Registered Retirement Savings Plans (RRSPs)

Registered Retirement Savings Plans (RRSPs) can be an excellent way for Canadians to save for retirement.

RRSPs can be

  • managed
    • few investment choices (e.g., GICs, market-linked GICs, mutual funds)
    • deposits invested in products held in trust
  • self-directed (also called a "self-administered RRSP")
    • you make all the investment decisions
    • more choice (e.g., stocks, bonds, mortgages, rights, warrants)
    • cannot hold nonqualified investments
      • e.g., art, jewelry, antiques, futures, precious metals, shares or debt of private corporations
      • penalty: 1% of cost for each month held

Contribution Limits

  • contribute up to 18% of earned income for the previous tax year but not exceeding
    • $22,000 in 2010
    • $21,000 in 2009
    • $20,000 in 2008
    • $19,000 in 2007
    • $18,000 in 2006
    • $16,500 in 2005
    • $15,500 in 2004
  • earned income” is generally net income from employment, business and rentals
    • excludes investment income, taxable capital gains and pension benefits
    • differs from the definition for tax purposes
  • contribute until Dec 31 in year of 69th birthday [update to 71?]
  • contribute for a calendar year up to 60 days after the end of the calendar year (e.g., to Mar 1 or Feb 29)
  • contribution amount reduced by
  • unused contribution room can be carried forward indefinitely

e.g., 2004 RRSP contribution = min{$15,500, 18% of $60,000} - PA of $7,750

Contribution Formula

Contribution Limit = Dollar Amount - Pension Adjustment - Past Service Pension Adjustment + Unused Contribution Room from the previous year + Remaining Portion of $2,000 Allowable Overcontribution

The amount you can contribute to an RRSP depends on several factors

  1. dollar amount
    • confirmed by CRA in an annual statement
    • minimum of $19,000 (2007) and 18% of earned income in the previous year
  2. pension adjustment for the previous year
  3. Past Service Pension Adjustment for the current year
    • for employer contributions to an employer's pension plan for years worked before the employer implemented a pension plan
  4. unused contribution room
      • can be carried forward indefinitely

RRSP Lifetime Overcontribution

  • $2,000
  • penalty of 1% per month on any excess
  • no penalty if excess withdrawn in the year you receive a Notice of Assessment for the year of overcontribution or the following year

Tax Receipts for Contributions

  • provided by Mar 31 of the following year

Rollovers into RRSPs

Spousal RRSP

  • the spouse with the higher income can make contributions to the RRSP of the spouse with the lower income
    • the contributing spouse gets the tax deduction
      • cannot contribute more than the remaining contribution room
    • the receiving spouse owns the asset and is taxed on the withdrawals
  • attribution rules: withdrawals made in year of deregistration or the two previous calendar years are taxed in the hands of the contributor unless
    • contributor was not residing in Canada
    • contributor died in year of the deregistration
    • divorce or separation and election made on how to split the RRSP income

Advantages of RRSPs

  • tax-free transfer the spouse upon death, if spouse is the beneficiary

RRSPs have the following advantages

  1. tax-deductible contributions
    • immediate tax write off against personal income for the contribution amount
  2. tax-deferred growth
    • all income and gains are tax sheltered until withdrawn (and taxed at your marginal tax rate)
    • sometimes called "tax-free investment growth until withdrawn"
  3. tax reduction
    • may be in a lower tax bracket when withdrawals made
  4. investment flexibility
    • many choices
    • you can manage the investments
    • you can have as many plans as you want
    • tax-free transfers to other RRSPs (no deemed disposition)
    • in 2005, the 30% limit on foreign content was removed
      • previous limit was 30% of the book value of the plan (measured plan by plan)
        • penalty: 1% of excess contributions each month
        • financial institutions would rebalance each monthend
  5. carryforward of unused contribution room back to 1991
    • not lost
  6. portable
    • not affected when changing employers
  7. early retirement
    • can use for early retirement or job sabbatical
  8. income splitting
    • the higher income earner makes contributions to the RRSP of the spouse with the lower earnings
    • reduces a couple’s effective tax rate during retirement
  9. nonretirement uses
    • e.g., home purchase or adult education

Disadvantages of RRSPs


RRSPs have the following disadvantages

  1. limits on contributions
  2. tax on withdrawals
    • reduces the amount you receive
  3. withholding tax
  4. lose access to dividend tax credit
    • normally available on eligible shares
  5. capital gains are fully taxable when withdrawn
    • lose advantage of lower taxation on capital gains (lower inclusion rate)
  6. tax at death (deemed disposition)
    • RRSP balance taxed as income of the deceased unless transferred to spouse or dependent (grand)child(ren)
  7. unavailable for loan collateral
    • cannot use RRSP savings as collateral for loans for tax-free retirement income
  8. no creditor protection

Withdrawals from RRSPs


Withdrawals are permitted at any time (except from a locked-in RRSP) but are subject to withholding tax and must be declared as income in the year withdrawal
Withdrawals from an RRSP are income (not interest, dividends or capitals) and taxed at your marginal tax rate, with a credit for the withholding tax paid.

Lump Sum (Cash)


By December 31 of the year a plan holder reaches age 71, the RRSP proceeds must be

  1. withdrawn (and taxed)
  2. used to buy an annuity (life annuity or Term Certain Annuity to age 90)
  3. transferred to a RRIF (most common)

RRSPs at Death


Upon the death of the planholder,

  • tax deferral can continue if the beneficiary is your
    • spouse
      • can rollover tax-free to own RRSP or RRIF
      • can buy an annuity
    • dependent children or dependent grandchildren
      • included in their income and taxed, or
      • tax-free transfer if used to buy a term certain annuity to age 18
          • recipient taxed on the annuity payments received
  • for any other beneficiary
    • the RRSP is included in the income of the deceased, taxed in the terminal return and then the proceeds are paid to the beneficiary

Non-Retirement Uses of RRSPs

Home Buyer’s Plan

  • can borrow up to $20,000 interest-free to buy a home in Canada, provided
    • that neither spouse has been a homeowner for four years (time limit waived if disabled)
    • house occupied as a principal residence by October 1 of the following year
  • each spouse can borrow if taking joint ownership
  • cannot deduct RRSP contributions made within within 90 days of the borrowing


  • must repay loan in equal annual installments over 15 years
    • if repaying more than the minimum, the amount payable in future years is reduced
    • if the minimum is not repaid, the shortfall is included in taxable income for the year
  • cannot repay after age 69 (71) → any remaining payments are included in income
  • at death the outstanding loan is taxed

Lifelong Learning Plan

  • can borrow $10,000 per year interest-free from your RRSP to a maximum of $20,000 over four years
  • used loan to pay for educational expenses for you or your spouse
    • not to pay for a child's education
  • for full-time qualifying programs at designated educational institutions
  • loan repaid over 10 years (minimum of 10% of loan each year)
  • at death, any outstanding loan is taxed

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