It's RRSP season and the deadline is March 1.
To qualify as a 2006 deduction, contributions to personal or spousal RRSPs must be made on or before this date.
Individuals can determine their contribution limit by referring to the
Notice of Assessment
they received from the Canada Revenue Agency (CRA) from the previous tax year or visit the CRA website at
The Institute of Chartered Accountants of Ontario has the following 30 tips to help people make the most of their RRSPs.
RRSP Tip 1 of 30
How Long Can I Contribute to my RRSP?
If you’re winding down your career, there are ways to extend the tax relief offered from an RRSP.
“At the end of the year in which you reach age 69, your RRSP matures and the funds in your plan must be transferred to an RRIF or annuity, or withdrawn in cash,” says Scott Conner, Senior Tax Manager, BDO Dunwoody LLP in Huntsville.
“If you still have unused RRSP contribution room or will continue to generate earned income, you can make RRSP contributions to a spousal RRSP after the year in which you turn 69. Remember that your spouse must be under 70 for this to be possible – at the end of the year in which your spouse turns 69; his or her RRSP will mature as well. For 2001 and subsequent taxation years, a spouse includes a same-sex partner.”
RRSP Tip 2 of 30
Save Tax Relief for a Rainy Day
If you’re contributing to an RRSP this year, it may be wise to take advantage of the tax relief another time.
“RRSP contributions do not have to be deducted in the year in which they are made,” says Conner.
“The contributions can be deducted in that year or in any future year. You should consider deferring the deduction of your contribution if you don't have much taxable income in the current year. By deferring the deduction to a year when your marginal tax rate is higher, you will save more in taxes.
“There are many reasons for doing this. Perhaps you’re a start-up business owner and you don’t have a great deal of taxable income this year. If you were able to contribute to an RRSP this year, you should consider deferring the deduction to a future year when you may have a higher tax rate and will save more in taxes. Remember that delaying the deduction has a cost as you will not get the benefit of the deduction until the future. You also have to consider the time-value of money when making the decision to defer the deduction of your RRSP contributions.”
RRSP Tip 3 of 30
Do I Need to Contribute the Maximum?
We often hear that we should contribute the maximum to our RRSP so that we can maintain our current lifestyle in retirement, but is this true?
“The truth is, many people simply can’t afford to maximize their RRSP contributions each year,” says David Trahair, author of
Smoke and Mirrors: Financial Myths That Will Ruin Your Retirement Dreams and The Entrepreneurial Itch
“It’s tough on top of all the other expenses like the mortgage, kids, vacations and other financial responsibilities.
“The RRSP rules are designed so that if you maximize your RRSP contributions every year, you will build a retirement nest egg that will pay you an income of roughly 70 per cent of your pre-retirement earnings. Of course, each of us is unique and may need less than that, or even more,” adds Trahair.
“If you pay off all debts including the mortgage, car loans and credit cards; if your kids have moved out; and if you are in reasonably good health after you retire; you may be fine with as little as 40 per cent of your pre-retirement income.”
RRSP Tip 4 of 30
What Size RRSP Do I Need to Retire?
Figuring out how much you need to retire can be confusing. Where do you start?
“Assess your financial situation and personal needs,” advises Trahair.
“The general rule of thumb is that you need 70 per cent of your pre-retirement income, but each situation is different. Figure out your expected retirement income and expenses. Do you own your own home, or will you have rental or mortgage payments? Do you have other outstanding debt or financial responsibilities, such as supporting an aging parent?
“Also consider your RRSP investments. Do you know what your annualized Personal Rate of Return (PRR) has been since you opened your RRSP? Many brokerage firms don’t provide this information on their monthly statements.
“It’s also smart to get rid of any debt at a higher interest rate. For example, if your PRR has been two per cent a year on average since you started your RRSP and your mortgage is at six per cent, then simple analysis shows that paying off the mortgage leaves you further ahead.
