Registered Retirement Savings Plan

Description
A registered Retirement Savings Plan (RRSP) is the most popular vehicle available to individuals to defer taxes and save for retirement. Contributions made to an RRSP are tax deductible. Furthermore, the earnings in the plan accumulate on a tax-deferred basis. The funds held within the plan will be taxable only when they are withdrawn. Typically, the investor's tax rate is lower at that time. RRSPs must be terminated once the investor reaches the age of 71.

Registered Retirement Income Funds (RRIFs) and annuities are designed to distribute the assets that have accumulated in an RRSP by providing a steady flow of income to the investor upon termination of the RRSP.

Setting Up an RRSP
Anyone 71 years or younger who has earned income in Canada (and thus a social insurance number) can create and contribute to an RRSP, including non-Canadian residents. There is no limit on how many RRSPs an individual may hold, but the total permissible contribution limit remains the same.

Spousal RRSPs
Spousal RRSPs are plans where the plan holder's spouse is the contributor. This allows couples to split their income in retirement years in order to minimize their income taxes. Usually, the spouse in the higher tax bracket is the contributor since it is the plan holder (in a lower tax bracket) who will eventually receive the income from the plan and will thus pay less tax. Since the contributing spouse is not the plan holder, he or she has no control over investment decisions.

The eligibility requirements to set up a spousal RRSP are identical to those for an individual RRSP.

Contributions
For any given year, tax-deductible contributions may be made during the year or within 60 days after year-end. The investor decides if the contribution made during the first 60 days of a year is applied for that or the preceding taxation year. Unused contribution room may be carried forward to future years.

Over Contributions
There is a maximum cumulative over contribution limit of $2,000. Any amount over this limit is subject to a 1% penalty per month.

Please note:

  • This only applies to plan holders older than 18 years of age.
  • Over contributions cannot be deducted from taxes. However, they may be deducted in subsequent years when RRSP room becomes available.
  • Earnings on over contributions are not subject to penalty fees.

Refunds of Excess Contributions
Excess contributions may be withdrawn by completing a T3012A form. Once withdrawn, these funds must be declared as income but no withholding taxes are applied. A tax-deduction is granted to offset the increased income taxes payable.

Unclaimed Contributions
Amounts contributed in any given year need not be deducted in that year. These amounts may be carried forward and deducted in future years.

1. Canadian residents

  • Withdrawals must be declared as income in the year of withdrawal.
  • Canadian residents receive a T4RSP form indicating the amount of the withdrawal that must be included in income. Quebec residents receive a Relevé 2 form as well.
  • Withdrawals are subject to withholding taxes.

2. Non-Canadian residents

  • The gross amount of the withdrawal is subject to a 25% non-resident tax unless otherwise specified by a tax treaty or by Revenue Canada.
  • An NR4 form is issued stating the withdrawn and withheld amounts.
  • Revenue Canada can lower the withholding tax upon reception of an NR5 form making the request. A valid reason must be supplied.

Beneficiary Designation
Beneficiaries may be designated within the plan itself or in a will (in Quebec, it must be stipulated in a legal will). In case the name of the beneficiary listed on the plan differs from the name stated in the will, the will takes precedence.

Foreign Content Restrictions
No more than 30% of the total book value of the account may be held in foreign property. There is a 1% penalty per month on any excess foreign content.

Transfers
Funds may be transferred from one RRSP to another without tax consequences. This can be done using a T2033 form.

Death
Upon death, the funds in an RRSP or RRIF are normally taxed with the estate unless transferred to the spouse's RRSP or RRIF, provided that the spouse is named as beneficiary. Otherwise, the funds may be transferred and taxed with a financially dependent child or grandchild, unless used to purchase a term annuity to age 18.

Marriage Breakdown
Subsequent to a court order, upon a marriage breakdown, an RRSP may be split and transferred to a spouse. To comply with the transfer, StrategicNova would require a copy of the judgment and a completed T2220 form.

Retiring Allowance
A retiring allowance (which includes severance pay and amounts received for wrongful dismissal) may be transferred tax-deferred to an RRSP rather than taxed as income when received. There is a limit of $2,000 for each year/part year of employment before 1996, plus $1,500 for years of employment before 1989 for which no employer pension contributions have vested. A transfer of a retiring allowance requires a TD2 form.

Pension Plans
Transfers from Registered Pension Plans (RPPs) and Deferred Profit Sharing Plans (DPSPs) to an RRSP are generally not allowed. Due to the nature of pension funds, these transfers must be done into a locked-in RSP (LRSP or a LIRA). If the pension funds are not locked in, then the transfer is allowed.