The Institute of Chartered Accountants of Ontario has compiled this excellent RRSP information. Feel free to distribute it to your employees.
RRSP primer for employees
If you’re like most Canadians, you are just now turning your mind to your annual Registered Retirement Savings Plan (RRSP) contribution. Before you act, make sure you understand the basics of RRSP investing, as well as changes affecting RRSPs this year.
Why are RRSPs the cornerstone of a retirement plan?
Pre-retirement, RRSPs lower your taxes because you can deduct the amount of your RRSP contributions from your taxable income. Meanwhile, your RRSP assets grow in value, without attracting tax, allowing you to save for retirement. When you retire and draw funds from your RRSP, your income may be lower, so the withdrawals will be taxed at a lower rate.
What is the RRSP contribution deadline?
The deadline for RRSP contributions is 60 days after the end of the year. The deadline for the 2000 tax year is March 1, 2001.
How much can you put into your RRSP?
“Generally speaking, you can contribute up to 18 per cent of your earned income in 1999, to a maximum of $13,500,” explains Sam Zuk, a Chartered Accountant with Soberman, Isenbaum & Colomby LLP in Toronto. However, adds Zuk, this amount will be lower if you have any pension adjustment and past service pension adjustment, and it will be higher if you have any unused contribution room from prior years or a pension adjustment reversal, which is reported on a T10 slip. “The best way to confirm your maximum contribution limit is to check your 1999 tax assessment notice from the Canada Customs and Revenue Agency (CCRA),” advises Zuk. You can also confirm the amount with the CCRA directly by calling the Tax Information Phone Service (T.I.P.S.) at 1-800-267-6999. When you call, you will be asked to provide your social insurance number, your month and year of birth, and the total income you reported on line 150 of your 1999 tax return.
What if you can’t afford to contribute the maximum?
“If you can’t contribute the maximum, the unused amount will be carried forward and can be used in any future year,” says Brian Quinlan, CA, of Campbell Lawless LLP in Toronto. “But you should try to contribute the maximum allowed, particularly if you are in a high-income tax bracket.”
You may even want to consider borrowing to make your maximum RRSP contribution. “This may make sense if you are in a high marginal income tax bracket and are certain that you will be able to repay the loan in a relatively short period of time, say less than one year,” says Zuk. “Don’t forget that even though the interest paid on RRSP loans is not deductible for tax purposes, your contribution is likely to result in a tax refund, which could be used to help repay the loan.”
When should you claim your RRSP deduction?
Most people claim their RRSP deduction the same year they make it, but that’s not always the best thing to do, says Zuk. “If your taxable income is very low, it might make more sense to defer your deduction to a year in which your income and tax rate are much higher, meaning you will save more,” he explains. Meanwhile, the funds you put into your RRSP will continue to compound, tax-free.
What’s new this year?
Changes announced in the February 2000 federal budget and October 2000 federal “mini-budget” should be considered when you are selecting investments for your RRSP.
“The changes mean that, effective October 18, 2000, capital gains are taxed at half the rate of interest income,” explains Quinlan. “As well, there are reductions to the tax on Canadian corporate dividends.”
Quinlan says these changes should be taken into account when reviewing your RRSP assets. “You will benefit most by keeping your highest-taxed investments – such as Guaranteed Investment Certificates or Canada Savings Bonds – inside your RRSP, and the less-taxed investments, such as those yielding capital gains and dividends, outside your RRSP,” he advises.
Another change for this year relates to the limits on foreign content in your RRSP. “For the 2000 tax year, foreign content can account for up to 25 per cent of the cost amount of all properties in a self-directed RRSP, compared to 20 per cent in past years,” says Quinlan. “For 2001 and future years, the limit will be increased to 30 per cent.”
Still have questions about your RRSP? Ask a Chartered Accountant for assistance. Brought to you by The Institute of Chartered Accountants of Ontario.
Frequently asked questions about RRSPs and recent changes to RRSP regulations
Plan Today for Retirement
It’s never too early to start planning for your retirement. And the first step – say the experts – is to work out a comprehensive financial plan.
“To develop a sound financial plan you must understand your long-term financial goals and needs, and assess your tolerance for financial risk,” advises Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “You should also maximize your Registered Retirement Savings Plan (RRSP) contributions and tax savings at every opportunity.”
A financial plan allows you to take responsibility for your financial well-being, and keeps you on track toward your retirement goals. Ask a Chartered Accountant to help you develop a financial plan that’s right for you.
Is a Self-directed RRSP Right for You?