“Remember that your RRSP is supplemented by the Canada Pension Plan (CPP) and Old Age Security (OAS). If your RRSP is projected to provide enough income during retirement, you may want to optimize its size so it doesn’t spit out too much income and cause a clawback on Old Age Security.
RRSP Tip 5 of 30
Eliminate Tax Refunds
How can a tax refund not be a good thing?
“It actually means that you’ve paid too much tax throughout the year and are now claiming it back,” says Tina A. Di Vito, Director of Retirement Solutions, BMO Financial Group in Toronto.
“In other words, you have given the Canada Revenue Agency (CRA) an interest-free loan until the time your tax return is processed and you receive your refund. One solution to this problem is to have your employer reduce your income tax withholdings to reflect the RRSP contribution you will be making during the year.
“To start the process, send a request to any tax services office of CRA. Once approved, your employer will be authorized to reduce the withholding amount. Your increased cash flow provides an excellent opportunity to start a monthly RRSP contribution program or other savings strategy. Why wait to get a refund when you can pay less tax throughout the year?”
Income tax withholdings may also be reduced if a portion of your remuneration is directed to an RRSP by your employer. Care should be taken to ensure that your contribution limit has not been exceeded.
RRSP Tip 6 of 30
Top Up Your RRSP
If you plan on obtaining a loan to purchase an RRSP, Di Vito has a suggestion for continuing to build your retirement nest egg once the loan is paid off.
“By applying the tax refund generated by your RRSP contribution to the balance of the loan, you’ll be able to pay off the entire loan early. After the loan is repaid, the secret is to continue making the same payment directly towards your RRSP. Once you develop the habit of contributing every month, you should have to borrow a lot less to top up your RRSP in the following year. By the third or fourth year, you’ll be so used to making regular payments that you may not need a loan at all,” says Di Vito.
RRSP Tip 7 of 30
Don’t Ignore RRSP Room
Discussing RRSP contributions with the over-65 crowd may not be so unusual these days, according to Di Vito.
“That’s because Canadians are working longer. The 2005 BMO Retirement Trends Study revealed that 33 per cent of current retirees either work for an employer or are self-employed. Canada Revenue Agency taxation statistics also show that individuals aged 65 and over who contribute to RRSPs make average contributions of $8,600. That’s 73 per cent higher than the average contribution made by those aged 45 to 64.”
How is this possible?
Canadians who continue working beyond age 65 will continue to accumulate new RRSP room annually. These individuals are no longer in employer pension plans so RRSP contribution limits are not eroded by pension adjustments.
Canadians may have unused RRSP room carried forward from their working years.
“While Canadians who are over 69 cannot have their own RRSP, they may continue to make tax-deductible RRSP contributions to a spousal RRSP if they have a spouse or common-law partner who is not yet 69.
“During RRSP season, remember that you don’t need to be working to take a deduction for an RRSP contribution. If you have RRSP room and taxable income from which to take the tax deduction, you can make a contribution to your own or a spousal RRSP.”
RRSP Tip 8 of 30
Withdraw Tax-Free Money From Your RRSP
If you plan to purchase your first home, you may withdraw up to $20,000 from your
RRSP on a tax-free basis by taking advantage of the Home Buyers' Plan (HBP),” says Bruce Ball, Tax Partner, BDO Dunwoody LLP National Office in Toronto.
“Your spouse may be eligible too, which leaves the potential for having up to $40,000 available towards a home purchase. The withdrawal is treated as a loan from your RRSP and must be repaid over a period of 15 years. Certain conditions and restrictions apply.”
RRSP Tip 9 of 30
Maximize Your 2005 RRSP Contribution
The maximum amount you can contribute to an RRSP depends on your earned income from the previous year.
“Your contribution will be limited to 18 per cent of your 2006 earned income to a maximum of $19,000 for 2007” advises Jim Lockhart, Partner, BDO Dunwoody LLP in Kenora.
