency savings, a
dream vacation, or to start a new business, people are also using it to save for
retirement for both workers and non-working spouses

Americans
 Who are resident in Canada have to pay tax on their worldwide income and receive a
tax credit for taxes paid in Canada
 However, unlike RRSPs, the TFSA is not part of the Canada-US tax treaty and will
likely be subject to American income taxes
 Though American income taxes are generally lower than Canadian and can, offer
some tax relief

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