A self-directed Registered Retirement Savings Plan may be a good choice for you if you want your RRSP to include a broader range of investments, over which you have more control.
“The range of investments available to a self-directed RRSP includes cash, Canada Savings Bonds, treasury bills, bonds, debentures, investment certificates, RRSP-eligible mutual fund investments, shares or warrants of companies listed on Canadian stock exchanges, shares of private companies (specific restrictions apply) and certain mortgages on real property,” says Sonja Chong, FCA of Braithwaite Innes Harris & Chong LLP in Toronto.
You may also hold your own house mortgage in your self-directed RRSP, says Chong, although there are accompanying set-up and annual administration fees.
While self-directed RRSPs allow more control and investment flexibility, this should be weighed against any service or administration fees, which are not tax deductible. Ask your Chartered Accountant whether a self-directed RRSP is right for you.
It’s Not Too Late to Top Up Your RRSP
If you haven’t contributed the maximum amount to your Registered Retirement Savings Plan (RRSP) in one or more past years, you still have an opportunity to top up your plan.
“Your unused contribution room is carried forward, so your 2000 RRSP maximum limit has been increased accordingly,” explains Chartered Accountant Sonja Chong of Braithwaite Innes Harris & Chong LLP in Toronto.
For example, if you were eligible to contribute $6,000 each year from 1996 to 1999, but contributed only $4,000 each year, the $8,000 in unused contributions have been added to your 2000 limit, bringing it to $14,000.
“Always try to contribute the maximum, especially if you are in a high income tax bracket,” says Chong. “But if you can’t contribute the maximum, the unused amount can be carried forward for contribution and deduction in any future year.”
Take Out a Loan to Top Up Your RRSP
Depending on your individual circumstances, it may be a good idea to borrow money to make your maximum contribution to your Registered Retirement Savings Plan (RRSP).
“If you have contributed less than your maximum in previous years and have significant unused contribution room, borrowing to catch up may make sense, especially if you are in a high income-tax bracket and can take advantage of the full tax deduction,” says Chartered Accountant Sonja Chong of Braithwaite Innes Harris & Chong LLP in Toronto. “However, the interest on money you borrow to contribute to your RRSP is not tax-deductible, so it is usually best to use available cash to make your RRSP contribution.”
If you do take out a loan to make your RRSP contribution, Chong says you should try to repay it within a reasonable period of time. You should also use your tax refund to help repay the loan. Ask a Chartered Accountant whether the benefits of borrowing to make your maximum RRSP contribution outweigh the costs.
New RRSP Foreign Content Rules
You can increase the foreign content in your Registered Retirement Savings Plan (RRSP) under new rules for the 2000 tax year.
“Foreign content can now account for up to 25 per cent of the cost amount of all properties in a self-directed RRSP, compared to 20 per cent in past years,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “For 2001 and future years, the limit will be increased to 30 per cent.”
The 25-per-cent limit applies to each RRSP account you have. “If you have several RRSPs, it may make sense to consolidate your assets in one plan, in order to maximize your foreign content room,” advises Wonfor.
If your foreign content is higher than 25 per cent, a penalty tax could apply. However, it is possible to devise an investment strategy that effectively allows foreign content to be much higher. Ask your Chartered Accountant for details.
Contributions-in-Kind to Your RRSP
If you want to build your Registered Retirement Savings Plan (RRSP) this year but are short of cash, consider making a “contribution-in-kind” to your plan.
“You can transfer shares, bonds and other eligible investments you own to your self-directed RRSP, providing you have sufficient contribution room,” says Chartered Accountant Bill Hyde of Millard Rouse & Rosebrugh in Brantford. “Your tax deduction will be equal to the fair market value of the assets transferred.”
Hyde suggests exploring possible tax consequences before making a contribution-in-kind. “If the investment is worth more or less than when you acquired it, the transfer may create a taxable capital gain or an unusable capital loss,” says Hyde.
Labour-Sponsored Venture Capital Companies and RRSP Investments
If you have a self-directed Registered Retirement Savings Plan (RRSP), you may want to consider investing in Labour-Sponsored Venture Capital Companies (LSVCCs).
“These companies allow investors to pool their funds to provide capital to smaller businesses which need money to grow,” explains Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “An LSVCC investment may be eligible for both federal and provincial tax credits that, when combined with the income tax saved by the RRSP contribution, can lead to a minimal after-tax cost.”
While the after-tax cost may be minimal, Wonfor says investors should keep in mind that the value of the investment may also be small, due to the highly speculative nature of LSVCCs.
As well, says Wonfor, the tax credits must be repaid if the LSVCC shares are not held for at least eight years. Ask a Chartered Accountant for details.
