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Getting the most out of your RRSP

Getting the most out of your RRSP
Getting the most out of your RRSP
A Registered Retirement Savings Plan (RRSP) is one of the best ways to save for retirement
for two main reasons. First, it allows you to claim a tax deduction for the amount you
contribute, which can provide a benefit if the amounts contributed are later withdrawn
when you are in a lower tax bracket. Second, an RRSP (and its successor, a Registered
Retirement Income Fund or RRIF) allows you to avoid paying tax on the accumulated
investment income while it remains inside the plan.
Here are five tips for getting the maximum benefit from your RRSP.
1.      Make an RRSP contribution
It may seem obvious to say that you should make an RRSP contribution but Statistics Canada
reported that as of 2011, there were 22.7 million people who had total RRSP room of
$772 billion.1 If you’re one of the many Canadians who has not taken advantage of all
available RRSP contribution room, now is the time to act.
Almost anyone with earned income can contribute to an RRSP
Your RRSP contribution limit for a year is 18% of your “earned income” for the prior year
to a maximum of $23,820 for 2013 ($24,270 for 2014), minus your pension adjustment,
plus any unused contribution room from prior years. Earned income includes salary or
bonus remuneration and rental income but does not include passive investment income
such as dividends, interest and capital gains. To claim a deduction for a given tax year,
contributions can be made at any time during the year or within 60 days of year end (by
March 3, 2014 for the 2013 tax year). To the extent that contributions are less than the
limit in a year, the unused RRSP contribution room can be carried forward and contributions
can be made in a future year. Since contributions in excess of the limits (plus a $2,000
overcontribution allowance) can attract penalties, be sure to check your available RRSP
contribution room before putting funds into a plan. The Canada Revenue Agency (CRA)
reports RRSP contribution room on your Notice of Assessment and online through their
“My Account” service at
You can claim a deduction for contributions that you make to your own RRSP or to a
spousal or common-law partner RRSP.
If you have kids under 18 who earn money through part-time or summer jobs, encourage
them to file a tax return to report their earned income to the CRA, creating RRSP contribution
room. They can then choose to either make an RRSP contribution with their earnings or,
at the very least, build up that RRSP contribution room for use in a future year, perhaps
waiting until their income becomes taxable.
If you are over age 71, although you can no longer
contribute to your own RRSP, you can still contribute to a
spousal or common-law partner RRSP if you have a spouse
or common-law partner who is 71 or younger. This would
only be applicable if you have RRSP contribution room,
either because you haven't contributed the maximum
allowed during your working years or you continue to
generate new room annually through earned income.
Make a cash-less contribution
If you don’t have the cash available to make an RRSP
contribution, you can transfer investments “in kind”
from a non-registered account to your RRSP. You’ll get
an RRSP contribution slip for the fair market value of
the investment at the time of transfer. Be forewarned,
however, that any accrued capital gains will be realized
on investments that you transfer to your RRSP.
It may at first glance be tempting to transfer an
investment with an accrued loss to your RRSP (or TFSA,
for that matter) to realize the loss without actually
disposing of the investment. Unfortunately, the Income
Tax Act specifically prohibits a loss from being recognized
on such a transfer.
One option, however, may be to consider selling the
investment with the accrued loss and contributing the
cash from the sale into your RRSP (or TFSA). If you want,
you can then buy back the investment inside your RRSP
(or TFSA), but be sure to wait at least 30 days because
of the “superficial loss rule.” This rule prohibits you from
claiming a loss when you sell property and buy it back
within 30 days.
RRSP vs. TFSA vs. the Mortgage
Our report, The RRSP, The TFSA and The Mortgage,2
describes some of the factors to be considered when
choosing, given limited funds, whether to make a
contribution to an RRSP or TFSA, or to pay down your
If you anticipate that you will be in a lower tax bracket
in your retirement years, investing in an RRSP may
be preferable to a TFSA. You might even consider
withdrawing funds on a tax-free basis from your TFSA
and contributing the proceeds to your RRSP. You could
then re-contribute the amount to your TFSA in a later
year once your RRSP contributions are maximized and
additional cash becomes available.
If you’re currently making accelerated payments on your
mortgage or other debt, consider whether making RRSP
contributions might be a better use of your cash. RRSPs
may be a better option than paying down debt when
the rate of return on RRSP investments is expected to
be greater than the rate of interest on debt. The report
referenced above discusses this in detail.
2. Choose when to claim the deduction
for your RRSP contribution
Claim your tax deduction in a later year
You don’t need to claim the deduction in the year
contributions are made and as long as you have the
necessary RRSP contribution room you will not be
penalized, even if your contribution otherwise exceeds
the posted yearly limits. It may make sense, therefore,
to defer claiming a deduction for your RRSP contribution
if you are relatively certain your marginal tax rate for a
coming year will be significantly higher, so you can boost
the tax benefit associated with that deduction.
Get your tax refund with each paycheque
Canadians often rush to submit their tax returns in
advance of the filing deadline so they can get their hands
on their tax refund. Yet a tax refund is simply a sign
you’ve loaned your hard-earned money to the CRA for a
year or longer and you’re just getting your own money
back, interest-free.
If you’re an employee who is subject to tax withholding
at source and you make an RRSP contribution annually,
there’s an easy way to get that tax refund throughout
the year. Simply complete CRA Form T1213, Request
to Reduce Tax Deductions at Source3 in which you list
various deductions, including your RRSP contribution,
that you plan to take when you file your current year’s tax
return. This form must be mailed to the CRA and, once
it’s approved, you will receive back a formal authorization
letter that you submit to your employer authorizing it
to reduce the amount of tax withheld at source from
CIBC February 2014
under the HBP must be repaid over a maximum of
15 years or the amount not repaid in a year is added to
your income for that year.
