FAQ - RRSP

1. What happens if there's a year I don't have enough money to contribute to my RRSP?

Don't worry if you aren't able to contribute to your RRSP for one or more years. It's not too late!You'll just accumulate "unused contribution room". And, there's no time limit for using your contribution room, meaning you can defer your contributions for as long as you need to. However, keep in mind, the sooner you contribute the better.

2. Do I need to deduct my RRSP contribution the year I make it?

You don't need to deduct an RRSP contribution the same year you make it. It's actually better to deduct only the amount that lets you maximize your tax savings based on your marginal tax rate.

3. What if I contribute more to my RRSP than I'm allowed?

Any person between the ages of 18 and 71 inclusive can carry a maximum excess contribution of $2,000 in their RRSP. Note however that excess contributions over the limit of $2,000 are subject to a penalty tax of 1% per month, for each month that the excess contribution remains in the RRSP.
 

Before withdrawing your excess contributions, you must complete form T3012A and have it approved by CRA to prevent taxes from being withheld at source.

4. Can I lower my tax bill immediately by contributing in instalments?

If you're a salaried employee and you make regular RRSP contributions, you can ask your employer to immediately reduce tax deductions at source. Simply complete the following forms: T1213 (federal) and TP-1016 V (Quebec).

5. What happens if I make a withdrawal from my RRSP?

When you withdraw funds from your RRSP, tax is generally withheld at source when the withdrawal is made. The amount withdrawn will be added to your other income for the year, which increases your annual tax bill. In other words, even if tax is deducted at source when the withdrawal is made, you may still have to pay tax on the withdrawal when you file your tax return.

Type of income	Amount	Quebec Residents					Residents of other provinces
		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%**

* Withholding tax rates are established as follows:
 

If the total amount of expected withdrawals for the year is known, the withholding tax payable is based on this total. Otherwise, it's based on the amount of the withdrawal.
 

Example:
Let's suppose you're receiving a monthly pension of $200 and you withdraw $1,000 from your RRSP.

• No taxes will be withheld at source for the $200 pension;
• A 10% withholding tax will apply to the $1,000 withdrawal. 

For a monthly pension of $800 and a $6,000 withdrawal:

• No taxes will be withheld at source for the $800 pension;
• A 20% withholding tax will apply to the $6,000 withdrawal.

** Only the federal tax is withheld; this includes the 3% provincial tax deduction.

6. What happens to my RRSP when I die?

When you die, the value of all of your RRSPs must be reported as income on your tax return, unless the value of your RRSPs is bequeathed:

• To your spouse:
   
• To your dependent children or grandchildren with a mental or physical infirmity:
  
  They can roll over all or part of the amount received into their own RRSP. If you only bequeathed a portion of your RRSP, then taxes on the remaining balance will be payable from your estate.
  
  Example: Pham died in January, leaving a $300,000 RRSP. She left $200,000 from her RRSP to her husband Alex. Alex can roll over this amount into his own RRSP, thereby deferring the tax payable. Pham's estate will be responsible for the taxes owing on the remaining RRSP balance of $100,000.
   
• To your dependent children or grandchildren:
  
  The heirs are taxed on the total or partial amount chosen, and the taxes on any balance is payable from your estate.

7. What income can I roll over into my RRSP?

The following income can be rolled over into an RRSP:

• Retiring allowances (certain conditions apply)
  
  
• RRSP assets inherited from a deceased spouse
  
  
• Sums exceeding the compulsory annual minimum withdrawal from your RRIF, if you're under 71
  
  
• Sums exceeding the compulsory minimum withdrawal under your LIF up to the lifetime maximum, if you're under 71 
  
  
• Lump-sum amount from an RPP after a death, separation or divorce (certain conditions apply)

8. Are borrowing costs and administration fees tax-deductible?

Borrowing costs and administration fees are not tax-deductible.

9. Does the Pension Income Tax Credit apply to RRSP withdrawals?

RRSP withdrawals do not qualify for the Pension Income Tax Credit. However, if you convert your RRSP into a RRIF, the annuity from this RRIF qualifies for this credit.

10. Are RRSPs subject to seizure?

If an RRSP holder declares bankruptcy, the funds accumulated in the RRSP are exempt from seizure, except for contributions made in the 12 months preceding the bankruptcy.

• It's important to remember that seizure-exempt status is not guaranteed. For example, it can be overridden by CRA under certain powers granted to this organization.
  
  
• This status can also be overridden if the RRSP was taken out shortly before an insolvent person declared bankruptcy.
  
  
• Finally, it can be overridden in the event that family assets are split between spouses or support payments are made.

When an RRSP matures, the annuitant can opt for the annuity provided for in the contract. The annuity payments then become subject to seizure, but the accumulated capital and ownership of the annuity contract itself remain exempt from seizure. When the RRSP matures, the annuitant can instead opt to transfer the accumulated funds into a RRIF, which is also exempt from seizure.

To learn more about Registered Retirement Savings Plans (RRSPs)

How much should I contribute?
Spousal RRSPs
How to get the most out of your unused contribution room
How to make an HBP withdrawal (or how to use your RRSP to buy your first home!)

Note  - This text is intended for information purposes only and in no case should be considered as legal or tax advice.