Designate a Beneficiary for your RRSP and RRIF
If you haven’t designated a beneficiary for your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), they may be subject to taxation upon your death.
“If you want your spouse to inherit your RRSP or RRIF, don’t leave it for your will to deal with,” explains Chartered Accountant Sonja Chong of Braithwaite Innes Harris and Chong LLP in Toronto. “Instead, designate your spouse as beneficiary in the RRSP or RRIF document itself.”
“Designating your spouse as beneficiary in the RRSP or RRIF trust document means the remaining funds will bypass your will and estate and pass to your spouse without income tax, provided the amounts are rolled over to certain tax-deferred plans of the spouse,” says Chong. “Otherwise, they will likely be subject to full income tax.”
Transfer of RRSP Assets after Death
Upon the death of an individual, the value of that person’s Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) may be transferred tax-free to an RRSP or RRIF for a surviving spouse.
“If there is no surviving spouse, the assets can be transferred to a financially dependent child or grandchild,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto.
“The distribution of RRSP or RRIF assets to a financially dependent child or grandchild can also occur even if the deceased had a surviving spouse,” adds Wonfor. “This applies to deaths occurring after 1998.”
RRSPs and Volatile Markets
With financial markets up one day and down the next, you may be tempted to change your Registered Retirement Savings Plan (RRSP) strategy. But the experts say that it’s probably not a good idea.
“RRSPs tend to be long-term investments, so it’s usually best to sit tight and let the markets correct,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto.
“A sound financial plan is key to reducing stress during yo-yo markets,” adds Wonfor. “Having a plan means you won’t be tempted to react to short-term market highs and lows,” he explains. “You will be making changes that fit your individual circumstances.”
Self-Employed Should Consider RRSPs
Self-employed Canadians are less likely than other people to have Registered Retirement Savings Plans (RRSPs), according to Statistics Canada.
“Many self-employed people say they are too busy building their businesses to put money into RRSPs or plan for retirement,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “But if self-employed individuals want to maintain a certain income level after retirement, they need to develop a financial plan.”
Besides providing post-retirement income, regular contributions to an RRSP can also help self-employed individuals reduce their taxes, adds Wonfor. Ask a Chartered Accountant for details.
Don’t Raid your RRSP for Cash
If you need cash, try not to raid your Registered Retirement Savings Plan (RRSP).
“You may jeopardize your retirement plan if you withdraw funds unnecessarily from your RRSP,” explains Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “You will also lose the benefit of those funds compounding, tax-free, inside your RRSP.”
If you must take money out of your RRSP, try to minimize the tax consequences through the timing of the withdrawal. “For example, if you have lost your job and need cash, it may be a good idea to wait until the next calendar year to withdraw the funds from your RRSP in order to reduce the tax impact,” Wonfor explains. “It may also make more sense to borrow money to tide you over, instead of withdrawing funds from your RRSP right away.”
Timing is Everything With RRSP Withdrawals
If you expect to have little or no income in 2001, after a high-income year in 2000, a well-timed withdrawal from your Registered Retirement Savings Plan (RRSP) can save taxes.
“For example, if you are going back to school or starting your own business in 2001, you could contribute $10,000 to your RRSP by March 1, 2001, deduct it on your 2000 tax return, and receive a sizeable refund,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “You could then immediately withdraw the $10,000 from your RRSP, include it in your 2001 income, and pay taxes at a much lower rate. “
“The 2001 withdrawal will attract withholding tax at the time of withdrawal and a final payment of tax in April 2002,” says Wonfor. As well, the amount you withdraw cannot be re-contributed to your RRSP.
Should You Over-Contribute to your RRSP?
Over-contributing to your Registered Retirement Savings Plan (RRSP) can be a good idea – but only under certain circumstances.
“The Canada Customs and Revenue Agency permits a one-time permanent over-contribution of $2,000,” explains Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “You can’t use this $2,000 as a current deduction, but it will generate tax-deferred income while in your RRSP and be taxed upon withdrawal. Therefore, the overall benefit of the contribution depends on the length of time it will remain in the plan.”
If you over-contribute beyond the $2,000 limit, a penalty of 1 per cent a month is charged on the excess amount, adds Wonfor.
Over Age 69? Consider a Spousal RRSP
You can no longer contribute to your own Registered Retirement Savings Plan (RRSP) if you are over the age of 69 and still earning business, employment or other qualifying “earned income”. However, you may be able to contribute to a spousal RRSP.
