Are you thinking of your retirement planning or are you looking to buy your house? Learning more about this tax planning tool can help you save taxes in the long run as well as plan for your retirement.
RRSP is a registered retirement savings/investment plan that allows you to deduct from your total income on line 20800 and hence lowers your tax liability for the year in which you invested in RRSP. The amount you can invest is based on your contribution limit. You can invest in your RRSP or for your spouse which is called spousal RRSP. The person who invests reduces his/her contribution room/limit and receives the tax deduction. If you contributed to your spousal RRSP, it will be taxed in the hand of the spouse when withdrawn. Your contribution room/limit is set by CRA based on your income reported on T1 general personal income tax and benefit return. The contribution room is calculated as 18% of your income reported however is subject to a maximum room limit of $27,830.00 for the tax year 2021. The maximum limit set by CRA changes every year. The maximum contribution limit is adjusted every year based on inflation and other factors.
That means when you first time file your personal income tax return in Canada, in that tax year you will have zero RRSP limit. Your next year’s RRSP limit is calculated by CRA based on your current year’s income reported on your income tax return filed in Canada. You build your RRSP limit year over year. Your investment in RRSP is a tax deferral saving plan. You pay taxes when you withdraw money from your RRSP.
RRSP Contribution Period:
You can contribute to your RRSP from March 1st of the current year till December 31st or in the 1st 60 days of the next year to claim RRSP in the current year tax return. The last day of contribution is also adjusted if it falls on a holiday. Contribution made in the 1st 60 days of the year can also be claimed in the same year tax return however you need to report this contribution in your last year tax return.
There could be several situations or tax planning involved that decide when and how much to invest in your RRSP. You may need to speak with your accountant.
Some of the common situations that may apply:
• Your family income and your tax bracket
• Federal non-refundable tax credits that you are entitled to
• Other amounts that you can deduct from your income
• Your age
• First time home buyer
• Your other investments such as RESP, TFSA
• Your employer-sponsored plans
• Your and your spousal contribution room
• Retiring allowance….
RRSP investment options
It may depend on your future goals. When you are planning to avail the first-time homebuyer option you may need to look into an investment plan that allows you to withdraw money without paying and penalties. You may need to contact your bank or a personal financial planner. The most common RRSP providers are rbc RRSP, desjardins group RRSP, amnulife RRSP, td RRSP, bmo RRSP, questtrade RRSP, great west RRSP, and many more. Your employer may also have a group RRSP to which you can contribute. In many such situations, your employer may also provide their contribution to help you build retirement savings.
If you are investing only yourself in your RRSP, we always advise all our clients to invest on a monthly or quarterly basis. This helps in withdrawing any large amount near the end of the year from your chequing account. Investing on a monthly or quarterly basis becomes your habit and you do not feel a burden at the end of the year. Generally, you have until the end of February of the following year by which you need to invest into your RRSP room to claim the benefit in your current year’s taxes. If the last day of February of the following year falls on a Saturday, Sunday, or public holiday then CRA allows you to invest by the next business day.
RRSP contributions over the limit/room
You or your spouse contribute to RRSP based on the limit/room for the year. If you do not contribute or contribute less than your limit for the year, the balance in your contribution room is transferred and added to your next year’s limit/room. If you contribute more than your room/limit for the year, generally the excess contribution does attract any interest or penalty up to an amount of $2,000.00. If you have RRSP excess contributions which are more than $2,000.00, you may have to pay a tax of 1% per month on those contributions.
Income from RRSP
You do not pay taxes on any income from your RRSP in the year you have earned it. You only pay taxes when you withdraw from your RRSP.
RRSP Withdrawal
When you withdraw from your RRSP, the amount you withdraw is added to your income on line 12900 on your T1 general in the year you withdraw. You can convert/purchase an RRSP annuity plan. The annuitant, the person who receives the annuity from RRSP or an RRIF reports the retirement income.
Home Buyers Plan (HBP)
One of the best tax planning tools for a new Canadian resident is the RRSP home buyers plan. You can withdraw money from your RRSP without paying any income tax if you are buying or building your first home. You can withdraw up to $35,000.00 ($70,000.00 if your spouse is also a first time home buyer) without paying any tax, however, you have to repay this withdrawal within 15 years which starts from the second year of your withdrawal. You have to be a resident in Canada. You must intend to use this home as your primary residence within one year.
RRSP on death
On the date on which you died, the fair market value or RRSP is added to your income on line 12900 unless you have a named eligible beneficiary. If you had a named eligible beneficiary in your RRSP plan, then your RRSP can be transferred to your beneficiary. Your beneficiary will report the transferred amount as income on line 12900 and at the same time, he/she will report as RRSP deduction on line 20800. If you do not have a named beneficiary in your RRSP plan then the withdrawal amount from your RRSP will be transferred to your trust. Your surviving spouse or common-law partner may qualify as the annuitant, in certain circumstances, when due to the death, they become entitled to receive benefits out of the plan or fund.
Employer-sponsored: Retirement plans
There are two basic kinds of registered pension plans (RPP):
Defined benefit pension plan (DBPP) – in which case employer will specify to employee coverage of the benefits to be provided in the future or some method for determining the benefits based on income and years of services of employees.
Defined contribution (money purchase) pension plans (DCPP) – in which case the employer will specify that how much will be contributed without exposing to the investment risk inherent in a defined benefit plan.
Deferred profit-sharing plans (DPSPs) – An alternative to the RPP is a deferred profit-sharing plan (DPSP). Under this type of arrangement, the employer makes payments to a trustee, who holds and invests the contributions for employee benefit. Unlike RPPs, however, employee contributions are not allowed.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.