Information and FAQ
Registered Retirement Income Funds (RRIFs)
Life Income Funds (LIFs)
The information contained herein is intended as an information guide only. References to income tax regulations are not exhaustive and where clarification is required, you should refer to the actual legislation. Contact Canada Customs and Revenue Agency (formerly Revenue Canada) or refer to it’s Pension and RRSP Tax Guide.
For further information on RRSPs or LIRAs, please contact your nearest League Savings Branch office.
The following publications are also excellent sources of information:
- The Basics Booklet on RRSP, RRIF, LIF – Available from League Savings branches or a participating Credit Union.
- Lifelong Learning Plan (LLP) – CCRA Booklet RC4112
- Home Buyer’s Plan (HBP) – CCRA Booklet RC4135
- RRSPs and other Registered Plans for Retirement – CCRA Booklet T4040
1. What is an RRSP?
A Registered Retirement Savings Plan is a plan approved and registered under the Income Tax Act to help individuals save for their retirement. Deposits to your plan (contributions) are subject to limits and are tax deductible. Income earned within the plan is tax sheltered.
2. Why an RRSP?
Government pension plans such as Canada Pension Plan (CPP) and Old Age Security (OAS) are neither designed nor sufficient to replace 100% of your pre-retirement income. By saving during your peak earning years you can ensure a more comfortable retirement.
3. What is the advantage?
When you contribute to an RRSP, you are actually investing money that would otherwise have been paid in income taxes. Since this deferred-tax plus 100% of any earnings are not subject to tax as long as they remain in your plan, your savings will grow rapidly.
The earlier you begin saving through RRSPs the better, as the compounding of your fund earnings over time will have a major bearing on the amount you accumulate to finance your retirement.
4. What happens at retirement?
At retirement, the savings you have accumulated may be invested in a variety of plans to provide you with a regular retirement income.
You will be subject to tax only on the income your receive each year, which spreads the taxation of your funds over your retirement years.
5. Who may contribute?
Anyone who has earned income subject to Canadian taxation including non-residents, may contribute to RRSPs. Since unused contribution-room may be carried forward, individuals with earned income should file a tax return, whether taxable or not to create future RRSP deduction room.
6. Consider spousal RRSP.
You may direct part or all of your contribution to a plan in your spouse’s name. You, the contributor, get the same tax deductions however, the funds become the property of your spouse.
7. Earned income defined.
Your RRSP deduction limit is based on your earned income for the previous year. The definition includes:
- salary, wages, bonuses and taxable fringe benefits (less: union or professional dues and employment expenses claimed as deductions)
- taxable wage loss replacement or long-term disability income resulting from employment
- Canada Pension Plan disability benefits only
- net income from self-employment (minus current year business losses)
- net rental income from real estate (minus current year rental losses)
- taxable alimony or maintenance payments received
- royalties of an author or investor
- net research grants
a. Earned income must be reduced by any deductible alimony or maintenance payments.
b. E.I. benefits and interest, dividend and capital gains income, do not qualify as earned income.
c. Income that is not taxed, such as Workers Compensation and welfare benefits, cannot be used as earned income.
8. RRSP deduction limits.
Canada Customs and Revenue Agency (CCRA) will include on your Notice of Assessment (which they send you after reviewing your return) your RRSP deduction limit for the following year. You may also get this information by phoning the CCRA TIPS line listed in your telephone directory. This calculation will depend on whether you are a member of a pension plan, and if so, the type of plan.
Your RRSP deduction limit, as discussed above, does not include special transfers to your plan (see details below).
a. The amount of RRSP contributions you can deduct from your income (RRSP deduction limit) may be less than the amount you can contribute (refer to over-contributions). Any contributions your employer made to an RRSP on your behalf are considered part of your RRSP contribution. (Try the calculator in Investing Tools for assistance in determining your RRSP deduction limit.)
b. Make sure you will be fully utilizing your available tax credits before making any RRSP deduction.
9. What is the current maximum deduction?
The maximum RRSP contribution you may deduct for the current year is:
- 18% of your earned income for the prior year, up to the maximum amount for the current year
- minus your pension adjustment (PA)* for the prior year
- plus any pension adjustment reversal (PAR)**
Present maximum amounts are:
- For years 2000 to 2003 – $13,500.