“If you are over the age of 69 and have earned income for the previous year or unused contribution room carried forward,” explains Chartered Accountant Michael Marks of Bolton. “You can take advantage of this room by contributing to a spousal RRSP.”
Contributions can be made to the spousal RRSP up to and including the year the spouse reaches the age of 69. “The individual can then claim the spousal RRSP contribution as a tax deduction,” adds Marks.
Spousal RRSPs Can Maximize OAS Benefits
Income-splitting through a spousal Registered Retirement Savings Plan (RRSP) can help you maximize your Old Age Security (OAS) benefits.
Spousal RRSPs help reduce taxes by shifting income from a spouse in a higher income-tax bracket to a spouse in a lower income-tax bracket. But this income-splitting can also reduce the amount of OAS benefits that you might otherwise be forced to pay back to the government.
“For example, a senior citizen with a net income of $70,000, would have to pay back approximately $2,500 of OAS benefits,” explains Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “But if that senior has used a spousal RRSP to split income, the net income will be less and the “clawback” of government benefits may be reduced or eliminated.”
Save Tax Dollars Through Spousal RRSPs
Contributing to a spousal Registered Retirement Savings Plan (RRSP) may make sense if your spouse will have a lower retirement income than you.
“A spousal RRSP allows you to shift income from the spouse with the higher potential retirement income to the spouse with the lower income,” explains Chartered Accountant Andrew Tran of HSBC Canada in Toronto. “This income-splitting leads to reduced taxes when retirement withdrawals are made.”
Spousal RRSPs are available to both married and common-law couples. If you make a contribution to a spousal RRSP, you get the income tax deduction. Your deduction is capped by your own contribution limit for the year, but your contribution to a spousal RRSP does not affect your spouse’s contribution limit. The spousal RRSP and any earnings it generates are the property of your spouse.
“When you contribute to a spousal RRSP, any withdrawals made during that year or the following two calendar years may be taxed as your income,” adds Tran. “Withdrawals at other times are taxed as your spouse’s income.”
Contacting the Canada Customs and Revenue Agency
Trying to get the amount of your 2000 RRSP contribution limit or other information from the Canada Customs and Revenue Agency (CCRA)?
CCRA has a toll-free, automated Tax Information Phone Service – T.I.P.S. – that can provide general and personal tax information. T.I.P.S. is available from mid-September until April 30 and can be contacted by phoning 1-800-267-6999. If you call T.I.P.S. for personal RRSP information, such as your contribution limit, you will be asked to provide your social insurance number, your month and year of birth, and the total income you reported on line 150 of your 1999 tax return.
A complete RRSP guide can be found on the CCRA Web site at www.ccra-adrc.gc.ca. Visually impaired persons can get the guide in Braille or large print, or on audio cassette or computer diskette by calling 1-800-267-1267.
For additional information, you can call your area tax services office. The number can be found in the government section of your phone book.
Shelter Retiring Allowance in RRSP
If you receive a retiring allowance due to the termination of employment or in recognition of long service, it is taxable in the year it is received.
“However, if you directly contribute a portion of the retiring allowance into your Registered Retirement Savings Plan (RRSP), you can defer taxes,” says Chartered Accountant Alan Mak of Rosen & Associates Limited in Toronto.
The amount eligible for transfer to an RRSP is the lesser of:
*the contribution room available in the RRSP immediately prior to the transfer; and
*$2,000 for each year of full- or part-time service prior to 1996;
plus
*$1,500 for each year of service prior to 1989 for which the employer’s contributions to a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP) on the employee’s behalf have not vested.
“You can defer tax and possibly avoid withholding taxes that might otherwise be deducted by directing the eligible portion of the allowance into your RRSP,” says Mak. A Chartered Accountant can help you complete and file the appropriate forms.
Make Regular Contributions to your RRSP
Instead of scrambling to make one large contribution to your Registered Retirement Savings Plan (RRSP) during the first 60 days of the year, consider making regular contributions throughout the year.
“Monthly contributions make sense from both a budgeting perspective and an investment perspective,” says CA Kevin Dunn of Morrison & Hollingsworth Chartered Accountants in Peterborough. “You can have funds automatically withdrawn from your bank account on a monthly basis and put into your RRSP.”
Monthly RRSP contributors also don’t have to wait for a tax refund owing to them because of their RRSP contributions. “You can apply to the Canada Customs and Revenue Agency for approval for your payroll administrator to reduce the income tax withholdings from each regular paycheque,” Dunn explains. “That means you receive your refund through an increase in your paycheque, instead of in a lump sum in April.”
Brought to you by the Institute of Chartered Accountants of Ontario.