Under the Lifelong Learning Plan (LLP), you can withdraw
up to $10,000 per year, or $20,000 in total, to finance
full-time education for you or your spouse or commonlaw
partner. To qualify, the student must have been
enrolled or received a written offer to enroll in a qualifying
educational institution. Most Canadian universities and
colleges and many foreign educational institutions will
qualify. Once the withdrawal is made, the funds can
be used for any purpose and no proof of expenses is
required. You must repay amounts withdrawn under an
LLP over a 10-year period, starting five years after the first
withdrawal or two years after ceasing studies, whichever
is earlier.
Until funds that were borrowed under either the HBP
or LLP are repaid into the RRSP, you forfeit any growth
on the withdrawn funds. Since it may be over 15 years
before you are required to fully repay funds under these
plans, this can have a serious impact on your retirement
savings. It, therefore, generally makes sense to repay
the borrowed funds as soon as possible. There are no
penalties for returning HBP or LLP funds to an RRSP
before the required repayment date, so early repayment
allows you to continue to maximize the tax benefits from
investing within an RRSP as soon as possible.
4. Designate beneficiaries
Holding an RRSP upon death can result in a large tax bill.
The tax rules require the fair market value of your RRSP
as of the date of death to be included on your terminal
tax return, with tax payable at your marginal tax rate for
the year. There are, however, exceptions that may allow
a tax-free rollover to certain beneficiaries.
This income inclusion can be deferred if the RRSP is left to
your surviving spouse or common-law partner. If certain
steps are taken, including that your spouse or commonlaw
partner puts the proceeds into his or her own RRSP
or RRIF, tax will be payable by your surviving spouse or
common-law partner at his or her marginal tax rate in
the year in which funds are withdrawn from his or her
each remaining paycheque in the year. Quebec residents
must also complete Revenu Quebec Form TP-1016-V,
Application for a Reduction in Source Deductions of
Income Tax for an Individual or a Self-Employed Person.4
Note that if your employer allows you to make RRSP
contributions through payroll deductions, you won’t
even need to file the CRA (or Revenu Quebec) forms.
Amounts that are directly contributed to an RRSP
through your employer are automatically exempt from
tax withholdings at source.
Once the payroll tax deductions are reduced, you’ll have
more cash available with each paycheque. Starting a
regular, automatic monthly RRSP or TFSA investment plan
may be an ideal way to take advantage of the ongoing
3. Leave funds in an RRSP
Once you’ve contributed funds to an RRSP, you’ll get the
most benefit by leaving funds to accumulate on a taxdeferred
basis until funds are needed in retirement. Our
previous report, Just do it: The case for tax-free investing,5
showed that RRSP investments can earn income that
is completely tax-free when personal tax rates remain
constant. Once you make a regular withdrawal from an
RRSP, you aren’t able to re-contribute the withdrawn
amount so you’ll lose the tax benefits that would have
been available for income earned within the plan.
If you find that you need RRSP funds before retirement,
consider other sources of funding. It might be preferable
to take funds from your TFSA or incur debt, rather than
disrupting your retirement savings plan for short-term
needs. If you have no other sources of funds, there are
two federal programs that may allow you to temporarily
borrow money from your RRSP and later return the
withdrawn funds to your plan without penalty.
The Home Buyers’ Plan (HBP) allows you to withdraw up
to $25,000 from your RRSP to purchase or construct a
new home. Spouses or common-law partners may each
be able to withdraw $25,000, for a combined total
of $50,000. You generally will not qualify for an HBP
withdrawal if either you or your spouse or common-law
partner has owned a home in the past five years and
occupied it as a principal residence. Amounts withdrawn
CIBC February 2014
Alternatively, an RRSP may be left to your financially
dependent child or grandchild and used to purchase a
registered annuity that must end by the time your child
or grandchild reaches age 18. The benefit of doing this
is to spread the tax on the RRSP proceeds over several
years, allowing the child or grandchild to take advantage
of personal tax credits as well as graduated marginal tax
rates each year until he or she reaches the age of 18. If the
financially dependent child or grandchild was dependent
on you because of physical or mental disability, then the
RRSP proceeds can instead be rolled to his or her own
RRSP and effectively only taxed when withdrawn.
While these tax-free rollover options may be available
whether eligible family members are named as
beneficiaries in your will or in the RRSP contract itself,6
the latter option may avoid provincial probate fees
(where applicable).
5. Plan for RRSP conversion prior to
age 71
If you turned 71 this year, you have until December 31
to make any final contributions to your RRSP before
converting it into a RRIF or registered annuity.
It may also be beneficial to make a one-time overcontribution
to your RRSP in December before conversion
if you have earned income this year that will generate
RRSP contribution room for next year. While you will pay
a penalty tax of 1% on the over-contribution (above the
$2,000 permitted over-contribution limit) for the month
of December, new RRSP room will open up on January 1
of next year so the penalty tax will cease come January.
You can then choose to deduct the over-contributed
amount on your return for next year or a future year.
As noted above, this may not be necessary if you have a
younger spouse or common-law partner, since you can
still make contributions to a spousal or common-law
partner RRSP until the end of the year your spouse or
common-law partner turns 71.
As the end of February approaches, many Canadians
rush to make an RRSP contribution. With these five tips
for making the most of your RRSP, you’ll be able to save
smarter throughout the year and reap maximum benefits
from your RRSP savings.

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