- For 2004 – $14,500.
- For 2005 – $15,500.***
*If you are a member of a registered pension plan (RPP) or deferred profit sharing plan (DPSP), your PA for the prior year should be on your T4 slips for that year. It reflects the value of future benefits arising from membership in your RPP or DPSP. Your employer can provide you with details on how your PA is calculated.
10. Special transfers to your RRSP.
11. Lump sum transfers.
You may transfer lump sums directly from a Registered Pension Plan or a Deferred Profit Sharing Plan to your RRSP. Subject to any non-redeemable investments or pension funds lock-ins, you may transfer amounts directlyfrom another of your RRSPs or from your RRIF.
12. RRIF Payments in Excess of Minimum.
Up until the end of the year you turn 71, you can transfer directly to an RRSP in your own name up to 100% of any payment received from your RRIF which exceeds the mandatory minimum payment amount for the year. CCRA form T2030 may be used for this purpose.
13. Retiring allowance.
Defined as a lump sum or sums paid to you by your employer, at or following your termination, in recognition of your loss of employment. Accumulated sick leave credits paid qualify under this definition but vacation pay, death benefits and pension benefits do not. The portion of a retiring allowance eligible for sheltering in your own RRSP can either be transferred directly (no income tax deducted) or contributed in the year received or within 60 days thereafter. No portion of a retiring allowance can be directed to a spousal RRSP.
The maximum retiring allowance, which can be sheltered, is:
- $2,000 for each full or partial year of service with your current employer before 1996, PLUS
- An additional $1,500 for each full or partial calendar year of service before 1989 with your current employer, in which you were not a member of a pension plan or DPSP, or years for which contributions to such plans by your employer have not vested in you.
14. RESP accumulated income.
As of January 1st, 1999 the subscriber under a Registered Education Savings Plan may transfer up to $50,000 of accumulated income from an RESP to an RRSP in the subscriber’s or their spouse’s name.
These conditions must be met:
- The RESP must have been in existence a minimum of 10 years.
- All current and former beneficiaries under the RESP must be at least 21 years of age and ineligible for education assistance payments.
- Only amounts transferred within the subscriber’s RRSP deduction limit and deducted in that year avoid taxation. There is a special 20% surtax on excess accumulated income withdrawn by the subscriber.
15. Spousal RRSP – advantages?
As mentioned in point #6, any part of your RRSP deduction limit can be contributed to RRSPs for your spouse. If one spouse will be in a higher tax bracket in retirement, RRSP funds should be accumulated in the name of the spouse who will be in the lower bracket. Retirement income from the RRSP will then be taxed at that spouse’s lower tax rate.
Setting up a spousal RRSP is simple. Your spouse applies for a plan in his or her name even though they may not have any earned income. Although you make the plan contributions, the assets of the plan belong to your spouse.
Even if you are over age 71, you can still contribute to an RRSP for your spouse until the end of the calendar year they turn 71.
If your spouse has earned income, they may contribute to an RRSP in their own name, however, a plan separate from the spousal plan is recommended.
A further advantage of having RRSP funds in both spouses names is that it ensures that both can qualify for the Pension Income Credit by age 65.
16. 3-year attribution rule.
Amounts contributed to spousal RRSP s are subject to a 3-year attribution period. See details under withdrawals from spousal RRSPs.
17. Carry forward unused deduction room.
If you do not claim your maximum RRSP deduction, the unused portion may be carried forward indefinitely. This applies regardless of whether you actually make a contribution. Your Notice of Assessment from CCRA records the balance of deduction room carried forward after 1990 in determining your maximum RRSP deduction for the current year.
If you don’t have the money to contribute now, the carry-forward rule means you can make larger catch-up contributions later when you have the cash available.
18. Carry-forward of undeducted contributions.
If you have the cash to contribute now, but expect to be in a higher tax bracket in the future, you can contribute now and claim the deduction in a future year. As long as your contributions are within your deduction room, this strategy is not penalized as an over-contribution. Another advantage is that subsequent earnings on your contribution are also tax-sheltered.
19. Pension income credit
The pension income credit is a federal income tax credit of up to $170 (17% of the first $1,000 of qualifying income). Where provincial income taxes are a percentage of federal tax, you will also save on provincial tax payable.