If you’re like most Canadians, you are just now turning your mind to your annual Registered Retirement Savings Plan (RRSP) contribution. Before you act, make sure you understand the basics of RRSP investing, as well as changes affecting RRSPs this year.
Why are RRSPs the cornerstone of a retirement plan?
Pre-retirement, RRSPs lower your taxes because you can deduct the amount of your RRSP contributions from your taxable income. Meanwhile, your RRSP assets grow in value, without attracting tax, allowing you to save for retirement. When you retire and draw funds from your RRSP, your income may be lower, so the withdrawals will be taxed at a lower rate.
What is the RRSP contribution deadline?
The deadline for RRSP contributions is 60 days after the end of the year. The deadline for the 2000 tax year is March 1, 2001.
How much can you put into your RRSP?
“Generally speaking, you can contribute up to 18 per cent of your earned income in 1999, to a maximum of $13,500,” explains Sam Zuk, a Chartered Accountant with Soberman, Isenbaum & Colomby LLP in Toronto. However, adds Zuk, this amount will be lower if you have any pension adjustment and past service pension adjustment, and it will be higher if you have any unused contribution room from prior years or a pension adjustment reversal, which is reported on a T10 slip. “The best way to confirm your maximum contribution limit is to check your 1999 tax assessment notice from the Canada Customs and Revenue Agency (CCRA),” advises Zuk. You can also confirm the amount with the CCRA directly by calling the Tax Information Phone Service (T.I.P.S.) at 1-800-267-6999. When you call, you will be asked to provide your social insurance number, your month and year of birth, and the total income you reported on line 150 of your 1999 tax return.
What if you can’t afford to contribute the maximum?
“If you can’t contribute the maximum, the unused amount will be carried forward and can be used in any future year,” says Brian Quinlan, CA, of Campbell Lawless LLP in Toronto. “But you should try to contribute the maximum allowed, particularly if you are in a high-income tax bracket.”
You may even want to consider borrowing to make your maximum RRSP contribution. “This may make sense if you are in a high marginal income tax bracket and are certain that you will be able to repay the loan in a relatively short period of time, say less than one year,” says Zuk. “Don’t forget that even though the interest paid on RRSP loans is not deductible for tax purposes, your contribution is likely to result in a tax refund, which could be used to help repay the loan.”
When should you claim your RRSP deduction?
Most people claim their RRSP deduction the same year they make it, but that’s not always the best thing to do, says Zuk. “If your taxable income is very low, it might make more sense to defer your deduction to a year in which your income and tax rate are much higher, meaning you will save more,” he explains. Meanwhile, the funds you put into your RRSP will continue to compound, tax-free.
What’s new this year?
Changes announced in the February 2000 federal budget and October 2000 federal “mini-budget” should be considered when you are selecting investments for your RRSP.
“The changes mean that, effective October 18, 2000, capital gains are taxed at half the rate of interest income,” explains Quinlan. “As well, there are reductions to the tax on Canadian corporate dividends.”
Quinlan says these changes should be taken into account when reviewing your RRSP assets. “You will benefit most by keeping your highest-taxed investments – such as Guaranteed Investment Certificates or Canada Savings Bonds – inside your RRSP, and the less-taxed investments, such as those yielding capital gains and dividends, outside your RRSP,” he advises.
Another change for this year relates to the limits on foreign content in your RRSP. “For the 2000 tax year, foreign content can account for up to 25 per cent of the cost amount of all properties in a self-directed RRSP, compared to 20 per cent in past years,” says Quinlan. “For 2001 and future years, the limit will be increased to 30 per cent.”
Still have questions about your RRSP? Ask a Chartered Accountant for assistance. Brought to you by The Institute of Chartered Accountants of Ontario.
Frequently asked questions about RRSPs and recent changes to RRSP regulations
Plan Today for Retirement
It’s never too early to start planning for your retirement. And the first step – say the experts – is to work out a comprehensive financial plan.
“To develop a sound financial plan you must understand your long-term financial goals and needs, and assess your tolerance for financial risk,” advises Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “You should also maximize your Registered Retirement Savings Plan (RRSP) contributions and tax savings at every opportunity.”
A financial plan allows you to take responsibility for your financial well-being, and keeps you on track toward your retirement goals. Ask a Chartered Accountant to help you develop a financial plan that’s right for you.
Is a Self-directed RRSP Right for You?
A self-directed Registered Retirement Savings Plan may be a good choice for you if you want your RRSP to include a broader range of investments, over which you have more control.
