Because information is your best retirement-planning ally, we've put together this 2007-2008 RRSP tax-treatment guide to help you make the most of your retirement savings.

Tax Regulation Summary
 

• Glossary
• RRSP Contribution Conditions
• Calculation of RRSP Contribution Limit
• Age limit for RRSP Contributions
• Carrying Forward of Unused Contributions
• Contribution Made and Deduction Claimed 
• Over-Contributions
• Contributions by Instalments
• Withdrawals from RRSPs and Tax Withheld at Source
• Spousal RRSPs
• Spousal-RRSP Withdrawals
• Death of the RRSP Planholder
• Income Eligible for Rollover to RRSPs
• Loan and Administration Fees
• Foreign Content
• Pension Income Credit
• Seizure
• Getting Advice
   

Glossary

Spouse (for RRSP-contribution purpose)
 

• Spouses: a legally married or civil union couple
   
• Common-law partners: two people, regardless of sex, who:
  
   
  • live together and are the natural or adoptive parents of the same child; or
  • have been living together for at least 12 consecutive months.
     

Such individuals cease to be considered common-law partners after a permanent separation of 90 days or more. However, any separation of less than 90 days does not affect the 12-month period mentioned above.

Dependent children (for RRSP tax purposes)

A child or grandchild is considered to be "financially supported by the annuitant at the time of death" if the following conditions are met:
 

• the child or grandchild depended on the annuitant for support (more specifically, a child or grandchild is financially dependent upon the annuitant with whom he or she does not live if the annuitant pays child support for the child or grandchild); and
   
• the child's or grandchild's net income for the year prior to the death did not exceed the basic personal amount. Therefore, for a death in 2007, the 2006 basic personal amount is used, i.e. $8,839 ($9,600 for a death in 2008). This amount goes up for a dependent child or grandchild who is physically or mentally infirm. For a death in 2007, the amount used is $15,580 ($16,460 for a death in 2008).
   

A child also means the spouse's child and any person under age 19 who is supported by the annuitant and under the latter's custody and control.

PA (Pension Adjustment)

An individual has a PA only if he/she belonged to a registered pension plan (RPP) or a deferred profit-sharing plan (DPSP) during the contribution year. This adjustment for the year is the sum of the pension credits accrued during the year under the provisions of an employer-sponsored RPP or DPSP. The PA appears in Box 52 of the T4 slip or Box 34 of the T4A slip.

PSPA (Past Service Pension Adjustment)

The PSPA represents the value of the benefits accumulated under the defined-benefits provision of an RPP. The PSPA is calculated when:
 

PAR (Pension Adjustment Reversal)

The PAR is generally the total of the PAs (and of any PSPAs) since 1990, less any money paid to the employee upon termination of employment with respect to the company RPP or the DPSP since 1990. The PAR, which appears on the T10 slip, applies only when the employee does not yet have any vested rights in the RPP or DPSP.

Earned Income

Earned income for federal tax purposes mainly consists of the following income:
 

• salary (including any taxable wage-loss insurance benefits)
• taxable benefits included in employment income
• tips and gratuities
• net income of a business operated alone or as a partnership
• taxable support payments
• supplementary employment benefits (other than those received under the Employment Insurance Act)
• net income from rental property
• net research grants
• Quebec Pension Plan (QPP) or Canada Pension Plan (CPP) disability benefits
   

Less

 

• union or professional dues
• certain expenses incurred by a salesperson to earn commission income
• certain expenses deducted by an employee to earn employment income
• losses from a business operated alone or as a partnership
• deductible support payments
• net losses from rental property
  
   

RPP (Registered Pension Plan)
 

Better known as a company "pension fund", to which both the employer and employee contribute. There are two types of RPPs: defined-contribution plans and defined-benefit plans.

Defined-Contribution Plans
 

• Under these plans, a fixed amount is paid by the employer and employee.
• A percentage of the employee's earnings is held in trust.
• The money accumulated in the plan is used to purchase a life annuity for the employee at retirement.
• The benefit is not defined in advance, since it is not known how much will be available at retirement.
   

Defined-Benefit Plans
 

• These plans provide pension benefits (annuities) that are defined in advance for each year of membership in the plan.
• A defined-benefit plan usually provides a benefit based on salary and years of service.
• Most RPP's are defined benefit plans.
   

DPSPs (Deferred Profit-Sharing Plans)

A DPSP is a type of employer-sponsored pension plan based on company profits. The employee does not contribute to this type of plan.

Unused Contribution Room

This is the difference between the total RRSP contributions an individual is entitled to make and the contributions he or she has actually made. Unused contributions may be carried forward to future years.

RRSP Contribution Conditions

Any individual, regardless of age (provided it is not over the age limit), who has unused RRSP contribution room from earned income in Canada in the previous year, or has income eligible for rollover (e.g.: retiring allowance), may contribute to an RRSP.

Calculation of RRSP Contribution Limit

The maximum RRSP contribution limit for a given year is calculated as follows:

Unused RRSP contributions since 1991

PLUS  The lesser of: 

• 18% of previous year's earned income or
  
• $19,000 (for the 2007 tax year)
  
  

LESS the previous year's PA (if applicable)
LESS the current year's PSPA (if applicable)
PLUS the current year's PAR (if applicable)
 

Consult your 2006 notice of assessment

Call the Canada Revenue Agency (CRA) at 1 800 267-6999.
 

