P (Registered Retirement Savings Plan)

It allows a taxpayer to invest his money on a tax-deferred and tax-deductible basis at the same time. However, the income withdrawn from the plan is taxable. To make a contribution towards an RRSP account one must have the room available. This room is based on the contributor’s deduction limit, which is calculated each year based on earned income. Let’s look at what does the earned income include:

Net employment & rental income – This is your income from the employment and the benefits obtained like overtime, bonuses, etc. EI during unemployment doesn’t create the RRSP room. Rental income after deduction of any expenses does contribute towards the RRSP room.

Business income – Income after deducting any losses will be part of the earned income. However, if the income is through any investments, or if the business owner pays dividends to him or herself then they won’t create the RRSP room.

CPP – CPP disability benefits add to the earned income but other CPP benefits are not.

Contribution Room – The earned amount of income is multiplied by 18% which gives the maximum deduction limit for the following year subject to an annual maximum. Unused RRSP room can be carried forward indefinitely. A taxpayer who has $11,000 in unused RRSP deduction limits from previous years and a new RRSP deduction limit of $17,000 for the current year could contribute $27,000 in the following year, and deduct that full amount from that year’s taxable income. The over contribution limit is $2000. The penalty is applied on over contribution @ 1%.

Lots of investment options are available within RRSP. Few examples are like Currency or forex investment, Bonds, ETFs, Stocks, Mutual or segregated funds, Mortgage, call/put options and investment grade gold, silver etc.

The following items can not be held in an RRSP:

  • Shares of a corporation in which you and your family members have more than 10% stake.
  • Futures contracts or derivatives, art, and antiques.
  • A mortgage could be employed in RRSP but there are certain specific steps which must be taken 

The contributions towards RRSP can be made until December 31st of the year that the taxpayer turns 71. A taxpayer can also contribute towards the spouse`s or common law partner`s RRSP. Its only beneficial, where one spouse earns a relatively higher income than the other. It allows the taxpayer to use his own reduction limit and obtain the tax deduction, but the funds are put in the other spouse’s RRSP. The intent is that, during the withdrawal of these funds by recipient spouse, presumably lesser tax will be paid due to being in lower income. However, the withdrawals will be attributed to taxes to the contributing spouse, up to the limit of spousal RRSP contributions made in the current year and the two previous years. So, a spousal RRSP should not be used as short-term income splitting strategy. If a taxpayer dies with unused RRSP room, contributions could be made as a posthumous to the spouse’s RRSP. This further reduces the tax at the year of death. This contribution could be made until 60 days into the next calendar year.


Withdrawals & Withholding Taxes – Any withdrawals made from an RRSP are taxable as ordinary income.The withholding tax is applicable on the amount withdrawn from RRSP. On withdrawals up to $5,000 a 10% tax is applied, for amount between $5,001 and $$15,000 a 20% tax amount is withheld and for amount over $15,000 a 30% withholding tax will be applied.

RRSP can be set up at any age if there is income earned and RRSP room available. It could be highly beneficial for a minor who earns a few thousand dollars to file tax return. This will help to grow the RRSP room and no tax is payable if the income earned is less than basic personal. 

The amount held in an RRSP is deemed disposed at death. This increases the tax burden on the terminal tax return of deceased. The amount of RRSP transfers directly to the beneficiary at death, and the annuitant’s terminal tax return incurs the tax liability. Effectively, this reduces the assets from the estate to pay out to the heirs.

Following beneficiary designations for a deceased that allow a possible rollover.

  1. Spousal or common law Partner
  2. Dependent child/grandchild having income below the basic personal amount. The child must withdraw the amount by year child turns 19. By annuitizing the tax burden is spread over the years until the child turns 19.
  3. A child or grandchild with a disability could be named as a beneficiary and can be of any age. Alternately, up to $200,000 can be transferred to RDSP.  

The RRSP matures before December 31st of the year in which the RRSP annuitant turns 71. There are three options available at maturity.

  1. Annuity– RRSP could be converted to a registered annuity before the annuitant turns age 71.  
  2. RRIF– The registered retirement income fund allows the continued tax deferral, without any further contributions. Annual withdrawals are mandatory right from the year its established.
  3. Cash.  The entire amount saved in the RRSP can be withdrawn as cash which results in this amount to be added in the income. This is generally the lesser desired option, provided the amount saved is small. 

The RRSP is most effective when a taxpayer earns income at a higher tax bracket while working, and is likely to be in a lower tax bracket during the retirement years. The compounding effects of reinvested tax savings generated by contributing to an RRSP can be very beneficial.


The withdrawals from RRSP are not taxed when used for a First-time Homebuyer plan and Lifelong Learning Plan. 

Home Buyer`s Plan – To buy a qualifying home it allows the withdrawal of up to $35,000 per spouse. The funds must have been in there in the RRSP for at least 90 days before making the withdrawal. There should be no ownership for a home in Canada in the previous 4 years and current year. The ownership of a rental doesn’t disqualify from using HBP as its not a home.

The repayment of withdrawals Is made neither in the current year when the withdrawals are made and nor in the first year following the withdrawals. This means that a taxpayer who makes an HBP withdrawal in 2021 has to make their first HBP repayment in the 2022 RRSP contribution year, which actually allows up to 60 days into 2023 for this repayment to be made. Repayments do not need the RRSP room to be available and the spousal RRSP contribution cannot be designated as a HBP repayment. The RRSP room which is used under the HBP can not be regained.


Lifelong learning Plan

An adult must enroll in a full-time education program to use the LLP. An amount up to $20,000 can be withdrawn, by a spouse for any of the spouse. The total amount allowed is up to $40,000 to be withdrawn, in case, both spouses have enough funds in the RRSPs. In a given year the maximum amount that could be withdrawn is $10,000 in one year from one RRSP; and the cumulative amount is $20,000 per year for a couple. The repayments must begin in the earliest of the 5th year after the first withdrawal is made or first year if not enrolled in a qualifying education program. The repayments are done in 10 years schedule.


Groups RRSP

In this kind of plan the employer contributes to the RRSP for employees or just the employees contribute through the payroll. It creates the taxable benefit for the employee but it’s an offset by tax deduction just as the regular RRSP. Most employers match the contribution up to a certain amount. Few group RRSP providers restrict the use of HBP and LLP for funds saved in the plan.

Important : This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.