“The range of investments available to a self-directed RRSP includes cash, Canada Savings Bonds, treasury bills, bonds, debentures, investment certificates, RRSP-eligible mutual fund investments, shares or warrants of companies listed on Canadian stock exchanges, shares of private companies (specific restrictions apply) and certain mortgages on real property,” says Sonja Chong, FCA of Braithwaite Innes Harris & Chong LLP in Toronto.
You may also hold your own house mortgage in your self-directed RRSP, says Chong, although there are accompanying set-up and annual administration fees.
While self-directed RRSPs allow more control and investment flexibility, this should be weighed against any service or administration fees, which are not tax deductible. Ask your Chartered Accountant whether a self-directed RRSP is right for you.
It’s Not Too Late to Top Up Your RRSP
If you haven’t contributed the maximum amount to your Registered Retirement Savings Plan (RRSP) in one or more past years, you still have an opportunity to top up your plan.
“Your unused contribution room is carried forward, so your 2000 RRSP maximum limit has been increased accordingly,” explains Chartered Accountant Sonja Chong of Braithwaite Innes Harris & Chong LLP in Toronto.
For example, if you were eligible to contribute $6,000 each year from 1996 to 1999, but contributed only $4,000 each year, the $8,000 in unused contributions have been added to your 2000 limit, bringing it to $14,000.
“Always try to contribute the maximum, especially if you are in a high income tax bracket,” says Chong. “But if you can’t contribute the maximum, the unused amount can be carried forward for contribution and deduction in any future year.”
Take Out a Loan to Top Up Your RRSP
Depending on your individual circumstances, it may be a good idea to borrow money to make your maximum contribution to your Registered Retirement Savings Plan (RRSP).
“If you have contributed less than your maximum in previous years and have significant unused contribution room, borrowing to catch up may make sense, especially if you are in a high income-tax bracket and can take advantage of the full tax deduction,” says Chartered Accountant Sonja Chong of Braithwaite Innes Harris & Chong LLP in Toronto. “However, the interest on money you borrow to contribute to your RRSP is not tax-deductible, so it is usually best to use available cash to make your RRSP contribution.”
If you do take out a loan to make your RRSP contribution, Chong says you should try to repay it within a reasonable period of time. You should also use your tax refund to help repay the loan. Ask a Chartered Accountant whether the benefits of borrowing to make your maximum RRSP contribution outweigh the costs.
New RRSP Foreign Content Rules
You can increase the foreign content in your Registered Retirement Savings Plan (RRSP) under new rules for the 2000 tax year.
“Foreign content can now account for up to 25 per cent of the cost amount of all properties in a self-directed RRSP, compared to 20 per cent in past years,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “For 2001 and future years, the limit will be increased to 30 per cent.”
The 25-per-cent limit applies to each RRSP account you have. “If you have several RRSPs, it may make sense to consolidate your assets in one plan, in order to maximize your foreign content room,” advises Wonfor.
If your foreign content is higher than 25 per cent, a penalty tax could apply. However, it is possible to devise an investment strategy that effectively allows foreign content to be much higher. Ask your Chartered Accountant for details.
Contributions-in-Kind to Your RRSP
If you want to build your Registered Retirement Savings Plan (RRSP) this year but are short of cash, consider making a “contribution-in-kind” to your plan.
“You can transfer shares, bonds and other eligible investments you own to your self-directed RRSP, providing you have sufficient contribution room,” says Chartered Accountant Bill Hyde of Millard Rouse & Rosebrugh in Brantford. “Your tax deduction will be equal to the fair market value of the assets transferred.”
Hyde suggests exploring possible tax consequences before making a contribution-in-kind. “If the investment is worth more or less than when you acquired it, the transfer may create a taxable capital gain or an unusable capital loss,” says Hyde.
Labour-Sponsored Venture Capital Companies and RRSP Investments
If you have a self-directed Registered Retirement Savings Plan (RRSP), you may want to consider investing in Labour-Sponsored Venture Capital Companies (LSVCCs).
“These companies allow investors to pool their funds to provide capital to smaller businesses which need money to grow,” explains Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “An LSVCC investment may be eligible for both federal and provincial tax credits that, when combined with the income tax saved by the RRSP contribution, can lead to a minimal after-tax cost.”
While the after-tax cost may be minimal, Wonfor says investors should keep in mind that the value of the investment may also be small, due to the highly speculative nature of LSVCCs.
As well, says Wonfor, the tax credits must be repaid if the LSVCC shares are not held for at least eight years. Ask a Chartered Accountant for details.