Age Limit for RRSP Contribution
 

•  Minimum age
   
  • There is no minimum age for contributing to an RRSP. All you need is earned income, as defined in the Act or income eligible for rollover
    
     
    
• Maximum age
   
  • To your own RRSP: before the end of the year in which you turn 71
  • To your spouse's RRSP: before the end of the year in which your spouse turns 71, regardless of your age
     

Carrying Forward of Unused Contributions
 

• Unused RRSP contributions may be carried forward indefinitely.
• That being said, however, the earlier, the better!
• If your spouse has died during the year, it may be to your tax advantage to make use of his or her unused contribution room in a spousal RRSP.
   

Contribution Made and Deduction Claimed
 

• The entire RRSP contribution does not have to be deducted the same year it is made. 
   
• You should deduct only the amount that lets you maximize the tax savings based on your marginal tax rate.(see the example "Maximize Your Tax Savings Via RRSP Contributions").
   
• Contributions made but not deducted can be deducted after age 71 even if your RRSP was transferred to a RRIF or an annuity..
   

Over-contributions
 

• Anyone aged 18 through 71 may keep up to $2,000 in over-contributions in his or her RRSP.
   
• Over-contributions exceeding $2,000 are subject to a monthly 1% penalty, until the surplus is withdrawn.
   
• Form T-3012A is used to prevent taxes being withheld at source. On this form, CRA approves the over-contribution amount prior to its withdrawal.
   

Contributions by Instalments
 

• Source deductions on employment income work to your advantage and can be made in the case of pre-approved contributions.
   
• Forms required: Federal T1213 and TP-1016 for Quebec.
   

Withdrawals from RRSPs and Tax Withheld at Source

Type of income		Résident du Québec				Residents of other provinces
Amount			Provincial deduction	Federal deduction	Total deduction	Federal deduction *and**
RRSP - Periodic payments (benefits)	$5,000 or under		No source deduction			No source deduction
	$5,000.01 to $15,000
	Over $15,000
RRSP - Lump-sum payments (withdrawals)	$5,000 or under		16%	5%	21%	10 %**
	$5,000.01 to $15,000		16%	10%	26%	20 %**
	Over $15,000		16%	15%	31%	30 %**

* The tax deduction rate is established as follows:
 

Spousal RRSPs
 

• The total contributions you make to your RRSP and your spouse's RRSP must not exceed your maximum contribution limit.
  
  E.g.: Your contribution limit is $4,300. You can contribute $3,000 to your own RRSP and another $1,300 to your spouse's RRSP. Other combinations are also possible, on the condition that the total contribution does not exceed $4,300.
  
  
• Contributions made to your a spousal RRSP belong to the RRSP holder. However, it is the person making the contribution who receives the tax deduction.
   

Spousal-RRSP Withdrawals
 

• The "three-year rule" applies to spousal RRSPs regardless of when, or to which financial institution, contributions were paid. For a withdrawal to be taxed in the hands of the RRSP planholder, the contributing spouse must not have made any contributions during the last three calendar years (i.e., the past three periods ending December 31).
   
• However, this rule does not apply to withdrawals under the Home Buyers' Plan (HBP) or the Lifelong Learning Plan (LLP).
   

Death of the RRSP Planholder

The value of all RRSPs must be reported as income in the deceased's tax return, unless the RRSPs are bequeathed to the deceased's:
 

• spouse or common-law partner in which case:
  
   
  • they can be rolled over to the spouse's RRSP.
    
    
  • The total or partial amount chosen by the spouse is taxable in the hands of the spouse; the balance is taxable in the hands of the deceased. The surviving spouse can defer the tax on all or part of this amount by transferring it into an RRSP or a RRIF in his/her name.
    
     
• dependent children and grandchildren with a mental or physical infirmity
  
   
  • The rules are the same as for the spouse, above.
    
     
• dependent children and grandchildren:
  
   
  • The heirs are taxed on the total or partial amount chosen, and any balance is taxed in the hands of the deceased.
    
    
  • The heirs can stagger taxes by purchasing an annuity that matures no later than their 18th birthday.
     

If you die, your spouse should contribute to a spousal RRSP, up to your unused contribution limit.

Income Eligible for Rollover to RRSPs
 

• Retiring allowances (within certain limits)
   
• RRSP assets inherited from a deceased spouse
   
• Funds accumulated in a RRIF in excess of the compulsory annual minimum withdrawal (provided you're under 71)
   
• The amount in excess of the compulsory minimum withdrawal (but not exceeding the lifetime maximum) of a LIF (provided you're under 71)
   
• Lump-sum amounts from an RPP after a death or separation (certain conditions apply)
   

Loan and Administration Fees

These fees are not tax deductible.

Foreign Content
 

Pension Income Credit

 

• RRSP withdrawals do not give entitlement to the pension income credit. However, if you convert an RRSP to a RRIF, the RRIF annuity is eligible for this credit.
   
• Federal conditions: You must be age 65 or over, except if the amounts come from a deceased spouse.
   

Seizure
 

The property held in an RRSP may be subject to seizure. For RRSP planholders, any seizure results in the taxation of the sums withdrawn in the year the seizure occurs. However, the sums accumulated in an RRSP that were transferred from an RPP are generally exempt from seizure, provided the source of these funds can be established.

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Note: This document is intended for information purposes only, and in no event should be considered or used as professional tax advice.

Updated: October 2007