What is a Registered Retirement Savings Plan (RRSP)?

A 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 higher-taxed 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 Contributions are usually withdrawn as Registered Retirement Income Fund (RRIF) payments and reflected as pension income in lower-taxed retirement years.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 income-splitting 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?

A RRSP contribution is the amount invested in a RRSP. A 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 (NOA) – please refer to our “Understanding the RRSP Deduction Limit Statement” article.

Timing Considerations

Individuals can make RRSP contributions up to and including the first 60 days following the calendar year end. A 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.

While individuals typically deduct the full amount of their RRSP contributions each year, they also have the option to defer the deduction to a future year. This is beneficial where an individual’s future income and marginal tax 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.

Other Considerations

While the RRSP primarily serves as a retirement savings vehicle, it also opens access to the Home Buyers Plan (HBP) and 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).