Designate a Beneficiary for your RRSP and RRIF
If you haven’t designated a beneficiary for your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), they may be subject to taxation upon your death.
“If you want your spouse to inherit your RRSP or RRIF, don’t leave it for your will to deal with,” explains Chartered Accountant Sonja Chong of Braithwaite Innes Harris and Chong LLP in Toronto. “Instead, designate your spouse as beneficiary in the RRSP or RRIF document itself.”
“Designating your spouse as beneficiary in the RRSP or RRIF trust document means the remaining funds will bypass your will and estate and pass to your spouse without income tax, provided the amounts are rolled over to certain tax-deferred plans of the spouse,” says Chong. “Otherwise, they will likely be subject to full income tax.”
Transfer of RRSP Assets after Death
Upon the death of an individual, the value of that person’s Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) may be transferred tax-free to an RRSP or RRIF for a surviving spouse.
“If there is no surviving spouse, the assets can be transferred to a financially dependent child or grandchild,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto.
“The distribution of RRSP or RRIF assets to a financially dependent child or grandchild can also occur even if the deceased had a surviving spouse,” adds Wonfor. “This applies to deaths occurring after 1998.”
RRSPs and Volatile Markets
With financial markets up one day and down the next, you may be tempted to change your Registered Retirement Savings Plan (RRSP) strategy. But the experts say that it’s probably not a good idea.
“RRSPs tend to be long-term investments, so it’s usually best to sit tight and let the markets correct,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto.
“A sound financial plan is key to reducing stress during yo-yo markets,” adds Wonfor. “Having a plan means you won’t be tempted to react to short-term market highs and lows,” he explains. “You will be making changes that fit your individual circumstances.”
Self-Employed Should Consider RRSPs
Self-employed Canadians are less likely than other people to have Registered Retirement Savings Plans (RRSPs), according to Statistics Canada.
“Many self-employed people say they are too busy building their businesses to put money into RRSPs or plan for retirement,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “But if self-employed individuals want to maintain a certain income level after retirement, they need to develop a financial plan.”
Besides providing post-retirement income, regular contributions to an RRSP can also help self-employed individuals reduce their taxes, adds Wonfor. Ask a Chartered Accountant for details.
Don’t Raid your RRSP for Cash
If you need cash, try not to raid your Registered Retirement Savings Plan (RRSP).
“You may jeopardize your retirement plan if you withdraw funds unnecessarily from your RRSP,” explains Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “You will also lose the benefit of those funds compounding, tax-free, inside your RRSP.”
If you must take money out of your RRSP, try to minimize the tax consequences through the timing of the withdrawal. “For example, if you have lost your job and need cash, it may be a good idea to wait until the next calendar year to withdraw the funds from your RRSP in order to reduce the tax impact,” Wonfor explains. “It may also make more sense to borrow money to tide you over, instead of withdrawing funds from your RRSP right away.”
Timing is Everything With RRSP Withdrawals
If you expect to have little or no income in 2001, after a high-income year in 2000, a well-timed withdrawal from your Registered Retirement Savings Plan (RRSP) can save taxes.
“For example, if you are going back to school or starting your own business in 2001, you could contribute $10,000 to your RRSP by March 1, 2001, deduct it on your 2000 tax return, and receive a sizeable refund,” says Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “You could then immediately withdraw the $10,000 from your RRSP, include it in your 2001 income, and pay taxes at a much lower rate. “
“The 2001 withdrawal will attract withholding tax at the time of withdrawal and a final payment of tax in April 2002,” says Wonfor. As well, the amount you withdraw cannot be re-contributed to your RRSP.
Should You Over-Contribute to your RRSP?
Over-contributing to your Registered Retirement Savings Plan (RRSP) can be a good idea – but only under certain circumstances.
“The Canada Customs and Revenue Agency permits a one-time permanent over-contribution of $2,000,” explains Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “You can’t use this $2,000 as a current deduction, but it will generate tax-deferred income while in your RRSP and be taxed upon withdrawal. Therefore, the overall benefit of the contribution depends on the length of time it will remain in the plan.”
If you over-contribute beyond the $2,000 limit, a penalty of 1 per cent a month is charged on the excess amount, adds Wonfor.
Over Age 69? Consider a Spousal RRSP
You can no longer contribute to your own Registered Retirement Savings Plan (RRSP) if you are over the age of 69 and still earning business, employment or other qualifying “earned income”. However, you may be able to contribute to a spousal RRSP.
“If you are over the age of 69 and have earned income for the previous year or unused contribution room carried forward,” explains Chartered Accountant Michael Marks of Bolton. “You can take advantage of this room by contributing to a spousal RRSP.”
