Today is the last day you can make a contribution to your RRSP to reduce your 2017 tax liability. With the deadline upon us, we thought we’d write a detailed blog explaining what exactly an RRSP is, the contribution limit, how it may affect your tax liability and how it can be withdrawn tax-free.
What is an RRSP?
An RRSP (Registered Retirement Savings Plan) is a retirement savings plan that you establish/register to which you or your spouse or common-law partner contribute. RRSP contributions can then be used to reduce your tax obligation to Canada Revenue Agency (CRA).
What are the tax consequences associated with RRSPs? In other words, why should I invest in an RRSP?
RRSP is primarily a retirement planning tool that allows taxpayers to defer tax when they are in a high tax bracket until retirement (when they are expected to be in a low tax bracket.) Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.
Example: David’s taxable income for the year 2017 is $ 70,000. If he contributes $ 30,000 into his RRSP, his taxable income would be reduced from $ 70,000 to $ 40,000. Therefore, his tax obligation for the year 2017 would be based on $ 40,000 instead of $ 70,000. In other words, by making a RRSP contribution, he moves to a lower tax bracket reducing his annual tax liability.
How much money can I contribute to my RRSP?
Your latest notice of assessment should have your RRSP contribution limit for the tax year. For instance, your notice of assessment for the year 2016 (that you would have received in 2017 after filing your 2016 tax return) would have your available contribution room for the year 2017.
You can also find out how much contribution room you have by calling CRA at 1-800-267-6999. You’ll be asked to provide the following to verify your identity:
- your SIN,
- your month and year of birth; and
- the total income you entered on line 150 of your prior year return.
Maximum RRSP contribution room is calculated as follows:
- Lesser of a or b:
- a) 18% of your “earned income” for the previous year
- b) the annual RRSP limit (For year 2017, it is $ 26,010)
- – Minus: Pension Adjustment (PA) from previous year (total from box 52 of your previous year’s T4 slips and box 034 of your previous year’s T4A slips). If the amount is negative, enter “0”.)
- – Minus: Any Past Service Pension Adjustments (PSPA)
- + Plus: Any Pension Adjustments reversals (PAR)
- + Plus: Unused deduction room carried forward from previous year.
Can I contribute to my spouse’s or common-law partner’s RRSP?
Yes, you can certainly contribute to your spouse’s or common-law partner’s RRSP, however, contributions you make will reduce your RRSP deduction limit. The maximum amount you can contribute is the same (calculation steps shown above) whether you contribute to your own RRSP or your spouse’s.
What’s the deadline to contribute to your RRSP?
For the deduction to be deductible, you must make an RRSP contribution within 60 days of the proceeding year which generally translates to March 1 (February 29 for leap years).
Example: For tax year 2017, the deadline is March 1, 2018 but for year 2019, the deadline would be Feb 29, 2020.
The deadline is generally extended when it falls on a holiday. For instance, the deadline for year 2002 was March 1, 2003 but since it fell on a Saturday, the deadline was extended to March 3, 2003.
If you turn 71 during the tax year, you only have until Dec 31 of that year to contribute to your own RRSP.
In the year you turn 71 years old you must choose one of the following options for your RRSPs:
- withdraw them (RRSP issuer will withhold tax & issue a T4RSP slip – see below)
- transfer them to a RRIF (no tax withheld on amounts transferred to RRIF but you may have to pay tax on the income when you start receiving payments from the RRIF.)
- use them to purchase an annuity (no tax withheld on amounts used to purchase an annuity)
After December of the year you turn 71 years old, you can contribute, up to your RRSP deduction limit, to a spousal RRSP or common-law partner RRSP, if your spouse or common-law partner is 71 or younger on December 31 of the year you make the contribution
How am I taxed when I withdraw money from RRSP?
When you withdraw funds from your RRSPs, your RRSP issuer will withhold tax, prepare and issue a T4RSP tax slip (Statement of RRSP income) that you will use to report your income and tax deducted on your income tax and benefit return for the year the RRSPs are withdrawn.
Can I deduct the interest I paid on money I borrowed to contribute to an RRSP?
No, interest on loans taken out to invest in an RRSP is not deductible. However, you can cash in an existing investment to contribute to RRSP and then take out a loan to acquire another investment that is not an RRSP. This way, you can get a deduction for your RRSP contribution as well as deduct the interest paid on the loan taken out to acquire a new investment.
Can contributions be made to a deceased individual’s RRSP?
No one can contribute to a deceased individual’s RRSP, PRPP or SPP after the date of death. But, the deceased individual’s legal representative can make contributions to the surviving spouse’s or common-law partner’s RRSP. The contribution must be made within the year of death or during the first 60 days after the end of that year.
Contributions made to a spouse’s or common-law partner’s RRSP can be claimed on the deceased individual’s tax return, up to that individual’s RRSP deduction limit, for the year of death.
What happens if you go over your RRSP/PRPP deduction limit?
If you (or your employer for pooled registered pension plan (PRPP) purposes) contribute more to your RRSP, PRPP or SPP, or your spouse’s or common-law partner’s RRSP or SPP than your RRSP/PRPP deduction limit allows, you will have an excess contribution.
Generally, you have to pay a tax of 1 % per month on excess contributions that exceed your RRSP/PRPP deduction limit by more than $2,000 unless you:
- withdrew the excess amounts
- contributed to a qualifying group plan
If you have to pay this 1 % tax, fill out a T1-OVP, 2017 Individual Tax Return for RRSP, PRPP and SPP Excess Contributions return and send it to your tax centre. Pay the tax within 90 days after the calendar year avoid late-filing penalties or interest charged.