- At any age,
- Periodic payments from a pension or superannuation plan, including foreign pensions taxable in Canada.
- At age 65 or over, or regardless of age where received as a result of the death of your spouse:
- Income from a RRIF, LIF, LRIF, or annuity purchased with RRSP or DPSP funds.
- Interest earned on term certain (general) annuities.
- What does not qualify:
- Old Age Security
- CPP or Quebec Pension Plans
- Retiring allowances
- Lump sum withdrawals from a pension or superannuation plan
- Cash withdrawals from an RRSP
20. Contribution deadline.
RRSP contributions may be made any time during the year. Contributions made during the first 60 days of any year may be deducted for that year or the immediately preceding taxation year. For contributions by mail, your application and/or deposit must be received by the plan issuer on or before the contribution deadline.
Contributions that exceed your deduction room can be made if you were 18 years of age or over in the prior year, and can be carried forward indefinitely. Between 1991 and 1995, an over-contribution limit of $8,000 was in effect, however, that was reduced to $2,000 by the federal budget that year. As a consequence of this reduction, individuals were not forced to remove excess contributions of up to $8,000 made prior to February 27th, 1995; however, beginning with their 1996 RRSP deductions for 1996, any over-contributions over $2,000 had to be used before making any further RRSP contributions. Under this rule, it might take several years to reduce the over-contribution to $2,000.
22. Over-contribution penalties.
If you exceed the over-contribution limit of $2,000, the excess amount is subject to a 1% per month penalty tax. Non-voluntary (normally employer) contributions to group RRSPs based on current earnings are not taken into account until after the end of the year in which they are made. At that point, additional deduction room for the current year will reduce the excess.
23. Refund over-contributions.
Excess contributions you cannot deduct may be refunded without additional taxation. You must receive a refund (subject to the above penalty) in the year you over-contributed, in the year the Notice of Assessment for that year is issued, or in the following year.
However, if CCRA can prove that you made the contribution with no reasonable prospect of deducting it for that year, or the prior year, and that you made part or all of the contribution with the intent of withdrawing it tax-free, they can deem the refunded over-contribution as taxable to you.
The bottom line here is you should not intentionally make an over-contribution unless you are sure you will be able to use it as your RRSP deduction in one or more future years, based on earned income.
An over-contribution can be carried forward beyond your age 71 for deduction in any subsequent year within your deduction limit.
24. Borrowing for RRSP?
You can borrow the funds you require to make RRSP contributions, however the interest you pay on the loan is not tax-deductible.
25. Official tax receipts.
Your RRSP issuer will provide you with official receipts for contributions. A copy must be attached to your tax return to support your deduction.
26. Transferring your RRSP.
The Income Tax Act allows you to transfer your RRSP between issuers at any time. If, however, your plan consists of non-redeemable investments, the issuer may not permit a transfer until the term expires. Transfers must be made directly from one issuer to the other to avoid tax consequences.
27. RRSP transfers following marriage breakdown.
If RRSPs are part of property to be divided following marriage breakdown, all or part of an RRSP may be transferred between the spouses without income tax consequences. The transfer must be made pursuant to a court order or a written separation agreement, and CCRA form T2220 must be completed to document the transfer.
Can you withdraw funds? Funds in most RRSPs can be withdrawn in whole or in part, subject to the original conditions at the time the plan was established. The amount withdrawn is taxable income and will be reported on a T4 RSP by the issuer of your plan.
28. Locked-In RRSPs (LIRAs)
RRSP funds that have been transferred from a pension plan continue to be subject to pension legislation. Depending upon which pension authority has jurisdiction, these RRSPs are referred to as either Locked-In Retirement RRSPs or Locked-In Retirement Accounts (LIRAs). You may be restricted to purchasing only life annuities with these funds, and your former pension plan may dictate a minimum age for such purchases. Most pension jurisdictions now allow Life Income Funds (LIFs) or Locked-In Retirement Income Funds (LRIFs) as alternatives to life annuities.
29. Withdrawals from spousal RRSPs.
Special rules apply to withdrawals from spousal plans. The contributor to any spousal plan in the year of a withdrawal, or in either of the two preceding years, is subject to tax on the lesser of:
- the amount withdrawn, OR
- the amount contributed during that period.
