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Return to RRSP section Learning Centre - RRSPs
RRSP Questions & Answers

The RRSP contribution deadline is around the corner once again, but many of the issues involved in planning for retirement fall outside the January to February time-frame. Here are some important questions and answers to consider.

General RRSP Information

What is an RRSP?

How much money can I contribute to my RRSP each year?

What is the best means of contributing to an RRSP?

Which assets are taxed most efficiently in an RRSP?

What is the current lifetime over-contribution limit?
Holding Foreign Assets

How much of my plan can I hold in foreign assets?

Crystallizing my RRSP: What does that mean?
Unlocking RRSP Funds

Can I unlock some of my RRSP funds?

Can I withdraw 2 x $5,000 and only pay 10 per cent tax?

How much money can I withdraw from my RRSP to purchase a home under the Home Buyers' Plan?

What is the maximum amount of money that can be withdrawn from an RRSP for The Lifelong Learning Plan?
RRSPs And Business

Can I use an RRSP as collateral for a loan?

Are all RRSP safe from creditors?

Can I use my RRSP to invest in a small business?

I have cash in my RRSP and wish to exchange it for non-registered funds.
Spousal RRSP Issues

When starting a spousal RRSP, which partner should be making the contributions?

What happens to my RRSP if I get divorced?
RRSPs And Retirement

At what age must I collapse/ convert my RRSP?

What options do I have when I collapse / convert my RRSP?

What happens if I die before I reach age 69?

What happens if I leave my RRSP to a charity?

Can RRSP contributions be made on a terminal return?
 

General RRSP Information

What is an RRSP?
A Registered Retired Savings Plan (RRSP) is an investment vehicle into which investors can make tax-deferred contributions to be used towards retirement savings. The funds remain in a tax shelter until retirement and are then taxed as they are withdrawn, at which point the contributor is normally in a lower tax bracket.

How much money can I contribute to my RRSP each year?

Up to 18 per cent of your earned income from the previous year, less any pension adjustment amounts, can be contributed to your RRSP. However, this amount cannot exceed $14,500 through the 2003 tax year. The maximum RRSP contribution amount rises to $15,500 for 2004 and to $16,500 for the 2005 taxation year. Any unused contribution room can be carried forward indefinitely.

In order for any new RRSP contributions to be tax deductible they must be made during the tax year or within 60 days of the year following the tax year. E.g. For the 2003 tax year, all contributions must be made between January 1, 2003 and March 01, 2004. (March 1, 2004 is actually the 61st day, however as the 60th day falls on a Sunday an extra day is provided)

What is the best means of contributing to an RRSP?
Generally speaking the best method of contributing to an RRSP is to follow "the sooner the better" approach. You should remember that time is your ally when saving for retirement so that the earlier assets can be placed in a plan, the longer they have to compound tax-free.

A good way to avoid having to make a large annual lump-sum contribution is to start early in the year and make small monthly payments. Arrangements can be made through your financial advisor or institution to have your contributions withdrawn from your bank account each month to be invested in an RRSP.

Which assets are taxed most efficiently in an RRSP?
Any asset held in an RRSP is tax deferred until the asset is withdrawn from the plan. At that point, all withdrawals are taxed equally at your marginal rate.

What is the current life time over-contribution limit?
The over-contribution limit is a maximum of $2,000, which is carried forward over your lifetime. Also, remember that exceeding this limit is expensive, as there is a 1.0% per month tax penalty.

Holding Foreign Assets


How much of my plan can I hold in foreign assets?

The foreign property limit of 30% you were allowed for foreign property in RRSPs or RRIFs, is canceled effective January 1, 2005. This allows more international diversification opportunities for retirement investments.

Crystallizing my RRSP: What does that mean?
To "crystallize" an RRSP is to increase the book value (purchases plus reinvested distributions) of your RRSP through the sale and purchase of the Canadian content investments in the plan and thus increase the plans foreign content limit . If your Canadian content holdings have increased substantially in value so that the market value of the investments is well above the book value, you can sell them and buy other Canadian content investments within the same plan. The purchase value of the new investments (the same as the market value of the old investments) becomes the new book value and this higher book value will allow you to buy more foreign content investments.

