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What is a Registered Retirement Savings Plan (RRSP)?
An RRSP is a retirement savings account available to
any Canadian individual taxpayer under the age of
72 and to which they or their spouse/common-law
partner can contribute — subject to their respective
deduction limits.
At the very least, an RRSP is an income tax deferral tool,
and in most instances generates tax savings. It offers
these key tax planning opportunities:
• Contributions are deducted from earned income
such as employment income, which helps to reduce
the amount of tax owing in the near term.
• Investment income and gains generated in the RRSP
are tax-deferred as long as they remain in the plan,
so they do not have to be reported in one’s highertaxed
working years. Contributions are usually
withdrawn as Registered Retirement Income Fund
(RRIF) payments and reflected as pension income in
lower-taxed retirement years.
• When converted to a RRIF or annuity, an RRSP may
also generate eligible pension income for incomesplitting
purposes depending upon the age of the
annuitant and may provide further tax savings by
supporting pension income-splitting opportunities
between spouses/common law partners.
What is the difference between an RRSP
contribution and deduction?
An RRSP contribution is the amount invested in an
RRSP. An RRSP deduction is any contribution amount
reported as a deduction to reduce taxable income on
an individual’s personal tax return.
RRSP contributions do not need to be reported
immediately as a deduction. The deduction can be
saved for use in a future year when higher income is
expected. Individuals are subject to RRSP deduction
limits calculated annually and on a cumulative basis.
For a better understanding of the Canada Revenue
Agency (CRA) RRSP deduction limit statement —
often found on an individual’s Notice of Assessment,
MyAccount or MyCRA Mobile app, please refer to
our “Understanding the RRSP Deduction Limit
Statement” article.
Timing considerations
Here is where the RRSP program can be confusing.
RRSP deduction limits are calculated based on a
calendar year — the same as the Canadian personal
Income Tax and Benefit Return (T1). If someone earns
$75,000 in 2022 and has no pension adjustments
or prior year carryforwards, they can technically
contribute $13,500 to their RRSP on January 1, 2023.
There’s no need to wait to file their 2022 T1 and receive
their Notice of Assessment.
Individuals can, however, make RRSP contributions
up to and including the first 60 days following the
calendar year end. CRA tracks these as well. An RRSP
contribution made in the first 60 days of the year can
be used as a deduction in the prior year or the
current year.
Confusion may also arise where the RRSP Deduction
Limit Statement reflects a negative balance of
more than $2,000 — highlighting a potential RRSP
overcontribution. It’s important to identify the date
of the carryforward contributions reflected on the
statement and if any of the carryforward contributions
were made in the first 60 days of the calendar
year, as they can be carried forward and deducted
appropriately in that year.
While individuals typically deduct their full annual RRSP
contributions each year, they also have the option to
defer the deduction to a future year. This is beneficial
rates are anticipated to be higher than the current year, such as when they are expecting a raise or other substantial increase in taxable income. In this instance an individual’s RRSP Deduction Limit Statement will reflect two types of carryforwards — the RRSP Deduction Limit and RRSP Contributions Carryforward. All is good in RRSP-land when Contributions Carryforward do not exceed the Deduction Limit by more than $2,000.
Other considerations
While the RRSP primarily serves as a retirement savings vehicle, it also opens access to the Home Buyers Plan (HBP) and the Lifelong Learning Plan (LLP), provided there are funds invested in the RRSP.
• The HBP allows each Canadian to withdraw up to $35,000 from their RRSPs to buy or build a qualifying home, subject to certain conditions. The HBP is essentially a loan from one’s RRSP and funds withdrawn must be paid back to the RRSP within a 15-year period (at minimum 1/15th of the original loan amount per year).
• The LLP allows Canadians to withdraw up to $10,000 in a calendar year from their RRSPs to finance full-time training or education up to a total of $20,000. Again, the LLP is a loan from one’s RRSP and withdrawn funds must be paid back to the RRSP within a 10-year period (at minimum 1/10th of the original loan amount per year).
Key features of an RRSP
Here are some quick facts about RRSPs to keep in mind when considering RRSP contributions:
• Contributions can be deducted from income in the year of contribution or in a future year.
• The annual RRSP contribution limit is 18% of prior year’s earned income to a maximum of the annual limit (2022 -$29, 210, 2023 – $30,780), plus unused RRSP contribution room from previous years.
• Watch for overcontributions! A 1% penalty tax will apply monthly to contributions that exceed one’s RRSP deduction limit.
• Investment income and gains in the RRSP are not taxed as earned — they are typically taxed as pension income upon withdrawal.
• Withdrawals from an RRSP are taxed at one’s marginal tax rates for the year. Withdrawals must begin in the year the annuitant turns 72.
• Though primarily a retirement savings vehicle, the RRSP can also help fund a home purchase via the HBP and education costs with the LLP.