“You need at least $105,556 of earned income in 2006 to maximize your 2007 contribution. This limit is further reduced by your pension adjustment for 2006. If you carry on business through a corporation, try to ensure that your 2006 salary is at least $105,556 to allow a full $19,000 contribution in 2007.”
“In general terms, earned income is income you receive from employment, business or the rental of real estate property, as well as any alimony and taxable maintenance. It is reduced by business or rental losses and any alimony and payments made,” adds Lockhart.
RRSP Tip 10 of 30
Use Your RRSP to Invest In Business
It is possible to use your RRSP to invest in a Canadian-controlled private corporation (CCPC).
“If you deal at arm's length with the CCPC, and the cost of the shares you hold in the CCPC or a related corporation is less than $25,000, you can invest your RRSP in shares of the company,” says Lockhart.
“In determining the amount and cost of the shares that you own, you have to consider shares owned by family members, both inside and outside their RRSPs. Also, all or substantially all of the company's assets must be business assets at the time the shares are purchased by your RRSP.”
“If you own less than 10 per cent of the shares, there are generally no restrictions on the amount you can invest. If you own more than 10 per cent together with family members, the investment may not qualify as an RRSP asset,” advises Lockhart.
RRSP Tip 11 of 30
It’s Never Too Early to Start
“If your children work for you, they should file a tax return as early as possible to start generating RRSP room,” says Glenn Lott, Partner at Lott & Company, Chartered Accountants in Markham.
“RRSP carry-forwards do not expire, meaning RRSP contribution room will be available in the future when the child is earning income and needs the deduction to reduce income taxes. We also advise our clients to consider an over-contribution for a child over age 18 because a maximum of $2,000 is allowed without penalty. The over-contribution could end up being deducted by the child in a future year when a tax break would be welcome.”
RRSP Tip 12 of 30
An RRSP Can Finance Your Home
“If you plan to take advantage of the RRSP Home Buyers’ Plan, there are some important details to consider,” says Lott.
“If you’re buying your first home you can withdraw up to $20,000 from your RRSP. But you’ll need to have the $20,000 in your RRSP at least 90 days before making that withdrawal. So, be sure to make any additional contributions to your RRSP prior to making your Home Buyers’ Plan withdrawal.
“Consider deferring repayment of Home Buyers’ Plan withdrawals if you have a low income year (for example, you’re on maternity leave or collecting employment insurance). If the required Home Buyers’ Plan repayment is not made, the amount of the required repayment is subject to income tax in that year. If your spouse is in a higher tax bracket, have your spouse use this money to make an RRSP contribution. The tax savings on the spouse’s contribution will exceed the income tax paid on the Home Buyers’ Plan income.”
RRSP Tip 13 of 30
Designate a Beneficiary and Avoid Probate Taxes
“To maximize the hard-earned funds in your RRSP or RRIF, consider naming specific beneficiaries rather than your estate,” advises Sam Zuk, Partner, Soberman LLP in Toronto.
“By designating the specific beneficiaries for these plans, you can avoid Ontario probate fees of 1.5 per cent. On $500,000 you could save $7,500. If you designate your estate as your beneficiary, you will pay probate taxes because these funds are part of the deceased’s will.
“While making this change in your designated beneficiary, go one step further and do the same with your life insurance policy.”
RRSP Tip 14 of 30
Set Up a Spousal RRSP
Are you the highest wage earner in your family? Do you expect to generate the bulk of your family’s retirement income? If so, then a spousal RRSP is an excellent strategy for you, according to Loren Francis of Cumberland Private Wealth Management Inc. in Toronto.
“A spousal RRSP helps provide more equal retirement income as well as tax savings.
“Different tax rates apply to couples versus individuals, with the result that a couple receiving two smaller incomes at retirement will be taxed at a lower rate than one individual claiming the total household income. When you contribute to a spousal RRSP, you will also get an immediate tax deduction – just remember that the contributions are owned and controlled by your spouse.