Unlocking RRSP Funds


Can I unlock some of my locked-in RRSP funds?
You should be able to access your locked-in accounts by converting them to a LIF (life income fund) or LRIF (locked in RRIF) if you are at least age 55. You could then withdraw anywhere between the minimum and maximum amounts allowed from the LIF or LRIF to help meet your cash flow needs. You may also be able to withdraw lump sum amounts from the LIF or LRIF if you meet certain hardship requirements. The rules that apply to an individual locked-in plan may vary among provinces and also whether the original pension plan from which the locked-in funds originated was provincially or federally regulated.

Can I reduce the withholding tax rate on any RRSP withdrawals?

According to the tax regulations, the withholding tax on RRSP withdrawals is calculated with respect to each individual withdrawal made, and not on a cumulative basis. Therefore, if withdrawal requests of $5,000 are made on five different days to the same institution, then each withdrawal is subject to the low withdrawal rate of 10 per cent ( 25 per cent for Quebec residents).

However, if a single $25,000.00 request is made on one day the institution must deduct the highest withholding tax rate of 30%(38 per cent in Quebec).

The withholding tax is only a partial prepayment of the total tax liability on the funds withdrawn, so if you are in a high tax bracket it may be better to have the higher withholding tax rate apply to reduce the final tax bill when you file your tax return.

How much money can I withdraw from my RRSP to purchase a home under the Home Buyers' Plan?
Each spouse can withdraw up to $20,000 from an RRSP for which they are the annuitant assuming each qualifies for the plan. The money borrowed from an RRSP under the Home Buyers' Plan has to be repaid by way of contributions to an RRSP over a period of no more than 15 years. The required yearly payment amount is 1/15th of the amount borrowed and the first repayment period begins in the second year following the year the RRSP funds were withdrawn for the home purchase. The repayment period will be shortened due to death, non-residency or age (over age 69).

What is the maximum amount of money that can be withdrawn from an RRSP for The Lifelong Learning Plan?

Although $20,000 can be withdrawn from an RRSP over four years to pay for an education, the most that can be taken out of an RRSP in one calendar year is $ 10,000. The funds may be used to finance the full-time program of the participant or their spouse at a qualifying educational institution.

The participant has 10 years to repay the money borrowed from their RRSP, beginning the earlier of the fifth calendar year after the withdrawal, or the second consecutive year in which the student cannot claim the education credit for at least three months of that year. Monies not repaid are taken into income for that year and taxed.


RRSPs And Business


Can I use an RRSP as collateral for a loan?
Don't use RRSP assets as collateral for a loan. When a trusteed RRSP is used as collateral for a loan, the tax rules require the annuitant to include the fair market value of the plan as income on his or her personal return.

Are all RRSPs safe from creditors?
No. RRSP assets may not be "creditor-proof" in the event of bankruptcy. Mutual fund RRSP's (other than those held in "locked-in" plans) are not protected from creditors' claims. Consider using segregated funds as an alternative if you are concerned about creditor protection since they are an insurance policy and have a better success rate of avoiding creditor claims.

Can I use my RRSP to invest in a small business?
Although there is no program like the Home Buyers' Plan that would allow a tax free withdrawal from an RRSP to finance a small business, in certain restricted circumstances a Self Directed RRSP may hold eligible small corporation shares or debt as long as the RRSP annuitant is not a designated shareholder.

I have cash in my RRSP and wish to exchange it for non-registered funds.

This is called a "swap". A swap is an exchange of properties between non-registered and registered accounts . This can be done to rearrange a portfolio or simply to increase liquidity (through an exchange of non cash assets for cash). With a swap, there are no mutual fund DSC fees charged as the fund is not actually redeemed: its status is just changed from registered to non-registered or vice versa.

Please note: Transfers of capital property from an open account to an RRSP are subject to the deemed disposition rules. A capital gain incurred on the deemed disposition is taxable, while any capital loss is denied.