Contributions can be made to the spousal RRSP up to and including the year the spouse reaches the age of 69. “The individual can then claim the spousal RRSP contribution as a tax deduction,” adds Marks.
Spousal RRSPs Can Maximize OAS Benefits
Income-splitting through a spousal Registered Retirement Savings Plan (RRSP) can help you maximize your Old Age Security (OAS) benefits.
Spousal RRSPs help reduce taxes by shifting income from a spouse in a higher income-tax bracket to a spouse in a lower income-tax bracket. But this income-splitting can also reduce the amount of OAS benefits that you might otherwise be forced to pay back to the government.
“For example, a senior citizen with a net income of $70,000, would have to pay back approximately $2,500 of OAS benefits,” explains Chartered Accountant John Wonfor of BDO Dunwoody LLP in Toronto. “But if that senior has used a spousal RRSP to split income, the net income will be less and the “clawback” of government benefits may be reduced or eliminated.”
Save Tax Dollars Through Spousal RRSPs
Contributing to a spousal Registered Retirement Savings Plan (RRSP) may make sense if your spouse will have a lower retirement income than you.
“A spousal RRSP allows you to shift income from the spouse with the higher potential retirement income to the spouse with the lower income,” explains Chartered Accountant Andrew Tran of HSBC Canada in Toronto. “This income-splitting leads to reduced taxes when retirement withdrawals are made.”
Spousal RRSPs are available to both married and common-law couples. If you make a contribution to a spousal RRSP, you get the income tax deduction. Your deduction is capped by your own contribution limit for the year, but your contribution to a spousal RRSP does not affect your spouse’s contribution limit. The spousal RRSP and any earnings it generates are the property of your spouse.
“When you contribute to a spousal RRSP, any withdrawals made during that year or the following two calendar years may be taxed as your income,” adds Tran. “Withdrawals at other times are taxed as your spouse’s income.”
Contacting the Canada Customs and Revenue Agency
Trying to get the amount of your 2000 RRSP contribution limit or other information from the Canada Customs and Revenue Agency (CCRA)?
CCRA has a toll-free, automated Tax Information Phone Service – T.I.P.S. – that can provide general and personal tax information. T.I.P.S. is available from mid-September until April 30 and can be contacted by phoning 1-800-267-6999. If you call T.I.P.S. for personal RRSP information, such as your contribution limit, you will be asked to provide your social insurance number, your month and year of birth, and the total income you reported on line 150 of your 1999 tax return.
A complete RRSP guide can be found on the CCRA Web site at www.ccra-adrc.gc.ca. Visually impaired persons can get the guide in Braille or large print, or on audio cassette or computer diskette by calling 1-800-267-1267.
For additional information, you can call your area tax services office. The number can be found in the government section of your phone book.
Shelter Retiring Allowance in RRSP
If you receive a retiring allowance due to the termination of employment or in recognition of long service, it is taxable in the year it is received.
“However, if you directly contribute a portion of the retiring allowance into your Registered Retirement Savings Plan (RRSP), you can defer taxes,” says Chartered Accountant Alan Mak of Rosen & Associates Limited in Toronto.
The amount eligible for transfer to an RRSP is the lesser of:
*the contribution room available in the RRSP immediately prior to the transfer; and
*$2,000 for each year of full- or part-time service prior to 1996;
plus
*$1,500 for each year of service prior to 1989 for which the employer’s contributions to a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP) on the employee’s behalf have not vested.
“You can defer tax and possibly avoid withholding taxes that might otherwise be deducted by directing the eligible portion of the allowance into your RRSP,” says Mak. A Chartered Accountant can help you complete and file the appropriate forms.
Make Regular Contributions to your RRSP
Instead of scrambling to make one large contribution to your Registered Retirement Savings Plan (RRSP) during the first 60 days of the year, consider making regular contributions throughout the year.
“Monthly contributions make sense from both a budgeting perspective and an investment perspective,” says CA Kevin Dunn of Morrison & Hollingsworth Chartered Accountants in Peterborough. “You can have funds automatically withdrawn from your bank account on a monthly basis and put into your RRSP.”
Monthly RRSP contributors also don’t have to wait for a tax refund owing to them because of their RRSP contributions. “You can apply to the Canada Customs and Revenue Agency for approval for your payroll administrator to reduce the income tax withholdings from each regular paycheque,” Dunn explains. “That means you receive your refund through an increase in your paycheque, instead of in a lump sum in April.”
Brought to you by the Institute of Chartered Accountants of Ontario.
