Registered Retirement Savings Plans (RRSP)
RRSP Contribution Limit
Current year limit is equal to 18% of previous year’s earned income less the previous year’s pension adjustment (PA) and current year’s past service pension adjustment (PSPA) plus current year’s pension adjustment reversal (PAR) subject to the annual maximum. Annual maximums are subject to change over the next number of years to a new level adjusted for inflation each year. The current limit for 2019 is $26,500 and will be indexed thereafter. Unused contribution room can be carried forward to future years. Revenue Canada informs you of your current year’s RRSP limit on your previous year’s Notice of Assessment.
Includes income from employment, business, rental of real property, royalties, research grants, taxable support payments, CPP disability income, and supplementary unemployment benefits received fewer business losses, rental losses, and deductible support payments.
Pension Adjustments (PA, PSPA, PAR)
These amounts effect members of registered pension plans. The amounts reflect the benefits received by an individual member of a plan and are used to equate pension plan members with individuals whose only retirement funding rests in an RRSP.
Timing of contributions and deductions
Contributions are deductible if made during the tax year or in the first 60 days of the following year. Contributions can be made up until the year in which an individual turns 71. At the age of 71, an individual must convert their RRSP to a RRIF or an annuity.
Individuals can contribute to their spouse’s RRSP and receive the deduction from that contribution up and until the year their spouse reaches the age of 71. The contributor may be over 71 as long as he or she has earned income. This used to be a very effective method of income splitting in the future when the spouse withdrew the funds. The new pension income splitting rules have all but eliminated this planning tool. Additionally, the spouse must wait until the third year after a contribution is made before making a withdrawal or the income will be taxed in the hands of the contributor and not the spouse.
Retiring allowances received upon ceasing employment are transferable directly to RRSP subject to the following limits: $2,000 per year of service prior to 1996 and $1,500 per year of service prior to 1989, adjusted for vested employer contributions to a registered pension plan. These contributions do not affect your regular contribution limit.
Savings accounts, GIC’s, government bonds, mortgages, shares and bonds of companies listed on a Canadian stock exchange, certain mutual funds, and certain bonds, shares of corporations listed on foreign stock exchanges and certain investments in investment grade gold and silver bullion. Former restrictions on foreign content have been removed.
Recently, CRA has been reviewing RRSP over-contributions after many years of neglecting this area. The general penalty for over-contributions greater than $2,000 is 1% per month of the amount over-contributed by more than $2,000. This penalty is calculated on a separate return, T1-OVP. This return must be filed within 90 days following the end of the year and is subject to its own late filing penalties and interest charges. RRSP over-contributions can be withdrawn from an RRSP in the year of contribution or following year without income inclusion. You may request by completing a form T3012 that withholding taxes not be applied to these withdrawals. In subsequent years, the RRSP contributions withdrawn must be reported as income.
Home Buyers’ Plan
Individuals can now withdraw up to $25,000 from an RRSP and use the funds to purchase a home. Individuals who have not owned a home during the preceding five years and have repaid any amounts previously withdrawn under the program qualify. The amounts must be repaid over a 15-year period in equal amounts annually or be subject to tax on the amounts not repaid. RRSP contributions must be made at least 90 days prior to any withdrawal under the program. Purchases must be made by October 1 st of the year following the withdrawal of the funds. Specific information on the HBP can be found at CRA’s Home Buyer’s Plan page.
Lifelong Learning Plan
RRSPs can be used to fund education similar to the Home Buyers’ Plan. Individuals are allowed to withdrawal up to $10,000 in any given year and $20,000 in total from their RRSP to finance education and training for themselves or their spouse. An individual must attend a full-time program for at least three months. If the individual leaves the program, the amounts received from the RRSP may be subject to tax. In any event, the amounts received from the RRSP must be repaid over a ten-year period in equal installments commencing no more than 60 days following the fifth year from the first year the funds were withdrawn. Individuals with disabilities are eligible to withdraw funds for part-time studies. Specific information on the Lifelong Learning Plan can be round in CRA’s guide RC4112 Lifelong Learning Plan.
CRA produces two useful publications detailing rules and options with respect to retirement income.
T4040 – RRSP’s and Other Registered Plans for Retirement