If you are a married couple or living in a common-law relationship – and you have earned income or unused RRSP deduction room – you can also contribute to a spousal RRSP until December 31 of the year that your spouse or partner turns 69,” Francis advises.
RRSP Tip 15 of 30
Don’t Delay Your RRSP Contribution
Even if you don't need the tax relief, don't delay making an RRSP contribution.
“It makes sense to contribute when you have the available funds and the RRSP room. This will shelter the income earned from taxes. Once you have made a contribution, you can carry it forward indefinitely and deduct it in a future year when you could potentially save over 46 per cent in taxes,” says Steven Aprile, a Partner with PKF Hill Chartered Accountants in Toronto.
RRSP Tip 16 of 30
RRSP Investments for Business Owners
“Business owners take on a lot of risk when operating their own company. So when it comes time to invest their personal RRSP funds, they may want to stick to safe, interest-bearing investments such as GICs, government bonds and investment grade corporate bonds,” says Aprile.
“They may also wish to keep their riskier investments, such as common shares, trust units and preferred shares, outside of their RRSPs. This makes sense because dividends and capital gains earned on these riskier investments are taxed at a lower rate than interest income. It makes further sense to earn interest income in your RRSP where tax is not a concern.”
RRSP Tip 17 of 30
Withdraw from a Spousal RRSP
What happens if you decide to make a withdrawal from a spousal RRSP?
“If your spouse wants to withdraw from the plan, he/she should wait three years after the last contribution was made. Otherwise, as the contributor, you’ll be responsible for paying the tax. This is called the three-year attribution rule, and under this rule, a withdrawal from a spousal RRSP will be taxable to you to the extent that you made contributions in the year of the withdrawal and the prior two taxation years.
At retirement, your spouse will be fully responsible for paying the tax on any withdrawals,” says Francois Menard, Investment Advisor, RBC Dominion Securities Inc. in Ottawa.
“You may want to explore other options before withdrawing from your RRSP. Consider any tax ramifications carefully. Once your spouse withdraws the money, the contribution is lost,” he adds.
RRSP Tip 18 of 30
Mortgage vs. Retirement Saving
Should you focus on paying down your mortgage or contributing to an RRSP?
“Mathematically, you can calculate which alternative is better, given assumptions about mortgage rates and the rate of return in your RRSP. Most analysts conclude that it is better to pay off your mortgage first, assuming that the rate of return of the investment in your RRSP does not exceed your mortgage rate,” says Ann M. Donohue, a Partner with Campbell Lawless Professional Corporation in Toronto.
“There are many factors that you should also consider. Will you be able to catch up on your RRSP contributions once you’ve paid off your mortgage? Will you need the funds in your RRSP for emergencies? Do you want to diversify your investments rather than place all of your available cash in your home?”
“Keep in mind that having the discipline to save money, either by paying down your mortgage or putting money in your RRSP, will mean that you will increase your net worth in the long run. Both paying off your mortgage and saving for retirement are important components of any good financial plan,” advises Donohue.
RRSP Tip 19 of 30
How Contribution Room is Calculated
How does the government calculate your RRSP contribution room?
“The CRA calculates your contribution limit for the upcoming year and highlights this in a box on the Notice of Assessment that you receive in the mail after you file your income tax return for the current year. You are entitled to contribute this amount to your RRSP without penalty, generally starting on January 1 of the upcoming year. Once you make a contribution to your RRSP, you can deduct it on your tax return in the current year or any future year,” says Ball, Tax Partner, BDO Dunwoody LLP National Office in Toronto.
Any contribution made before March 1, 2007 can be deducted on your 2006 tax return if you have contribution room for 2006.
RRSP Tip 20 of 30
How Many RRSPs Can I Have?
There is no limit to the number of RRSP plans you can have, but there are limits on how much of your investment can be insured.
“Most people find it simpler to have only one or two plans, making it easier to keep track of their RRSP investments. If you are investing in assets which are insured by the Canada Deposit Insurance Corporation (CDIC), it may make sense to have more than one RRSP with different RRSP insurers,” says John Wonfor, National Tax Partner, BDO Dunwoody LLP National Office in Toronto.