Spousal contributions within these three-years are deemed to be the first spousal funds withdrawn, regardless of whether the funds withdrawn were actually contributed prior to the three-year period. To the extent the amount withdrawn is more than you have contributed within the three yeas, the excess is taxable in your spouse’s hands. You should wait until the third taxation year after the last contribution to any spousal plan to ensure a withdrawal is taxable to the registered owner and not the contributing spouse.
Form T2205 is available at District Taxation Offices to help determine who is taxable.
The three-year period terminates on the death or non-residency from Canada of either spouse, or upon the legal separation of the spouses. It also terminates if the RRSP funds are used to purchase an annuity. It continues to apply if converted to a RRIF and payments greater than the mandatory minimum payment amount is taken from the RRIF in any of the three years.
30. Withdrawals for education.
Commencing in 1999, an individual can withdraw up to $10,000 per year from their RRSP without immediate taxation, to finance full-time training or higher education of at least three months duration for themselves or their spouse. Full-time is defined as a minimum of 10 hours of study per week. Disabled students can qualify with part-time enrollment. Withdrawals cannot exceed $20,000 over a four-year period.
Withdrawals for education are not permitted from locked-in RRSPs or LIRAs, and it is the RRSP issuers decision whether it will allow early withdrawals from non-redeemable investments.
A tax deduction is not allowed for an RRSP contribution made less than 90 days before it is withdrawn under this provision.
Repayment without interest, to any RRSP, of amounts withdrawn is due in equal payments over a 10-year period commencing in the year following the last year in which the student is enrolled full-time, or in the sixth year following the first withdrawal, whichever is earlier. Amounts not repaid as required are added to the income of the plan holder for that year. Special rules apply where RRSP funds are withdrawn and the student does not complete the educational program.
Before making a withdrawal for education it is important to consider the loss of compound earnings on this amount. Even if you eventually repay the amount to your RRSP, it may have a substantial impact on the value of your savings for retirement.
You initiate this process by completing CCRA form RC96 with your RRSP issuer. No withholding tax will be deducted from a qualifying withdrawal but a T4RSP will be issued to you in that year.
31. Withholding tax – how does it work?
When you withdraw money from your RRSP, the issuer is required to withhold income tax based on the following scale:
- 10% on a withdrawal not over $5,000
- 20% on a withdrawal over $5,000 but not over $15,000
- 30% on a withdrawal over $15,000
The amount of your withdrawal and any tax withheld will be reported to you on a T4RSP for inclusion on your tax return for that year. Remember that your RRSP withdrawals are added to your taxable income, therefore, the tax withheld may not cover the additional tax payable. On the other hand, if you are not taxable, by filing a tax return you can receive a refund of the taxes withheld.
If you are a non-resident when you withdraw RRSP funds, the rate of withholding tax will depend upon your country of residence.
32. How long can funds stay in an RRSP?
You must purchase a retirement income option or withdraw your funds before the end of the calendar year in which you reach age 71. See “Retirement Income Options” section of the Retirement Centre for details.
33. What happens if you die?
Where your surviving spouse is the beneficiary of your RRSP, or inherits these amounts under your will, the funds can be transferred without tax consequences, to an RRSP, RRIF or annuity for your spouse.
Where the beneficiary of your plan is a child or grandchild who was financially dependent on you, there are a number of special provisions available for continued tax sheltering.
In all other circumstances, your RRSP funds are taxed on your final tax return as if you had withdrawn them from your plan immediately before your death.
Contributions after death – Following your death, your legal representative can make contributions to RRSPs for your spouse, and these can be deducted on your final tax return. This applies to contributions for the year of death (which must be within your RRSP contribution limit) and these must be made within 60 days after the end of the calendar year of your death.
34. The Home Buyers’ Plan
First-time home buyers can withdraw, without immediate taxation, up to $25,000 to be used as part of a down payment for a qualifying residence. No income tax will be paid on the funds withdrawn provided they are repaid to an RRSP during the 15 year repayment period.
35. First-time Home Buyer – defined.
In this context, an individual qualifies as a first-time buyer if, during the year of the withdrawal(s) under the plan and the four previous calendar years, they did not own a home that was their principal residence.
36. Home Buyers’ Plan – Special provisions.
League Savings Branch.
37. How does interest accrue?
Interest accrues daily and is paid annually on the anniversary date.