What no one tells you about Registered Retirement Savings Plan


Created in 1957, the RRSP came into being as retirement savings plan similar to a pension plan. The deadline for contributing to an RRSP, for the previous tax year, is 60 days from the start of the year. As a result, you hear a lot about RRSPs every February when the RRSP forces are in blitz mode. RRSP is a big business and all the financial institutions are competing for their share of 40 billion dollar pool of RRSP cash.

RRSPs are the most widely used tax shelter in Canada.

In 2016- The province of Ontario got the highest amount of RRSP contributions followed by Quebec and British Columbia. Source: Statistics Canada.

Although an RRSP is a tax deferral tool that gives you immediate tax planning benefits, its real benefit is in the opportunity to shelter future investment income. The best part of an RRSP is its tax-sheltered compound growth over the years to come!

In 2016- Toronto got the highest amount of RRSP contributions followed by Montreal and Vancouver. Source: Statistics Canada.

While there seems to be enormous pressure for everyone to contribute to RRSPs, you need to be aware of some lesser known or poorly understood RRSP facts to save money. Also watch 10 myths about RRSP.

Interest deductibility of loan taken to contribute to RRSP:

Keep in mind that interest on the loan taken out to invest in an RRSP is not tax deductible.

Tax Planning :

Consider cashing in an current investment to contribute to your RRSP and then if you wish, borrow money to purchase another investment that is held outside your registered plan so that you receive an RRSP contribution deduction , and the interest on the loan borrowed for investment purpose becomes tax deductible provided certain conditions are met(Article 160).

Home Buyer’s Plan 

If you are planning to buy a house, you can withdraw money from RRSP on a tax-free basis under the home buyer plan, however, keep in mind that if you contribute an amount to your RRSP, you cannot make a withdrawal under the Home Buyers’ Plan within 90 days of that contribution.

If you have money on hand for a down payment and you have accumulated some RRSP room, open an RRSP. Then you can deposit the money into the plan, wait 90 days, be eligible to partake in the Home Buyers’ Plan and at the same time use whatever refund is issued to bolster your original down payment amount. Be sure to run this with your CPA to ensure it is a sound strategy for your particular financial circumstances.

A common question asked by my clients is whether they can enjoy the tax-free withdrawal from RRSP for home buyer plan more than once, please be advised that under certain situations you may be able to participate the second time. First of all, the full amount previously withdrawn must be paid back into your RRSP before the beginning of the given year in which you wish to participate a second time, also you must qualify as a first -time homebuyer.

Each spouse or common-law partner can withdraw available amounts under the Home Buyers plan from any RRSP under which he or she is the annuitant, including spousal RRSPs. Also, each person may withdraw up to the $25000 limit of $50000 in aggregate (if purchasing property jointly)

Contribute and pay your mortgage

If you borrow money on a home equity loan to invest outside your RRSP, the interest on that loan is tax deductible. If you borrow money to put into your RRSP, you can’t deduct the interest.

Retiring Allowance 

If a portion of your retiring allowance that is eligible to be transferred to your RRSP is paid directly to your RRSP, your employer is not obligated to withhold income tax.

Registered Pension Plan

If you leave a registered pension plan before retirement, you may be able to have your lost RRSP contribution room restored. The pension adjustment reversal is a mechanism designed to achieve this.

Pension adjustment reversals get added to your RRSP contribution room for the year of termination.

Pay the loan or contribute to RRSP

You should generally pay off personal interest-bearing debt before contributing amounts to RRSP. Generally, the present value of the tax savings from making an RRSP contribution exceeds the PV of the tax paid on its withdrawal. Therefore, you also try to maximise your RRSP contributions before contributing to TFSA.

Spousal RRSP

Contributing to a spousal RRSP is an income splitting strategy. A spousal RRSP is an RRSP that is in the name of your spouse but where you still get to use the deduction to reduce your current year’s “taxable” income. The advantage of spousal RRSP is that at retirement if your spouse is in a lower tax bracket than you, he or she can take income from the RRSP creating a considerable tax saving.

Sometimes , we get concerned clients who hesitate contributing to spousal RRSP because they think that things are not going too well in their married life and they rather not contribute to spousal RRSP(despite clear tax advantages), this concern gets alleviated once we explain the equal split of assets including RRSP on a divorce. For more information read-How to deal with divorce related taxes .

If your spouse is likely to be receiving a pension on retirement, then spousal contributions may not be for you. In contrast, if neither of you is going to receive a company pension, both of your RRSP accounts should grow in equal amounts to maximise the use of lower tax levels when you retire.

