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The Money Management Newsletter: Taxes and Estate Matters
Facts about Your RRSP for this Tax Season

Provided by IPC's Intelligent Investor
Money Management Newsletter, January 2008

Once again, it is RRSP season - the time when many of us scramble to make RRSP contributions to earn a tax deduction for the latest tax year. However, making RRSP contributions is not just about reducing taxation; it is about planning for a dream. That dream is financial independence.

One day you may want to take it easy and enjoy life. This does not mean you have to quit working, but it will mean getting out of the rat race and doing the things you have been putting off -traveling the world, relaxing at the cottage or just spending more time with children and grandchildren. The RRSP is one vehicle that can help you save money in a tax effective manner so you can successfully live your dream. When looking at contributing to an RRSP it's important to understand the details. The rules governing RRSPs are set out in the federal Income Tax Act and are administered by Canada Revenue Agency. We have summarized some of the key aspects you should know about RRSPs.

RRSP Contribution Maximums

in 2007, the dollar limit is $19,000
in 2008, the dollar limit is $20,000
in 2009, the dollar limit is $21,000
in 2010, the dollar limit is $22,000

Your Allowable RRSP Contribution for Each Year

the lower of 18% of your earned income from the previous year or the maximum annual contribution limit for the taxation year;
less any company-sponsored pension plan contributions;
plus any unused RRSP contribution room carried forward from past years.

Earned income includes salary or wages, alimony received, and rental income, among other income sources, but does not include items such as investment income. You can find the exact amount you can contribute to your RRSP for the current year on the Notice of Assessment you received from Canada Revenue Agency after they processed your tax return for your previous tax year.

Company Pension Plan or Deferred Profit Sharing Plan

If you are a member of a company-sponsored registered pension plan or deferred profit sharing plan, the amount that you can contribute to your RRSP is reduced by the total value of the pension credits you earned for the year.

This amount is referred to as a pension adjustment (PA) and is reported on the T4 slip (Statement of Remuneration Paid) you receive from your employer.

Annual Contribution Deadline

To be eligible for an RRSP deduction in a specific taxation year, you can make contributions anytime during the year, or up to 60 days into the following year. However, we recommend that you make your RRSP contribution as soon as possible to maximize tax-deferred compounding in your plan.

Carry-Forwards

If you can't make your maximum contribution one year, you can make up that portion of the contribution in later years by carrying it forward. This may be favourable if you expect to earn a larger tax deduction in a future year.

You may also choose to delay claiming your current year's RRSP tax deduction. To take the deduction in a later year, you must make sure that your allowable deduction limit has not been reached.

You may even consider taking a loan to bring your RRSP contributions up to date.

Over-Contributing to your Plan

If you make an RRSP contribution beyond your maximum allowable amount for a year it is considered an over-contribution. You are allowed to over-contribute up to $2,000 beyond your maximum allowable limit at any given time. Although you will not receive a tax deduction for the over-contribution, the money will eventually be taxed when withdrawn, just like other RRSP funds. However, the potential benefit is that the over-contribution can grow tax-sheltered within your RRSP and may be deducted in a future year as new contribution room is created.

Home Buyer's Plan

The Home Buyer's Plan allows you to borrow funds from your RRSP to purchase your first home. Here are some of the key facts:

You and your spouse can each borrow up to $20,000.
The funds must have been deposited to your RRSP at least 90 days before you withdrew them.
At least one-fifteenth of the funds must be repaid each year, beginning two years after the funds were withdrawn.
A signed agreement to buy or build a qualifying home is required.

Lifelong Learning Plan

The Lifelong Learning Plan allows you to pay for training or education with RRSP funds. Here are some of the key facts:

You can withdraw up to $ 10,000 per calendar year to finance full-time training or post-secondary education.
The student can be you or your spouse, but not your children.
If the student meets disability requirements, then the training/education can be on a part-time basis.
The total amount that can be withdrawn is $20,000 over a maximum of four consecutive years.
Amounts that are withdrawn are not subject to taxes on withdrawal.
At least one tenth of the amount borrowed must be repaid each year, over a maximum period of 10 years.

Separation or Divorce

During separation or divorce, either you or your spouse can transfer existing RRSPs to the other, without being subject to tax, provided that:

You are living apart when property and assets are settled; and
You have a written separation agreement or a court order.

Death of a Plan Holder

In the event of death, the proceeds of your RRSP are distributed to whoever was named as your beneficiary, or to your estate if no beneficiary has been designated. This designation can be specified in either your RRSP or in your will. Quebec residents must make the designation by will or marriage contract for most plans.

The proceeds of the RRSP will remain tax-sheltered if one of these situations applies:

Your surviving spouse is the beneficiary, and the proceeds are transferred into an RRSP or a Registered Retirement Income Fund (RRIF) in his/her name;
You have no surviving spouse, but have children or grandchildren who are minors named as beneficiaries of your RRSP and who are dependent on your estate for financial support. In this case, the RRSP proceeds can be taxed in their hands in the year of your death or transferred to a term annuity to age 18 that is registered in their names; or
The beneficiary is a child or grandchild [likely only one with disability], regardless of age, who is financially dependent because of physical or mental infirmity. The RRSP proceeds can be transferred to an RRSP or RRIF registered in his or her name, without immediate tax implications, or used to purchase an annuity of any kind.

In all other situations, the balance of the RRSP at the date of death is included as income on the plan holder's final tax return. Making RRSP contributions and managing the investments properly is a very important aspect of your financial plan. Great care and attention should be made to how your RRSP is invested based on your tolerance for risk and time horizon. This year, we are offering to review all of our clients' RRSP portfolios and make recommendations on how to manage them effectively to live your dream.

If you would like an RRSP profile done for your situation, please contact our office for a consultation.

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