“The CDIC only insures up to $100,000 with each member financial institution. By having RRSPs with more than one institution, you can increase the amount of your investments that are covered by the CDIC. Assets usually covered include bank or trust company deposits and GICs, but not mutual funds.”
RRSP Tip 21 of 30
Hidden Costs of RRSPs
There are fees associated with RRSPs that you should be aware of when looking at the whole RRSP picture.
“Fees are usually charged if you make withdrawals from your plan, or your plan is wound up, or transferred to another RRSP insurer. These fees can range from $25 - $100. In addition, there are annual administration fees associated with trusteed RRSPs. For a self-directed plan, fees usually range from $100 - $200 annually and are not deductible for tax purposes. If they are paid with RRSP funds, this will reduce the amount available for future withdrawals,” says Wonfor.
RRSP Tip 22 of 30
Reduce Taxes for Business Owners
“Canadian tax law as it pertains to private business owners is, to say the least, complex,” advises Gena Katz, Executive Director with Ernst & Young LLP in Toronto.
“Use corporate funds to make your RRSP contribution. The cash used to make the contribution is considered employment income but the offsetting RRSP deduction helps you avoid taxation on the salary. If possible, pay bonuses to employees to reduce your company’s taxable income to $400,000. The first $400,000 of active income for small business is taxed at a rate of 15 - 22 per cent.”
“Defer paying employee bonuses for up to 179 days after your corporate year-end. Your business will get a tax deduction in the current corporate tax year, even though you haven’t actually paid the bonuses. Your employees will be able to declare the bonus in the year of its receipt. In certain cases, this should lower their tax liability for the bonus, although the withholding tax continues to apply,” explains Katz.
RRSP Tip 23 of 30
Strategic Investing for Couples
“If you and your spouse both earn income, consider having the higher-income spouse pay all the day-to-day living expenses and use the income of the lower-earning spouse to invest,” says Katz.
“The investment income generated by the lower income earning spouse will be taxed at a lower marginal rate (the rate applied to additional income). The higher income spouse can even pay tax installments on the final tax balance owing for both spouses, preserving more of the lower-income spouse’s money for reinvestment.”
RRSP Tip 24 of 30
Do Spousal Contributions Still Make Sense?
Even though spouses can now allocate half of their pension income to each other, spousal contributions still make sense, according to Zuk, Partner, Soberman LLP in Toronto. Qualifying pension income includes RRIF withdrawals for those 65 years of age or older.
“For many years, spouses have planned their RRSP contributions to equalize their RRSP accounts and minimize taxes paid on retirement. Through spousal contributions, one spouse can contribute to the other’s RRSP and still deduct the contribution from his/her income for tax purposes.
“New provisions in the recent federal announcement dealing with income trusts now allow pensioners to allocate up to one-half of their pension income to their spouse or common-law spouse – up to and including the amount that qualifies for the pension income tax credit.”
Zuk advises that, because only up to half of your income can be reallocated to your spouse, you shouldn’t rule out a spousal contribution.
“Assuming the rule applies for Ontario purposes, reallocating half your income still may not adequately maximize the benefits of income splitting, given that one spouse may enjoy other sources of income. Furthermore, certain withdrawals from RRSPs and RRIFs will not qualify for this treatment.”
RRSP Tip 25 of 30
Owner-managers who are retiring this year should consider having the company pay eligible retiring allowances directly to their RRSPs.
Francis of Cumberland Private Wealth Management Inc. in Toronto explains why this strategy is advantageous.
“Prior to selling or winding-up an operating company, you can contribute eligible retiring allowances to your own RRSP to a maximum of $2,000 per calendar year of service. This applies to years prior to 1996, and is in addition to your regular RRSP limits. You can also contribute $1,500 more per calendar year of service prior to 1989, if you didn’t have vested rights in a company-sponsored pension plan pre-1989.