If you do not stop making RRSP contributions for three years before your spouse starts withdrawing the contributions, the RRSP withdrawals are included in your income and not your spouse’s. It is essential to talk to your CPA before using this income splitting strategy.

Early bird gets the worm: Timing of RRSP contribution

As a matter of practice, the earlier you make an RRSP contribution, the better, as there is a long time during which the income is compounding without tax. If you have always contributed just before the deadline, consider making both the contribution for the current year and the next year at the same time. Then continue as usual, making your contributions at the “deadline “-only when you’ll always be one year ahead.

For example, suppose you annually contribute $8000 to your RRSP. The difference between making your contribution at the beginning of the year rather than at the end of the year, over 30 years at 10% interest per year is $131,578 which demonstrates that the effect of early contributions over a long period is incredible.

For Investments which fluctuate in value, such as mutual funds, you might want to contribute at regular intervals throughout the year so that you can benefit from income sheltering and dollar cost averaging.

Reduced Tax Withholding from your pay cheque

If you make regular contributions to RRSP, consider applying to have your income tax withholdings reduced on your paycheque, which improves your monthly cash flow. To do this, merely submit form T1213 to the CRA for authorisation, Once authorised your employer can reduce the amount of taxes withheld from your pay.

At the year-end, if you receive a bonus or lump-sum payment, you will be able to put into your RRSP an amount which might be higher as you may have already reached the maximum annual amount for CPP and EI.

Moreover, if you receive a bonus as compensation; and you have RRSP contribution room, consider asking your employer to pay the bonus amount directly into your RRSP without withholding income tax.

For example, lets say you receive a bonus this year of $10,000 and you have sufficient room in RRSP to make a $10,000 contribution. Let’s further assume you have a marginal tax rate of 40%. If you make RRSP contribution from after-tax funds yourself, you would only have the net amount of $6,000 to contribute because your employer is required to withhold a tax of $4,000 ($10,000 x 40%). In this situation, your tax savings are only $2,400 ($6,000 x 40%), and you need to wait until you file your tax return the following year to get your refund and contribute those additional funds to your RRSP.

If instead, you ask your employer to contribute your bonus directly to your RRSP, your employer could contribute the full $10,000 to your RRSP saving you taxes of $4,000($10,000 x 40%) for the year, this way $4,000 tax savings is already yours. This strategy allows you to have your tax savings NOW to spend and invest as you see fit, rather than waiting for a tax refund.

Remember, a refund is just the return of your own money that you never owed in the first place.

RRSP Administration Fee

There can be fees associated with your RRSP such as administration and trustee fees charged by the institution that manages your RRSP. Even though your RRSP administration fee is not tax deductible, you should consider paying it directly, instead of from inside your RRSP as this helps maintain capital in your plan, allowing it to grow on a tax-deferred basis. For example, if you pay $300 per year in fees from your RRSP (averaging an annual return of 10%), you have almost $32,500 less in your RRSP in 25 years. Sometimes a small mistake can add up to be a costly one.


Delaying RRSP deduction

If you have funds to contribute, but don’t want to claim a deduction because you are in a low tax bracket, please go ahead with your plan as this is a recommended tax strategy if you are expecting to be in higher tax bracket in the future.

Giving up the deduction now can maximise the tax-sheltered growth of your money now while maximising your tax savings later.

If you have generated earned income for RRSP purposes, you should consider filing an income tax return. Your RRSP contribution room, which you can use in subsequent years, accumulates only if a tax return if you file a tax return.

Put your interest-earning investments into your RRSP

If you have enough money to build a portfolio which consists of interest earnings investments such as Bonds, GICs and high-interest savings accounts;and investments which earn capital gains and dividends such as stocks, then you can enjoy tax savings( until you sell your investment fund shares) by keeping interest income, which gets taxed at a higher rate, inside of an RRSP. In contrast, you are better off by keeping your investment in stocks outside the RRSP as capital gains and dividends are taxed at a lower rate.

Overcontribution :

You can use the $2,000 over-contribution to get ahead of the game and take advantage of tax-deferred growth and compounding in the RRSP. However, as you get nearer to retirement and withdrawals, make sure that you eventually claim the $2,000 as part of your deduction limit to avoid double taxation.

The information provided on this page is intended to contain general information. The data does not take into account your situation and is not designed to be used without consultation from accounting and financial professionals. Cloudiverse CPAs will not be held liable for any problems that arise from the usage of the information provided on this page.