Spousal RRSP Issues


When starting a spousal RRSP, which partner should be making the contributions?
There is no right answer here - many different scenarios have to be considered. Generally, it is best for a higher income earner to contribute on behalf of the lower income partner. But the future of both people must also be considered. If one partner has a pension plan through his/her employer, then it might make sense to start an RRSP for the other to provide post-retirement income. Speak to your financial adviser about your specific situation.

What happens to my RRSP if I get divorced?

It is recommended that couples take a close look at the stability of their marriage before contributing to a spousal RRSP. If you live in a province that is governed by Family Law, all assets that are shared and have been accumulated over the course of the marriage are divided equally. This includes both personal and spousal RRSPs. If a portion of the RRSP assets for one spouse have to be transferred to the other spouse as part of a division of assets, there is a marriage breakdown document that can be used to effect the transfer. In this way the transferring spouse does not have a tax liability and the receiving spouse does not receive a tax receipt.

Please note: Any personal RRSPs that were acquired by either party before entering into a marriage are not considered shared assets and are therefore not included in the division of assets.


RRSPs And Retirement


At what age must I collapse/ convert my RRSP?
At the end of the calendar year in which you turn 69, your RRSP must be converted to either a RRIF or an annuity, or it must be collapsed. You can however convert your RRSP prior to age 69.

What options do I have when I collapse/convert my RRSP?

When you reach the age of 69 and the time has come to either collapse or convert your RRSP, you are faced with a few choices.

  • the funds can be withdrawn and declared as income; or
  • the money can be rolled into a Registered Retirement Income Fund (RRIF); or
  • an annuity can be purchased with the accumulated funds

Withdrawing the funds and declaring them as income may not always be the best choice since you have to pay income tax on the whole amount.

Rolling the funds into an RRIF or using the money to purchase an annuity are more popular choices since both of them involve withdrawing the money in smaller increments over a period of time.

A RRIF is similar to an RRSP except that you do not make any contributions to it. There is a minimum amount that you must withdraw each year, determined by the CCRA (formerly Revenue Canada), but there is no maximum withdrawal amount. This means that you are able to withdraw the whole amount at one time, if you wish. However, any withdrawals must be declared as income for that year and you will be required to pay any applicable withholding taxes.

Purchasing an annuity from an insurance company is another viable option. With an annuity you provide the insurance company with an amount of money and in return, they agree to provide you with a monthly income for the duration of your life. The amount of the monthly payments depend on your age, the prevailing interest rates at the time of the annuity purchase and the length of any guaranteed payment periods in the event of your earlier demise. Annuities however, do not have the same level of flexibility as a RRIF since you are generally locked in to the payment terms that you choose.

Before collapsing or converting your RRSP, talk to your Fiscal Agents Advisor to discuss your particular situation.

What happens to my RRSP if I die before I reach age 69?
If you should die and there is no surviving spouse (including common law), your RRSP is considered income and will be taxed as such on your terminal return. If a surviving spouse exists, the RRSP can be rolled-over to them tax-free. The survivor then becomes the RRSP holder. The RRSP can also be transferred tax-free to a financially dependent, minor child or grandchild to be used to purchase an annuity. In this case, the annuity length is calculated by subtracting the child's age at the time of the inheritance from 18. The number of years remaining would represent the maximum length of the annuity.

What happens if I leave my RRSP to a charity?
Designating a charity as a beneficiary of an RRSP or RRIF does not absolve a individual from declaring the fair market value of the plan on their terminal return for the year of death. Furthermore, since the charitable contribution is being made directly from the RRSP as opposed to the estate, the annuitant of the RRSP may not be eligible to claim the donation credit on the terminal return.

Can RRSP contributions be made on a terminal return?

Contributions can not be made to a deceased person's RRSP. However, if the deceased's spouse survives, a spousal RRSP contribution can be made by the legal representative of the estate, as long as the deceased had sufficient RRSP contribution room before death. This contribution can then be deducted from income on the terminal return of the deceased.

Note: No additional RRSP contribution room is generated from income earned in the year of death.

Notice:- Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this Executive Overview are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein, readers should seek advice that is appropriate to their personal circumstances from a professional advisor.





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