“Bear in mind that this extra RRSP room is temporary, and it is lost if it is not used in the year the retiring allowance is paid.
“While the eligible retiring allowances are deductible to the company and taxable to the owner-managers, the net effect on your annual taxable income will be nil because you will claim equal and offsetting RRSP contributions. To get the maximum tax advantage, it’s best to discuss your individual situation with your ,” Francis adds.
RRSP Tip 26 of 30
The Self-Employment Pension Plan
What if you don’t have the funds to build up a substantial RRSP? Is there another way to fund a comfortable retirement?
“Consider the Self-Employment Pension Plan (SEPP),” advises David Trahair.
“The SEPP is something that anyone who is self-employed automatically has access to – the ability to do what you love doing during retirement and get paid for it. You’ll want do something to keep yourself busy, so why not earn money for it?
“If you start honing your skills early enough, by retirement age you’ll probably have developed a niche you enjoy. You’ll most likely also have clients, and you can get involved as much or as little as you like. At this stage you’ll have tremendous experience, which is worth good money to those that need it.
“Not self-employed? Consider building your skills on a part-time basis. Learn how to find and keep clients, bill what you are worth, and run a business you enjoy. It has the potential to be your very own pension plan.”
RRSP Tip 27 of 30
Borrow to Save for Retirement
Is obtaining a loan to purchase an RRSP a good idea?
“An RRSP loan can be advantageous if you have accumulated a significant amount of unused RRSP room because it allows you to maximize your contribution,” says Di Vito, Director of Retirement Solutions, BMO Financial Group in Toronto.
“For example, say you have unused room of $18,500 and your marginal tax rate is 46 per cent – if you can come up with $10,000 yourself and borrow $8,500, for a total contribution of $18,500, the RRSP contribution will generate a tax refund of $8,500 – just enough for you to pay off the entire loan.”
RRSP Tip 28 of 30
Considering a Career Change?
“You can withdraw up to $20,000 ($10,000 maximum per year) from your RRSP through the Lifelong Learning Plan (LLP) to finance training or education for you or your spouse or common-law partner,” says Donohue, a Partner with Campbell Lawless Professional Corporation in Toronto.
“Eligible withdrawals are not included in your income but must be repaid over a specified period of several years. You can participate in the plan more than once over your lifetime but you must meet certain conditions before you can withdraw funds. Check with the Canada Revenue Agency (CRA) or your Chartered Accountant to find out if you meet these conditions.”
RRSP Tip 29 of 30
Death, Taxes and RRSPs
“An important part of your tax and financial planning should include taxes that arise upon death,” says Zuk, Partner, Soberman LLP in Toronto.
“The value of your RRSPs and a Registered Retirement Income Fund (RRIF) at the time of your death must be included as income. If capital assets or RRSPs/RRIFs are inherited by a surviving spouse or partner, the resulting capital gains and income inclusion can be deferred until the death of the surviving spouse or partner.
“Another exception arises if the RRSPs/RRIFs are inherited by a financially dependent child or grandchild. Then the resulting income inclusion can either be taxed in the hands of the child or grandchild or used to buy a term annuity up until age 18,” explains Zuk.
RRSP Tip 30 of 30
Tap into Your RRSP Savings
If you withdraw money from your RRSP, here’s how it will affect you financially.
“You’ll be subject to tax withheld at source of 10 per cent if the withdrawal is less than $5,000; 20 per cent if the withdrawal is greater than $5,000 and less than $15,000; and 30 per cent for amounts greater than $15,000,” says Gary H. Kopstick, Senior Tax Partner, Soberman LLP in Toronto.
He suggests that you consider several smaller withdrawals rather than one large lump-sum payment to reduce the tax withheld at the time of the withdrawal. “The reduction is only a tax deferral, as the withdrawn amounts must be reported on your tax return where they will be subject to your regular tax rate.”