Can the Canada Revenue Agency (CRA) cancel or waive the tax on your excess contributions?
You can ask the CRA in writing to consider cancelling or waiving the tax if you can explain:
- why your excess contributions were due to a reasonable error
- what steps you are taking, or have taken, to withdraw the excess contributions
Include the following with your letter:
- a request to cancel or waive the tax
- copies of your RRSP, PRPP, specified pension plan (SPP), or RRIF statements that show the date you withdrew your excess contributions
- any other correspondence that shows that your excess contributions are due to a reasonable error
How much tax is withheld by the RRSP issuer when I withdraw money from RRSP?
When you withdraw funds from an RRSP, your financial institution withholds the tax. The rates depend on your residency and the amount you withdraw. For residents of Canada, the rates are:
- 10% (5% in Quebec) on amounts up to $5,000
- 20% (10% in Quebec) on amounts over $5,000 up to including $15,000
- 30% (15% in Quebec) on amounts over $15,000
For funds held in the province of Quebec there will also be provincial tax withheld.
Can I withdraw money from my RRSP tax free?
When you withdraw funds from your RRSPs under either of the following plans, you do not include them as income on your income tax and benefit return.
1. Buy your first home (Home Buyers’ Plan (HBP))
You and your spouse each can borrow up to $25,000 from your RRSPs for a down payment on your first home under the government’s Home Buyers’ Plan (HBP). You won’t pay any tax on the money as long as you pay it back over the next 15 years.
2. Pay for education or training
You and your spouse each can borrow up to $20,000 from your RRSPs to pay for full-time or part-time education or training expenses under the government’s Lifelong Learning Plan (LLP). The maximum you can take out in any year is $10,000. You won’t pay any tax on the money as long as you pay it back over a period of 10 years.
Your RRSP deduction may be affected by HBP or LLP participation
If you participate in one of these plans, certain rules limit your RRSP deduction for contributions you made to your RRSP during the 89-day period just before your withdrawal under these plans. Under these rules, you may not be able to deduct all or part of the contributions made during this period for any year.
You cannot deduct the amount by which the total of your contributions to an RRSP, during the 89-day period just before your withdrawal from that RRSP, is more than the fair market value of that RRSP after the withdrawal. The same rules apply if you contributed to your spouse’s or common-law partner’s RRSP during the 89-day period just before that individual made the withdrawal from the same RRSP under these plans.
In other words: for contributions to be fully deductible that are made to an RRSP in the 89-day period just before an HBP or LLP withdrawal from that RRSP, the value of that RRSP after the withdrawal must be at least equal to those contributions.
What happens when a RRSP annuitant dies?
At the time of death, an individual may have an RRSP. The amount you include in income of the deceased annuitant can vary depending on whether or not the RRSP has matured. Also, any balances remaining for withdrawals under the Home Buyers’ Plan or Lifelong Learning Plan may have to be included in income on the final income tax return.
The amount to be included in a deceased participant’s income for the year of death is equal to the participant’s HBP balance before death minus any RRSP contributions (made before the participant died) designated as an HBP repayment for the year of death
If the surviving spouse or common-law partner is:
- the beneficiary of the RRSP, as specified in the RRSP contract, the remaining annuity payments under the RRSP become payable to the annuitant’s surviving spouse or common-law partner and he or she will begin to receive the annuity payments; or
- the beneficiary of the estate, the spouse or common-law partner and legal representative can jointly elect in writing to treat amounts the RRSP paid to the estate as being paid to the spouse or common-law partner. The surviving spouse or common-law partner must attach a copy of the written election to his or her income tax and benefit return. The election has to specify that the surviving spouse or common-law partner is electing to become the annuitant of the RRSP. If such an election is made, no T4RSP slip will be issued in the name of the estate even if the estate received the amounts.
The T4RSP slip is issued with an amount shown in box 16 of the T4RSP. The slip will be in the name of the surviving spouse or common-law partner and is to be reported by the surviving spouse or common-law partner.
Transfer to the surviving spouse or common-law partner (named as beneficiary in the RRSP contract)
If, by the end of the year following the year of death of the annuitant, all of the property the RRSP held is paid to you as the deceased annuitant’s spouse or common-law partner (as specified in the RRSP contract), and that property is directly transferred to your RRSP, claim a deduction equal to the amount transferred to your RRSP on line 208 of your income tax and benefit return. If the amount is directly transferred to your RRIF or directly transferred to an issuer to buy yourself an eligible annuity, claim a deduction equal to the amount transferred on line 232 of your income tax and benefit return.
The T4RSP slip is issued in the name of, and is to be reported on line 129 by the surviving spouse or common-law partner. The amount will be shown in box 18 of the T4RSP. The spouse or common-law partner will be eligible to claim a deduction on line 208 of his or her income tax and benefit return.
For more information, see Amounts paid from an RRSP or RRIF upon the death of an annuitant.
Can I make a contribution this year but claim the deduction next year?
Yes, definitely. If your income falls in the lowest bracket right now but are expecting your income to go up in the future, you could consider making a contribution this year (assuming your cash-flow allows) but not claiming the deduction until you’re in a higher tax bracket.
For more information regarding RRSPs or any other tax issue, please click here. Should you have questions bout how these changes may impact your business, please call us at +1-905-507-0032 or contact us through our website or Facebook Page.