Module 8 - savings plans

registered retirement savings plan (RRSP)

incentivize Canadians to save for retirement

first home savings account (FHSA)

Introduced to help Canadians purchase their first homes

Contribute up to $8000 per year to a lifetime maximum of $40,000 - contributions are tax deductible in the year they are made

Withdrawals are tax free to purchase their first home - unlike RRSP they don’t need to be repaid

Tax-free savings accounts (TFSA)

incentivize Canadians to save in general - allows canadian residents to earn investment income on a tax free basis

contributions are not deductible and withdrawals are received tax-free i.e. TFSA has no impact on an individual’s taxable income

An individual’s contribution will increase each year (starting in the year they turn 18) based on a defined limit - this contribution room accumulates each year the individual is 18 or over, regardless of if they have opened a TFSA or even filed a tax return - unused contribution room is carried forward indefinitely

Any amount withdrawn from TFSA can be recontributed, regardless of contribution room

Registered education savings plan (RESP)

incentivize Canadians to save for their post secondary dependent’s education

contributions are not deductible

withdrawals of funds that were contributed are received tax free by the student. withdrawal of income earned on contributed funds are taxed for student when recieved

no yearly contribution limit but lifetime maximum is 50,000 per RESP → a taxpayer can have multiple RESPs if they have multiple dependents

The Canada education savings grant is an incentive whereby the Canadian government will match up to 20% of RESP contributions (to a limit of 500 per year or 1000 if limit last year was unused to a lifetime maximum of 7,200)

Registered disability savings plan (RDSP)

incentivize Canadians to save for the long-term financial security of a dependent with sever disability

any contributions made are not deductible - no yearly contribution limit but lifetime limit is 200,000 per disabled individual

initial contributions can be received tax free by the disabled individual and income earned on contributions will be taxed for the disabled individual when received (like RESP)

RRSP contributions

the individual can take tax deductions for amounts contributed within certain limits, to their own or to their spouse’s RRSP

contributions can be carried forward, meaning that in a given year, if a taxpayer makes a contribution to an RRSp, they have the option to either deduct it that year or carry it forward to future years (i.e. deduct in future years → subject to the RRSP limit mentioned previously)

RRSP withdrawals

the individual will be taxed once the funds are withdrawn, whether at maturity (i.e. time of retirement) or before (w/ some exceptions)

benefits to investing in an RRSP

• results in tax deferral over many years

• allows pre-tax income to accumulate without being taxed

• results in tax savings if the individual’s margin tax rate is lower when the amounts are withdrawn (which is usually the case at retirement)

timing of contributions - RRSP

an individual may contribute any time and up to 60 days after the year end to claim a deduction for a given taxation year

RRSP limit calculation - pension adjustment

what my employer contributed to other sources of retirement savings or if you have other plans that you contribute to

• the idea behind this is that everyone should have the same benefits in total (in all retirement savings accounts, regardless of which you have/how many people are contributing etc)

RRSP limit calculation - employment income

additions:

• employment income

• business income

• rental income

• spousal support received

• research grants

• CPP and disability benefits

• royalties (if the individual is the author/inventor/etc. of a work)

deductions:

• spousal support payments

• rental losses

• business losses

excludes very passive income (like dividends) but not all slightly passive income like rental income

RRSP tax planning opportunity - contributions

If an individual knows that they will be in a higher tax bracket in the future, they may want to wait to deduct their contribution to ensure they can deduct more in higher tax rate years in the future

what happens if funds are borrowed to contribute to RRSP

interest on those funds is not deductible

what happens if funds are over contributed to RRSP

there is a penalty of 1% per month (with a threshold of $2000 in excess before incurring penalty)

i.e. if you’re going to over contribute, don’t do it my more than $2000

exceptions to immediate taxation of RRSP withdrawals

• funds withdrawn (before maturity) under the homebuyer’s plan or the lifelong learning plan can be withdrawn without triggering immediate taxation

• at maturity, if they purchase an RRIF

RRSP withdrawals under home buyer’s plan

allows an individual to withdraw up to $35,000 (limit becomes $60,000 if withdrawn after April 16 2024) from their RRSP to purchase a qualifying home (a “first home” intended to be a principal residence). The taxpayer must make repayments over 15 years to the RRSP in the second year following the withdrawal → for 35k withdrawal, payments of 2.33k must be made

RRSP withdrawals under lifelong learning plan

allows an individual to withdraw up to $10,000 to return to school. Repayments must be made over 10 years once 5 years have passed OR they have stopped going to school

RRIF purchase following RRSP withdrawal

an RRIF is a registered retirement income fund which is an annuity. This allows taxation to be further deferred as the funds will be withdrawn over time

• CRA mandates minimum withdrawals based on FMV and age of fund to prevent excessive deferral

what is the latest date at which an individual can contribute to an RRSP

the day they turn 71

spousal RRSP

a plan under which an individual contributes to an RRSP of which they are not the beneficiary but instead their spouse or common law partner is the beneficiary, meaning the spouse will be the one to withdraw the funds at retirement

spousal RRSP - contribution limit

the contribution limit is defined by the contributor’s limit so a spousal RRSP does not increase the amount an individual can contribute to an RRSP during the year → this means the contributing individual must choose between contributing to their own RRSP or a spousal RRSP

• contribution will be deducted by the contributing taxpayer

Why would a taxpayer make contributions to a spousal RRSP

as a tax planning opportunity!

• the higher income spouse normally makes the contribution and is allowed to take the deduction when they are in a high tax bracket

• the income is then allowed to accumulate tax free until retirement

• when funds are withdrawn by the lower income spouse, the income will be taxed in the lower income spouse's hands, i.e. the lower tax bracket

when do making contributions to spouse’s RRSP work best?

This mechanism works especially well in the case where the contributor will continue to earn income (ex. business income earned after retirement)

3 other types of pension plans (outside of RRSP)

(1) Registered pension plan - Defined benefit plan

(2) Registered pension plan - money purchase plan

(3) Deferred profit-sharing plan

registered pension plan - defined benefit plan (purpose, contributions, withdrawals)

purpose: benefit to each employee is defined

contributions: contributions are deductible, limit is 31,560 for 2023

withdrawals: taxed as received

registered pension plan - money purchase plan

purpose: required contribution by employer and employee is defined

contributions: contributions are deductible, limit is 31,560 for 2023

withdrawals: taxed as received

deferred profit-sharing plan (purpose, contributions, withdrawals)

purpose: employer contributes to plan for employee based on company performance

contributions: deductible to the employer

withdrawals: taxed as received

transferring funds between FHSA and RRSP

Taxpayer has the option of transferring funds from an RRSP into a FHSA (without any deduction)

If the taxpayer never buys a home, they can simply transfer funds into an RRSP without consequences (without this impact your RRSP contribution limit)