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What is a RRSP?

A Registered Retirement Savings Plan (RRSP) is a personal savings plan registered with the Canadian federal government allowing you to save for the future on a tax-sheltered basis.
Think of an RRSP as an investment portfolio. It can contain a variety of investments including: savings deposits, treasury bills, guaranteed investment certificates (GIC), mutual funds, bonds, Canadian equities and even foreign equities and bonds.
What makes RRSPs special is that your contributions to it are tax deductible and your portfolio grows tax sheltered.

What is a Spousal RRSP?

You can use all or some of your RRSP contribution room to contribute to an RRSP in your spouse's name. This kind of RRSP is referred to as a "spousal RRSP." You claim the tax deduction for the contribution, but the RRSP belongs to your spouse. Contributing to a spousal RRSP is a good idea if you think your spouse will have less income in retirement than you will and will therefore be in a lower tax bracket. That way, as a couple, you will save on taxes because your spouse will declare the retirement income provided by the RRSP.

What would happen if my spouse were to withdraw from a spousal plan to which I contribute?

Withdrawals from a spousal plan have to be declared as income by the spouse who is the holder of the plan. However, if you contributed to any spousal plan in the year of the withdrawal — or in either of the two preceeding years, even if it was not the particular spousal plan from which the funds are being withdrawn — you will have to declare the amounts withdrawn by your spouse and pay tax on them. This rule does not apply if you and your spouse are separated and living apart because of marriage breakdown when the withdrawal occurs.

What can I hold in my RRSP?

All kinds of investments are eligible for an RRSP, including:
· Mutual funds that invest in eligible securities
· Certain types of mortgages
· Savings accounts
· Guaranteed Investment Certificates (GICs)
· Term deposits
· Government treasury bills
· Canada Savings Bonds
· Shares of Canadian companies and of some foreign companies if they are listed on a recognized Canadian stock exchange
· Canadian corporate and government bonds

You can't hold tangible assets such as jewelry or real estate in your RRSP — but you can invest in mutual funds that invest in real estate or precious metals. If you set up a self-directed plan, we will ensure that your plan holds only eligible investments.

What is a Locked-in Retirement Account (LIRA) or Locked-in RRSP?

If you leave a workplace pension plan before you reach retirement age and the terms of your pension allow it, you may be able to transfer your accumulated pension benefits into a locked-in account. The funds can then be invested in the same way as you would invest in a RRSP. There are a number of restrictions, due to the fact that funds in a locked-in RRSP come from a workplace pension plan, locked-in accounts are regulated by pension legislation, which determines the terms and conditions of these plans. To minimize confusion surrounding a regular RRSP and a locked-in account, locked-in RRSPs are now generally referred to as Locked-In Retirement Accounts (LIRAs). The Pension legislation requires the funds in a locked-in RRSP be used to provide a lifetime income for the holder. That means you can't make a lump sum withdrawal from a locked-in plan, nor can you cash it in at any time.

When must a RRSP mature?

An RRSP matures at the end of the year in which you reach age 71. At that time, the funds must be used to purchase an annuity or transferred to a Registered Retirement Income Fund. If you fail to select one of these options, the entire amount in your plan will be considered income and you will be taxed on it.

What if I’m still earning income after age 71?

You can continue to contribute to your RRSP until the end of the year you turn 71. And since your contribution room is based on your earned income from the previous year, you could contribute to your RRSP after you've retired — as long as you haven't reached the age cut-off. This "post-age 71 " contribution room may still be used to:

• contribute to your spouse's RRSP in each year up to and including the year he or she turns 71
• deduct, in the calculation of taxable income, previously un-deducted RRSP contribution
• cover certain past service pension adjustments which may arise, if you are a member of a defined benefit pension plan.
  

What choices do I have to invest my RRSP savings in the year I turn 71?

Essentially, you have two options when your RRSP matures. You can take all the funds out and declare it as income - generally not a good idea, since you'll pay tax on the whole amount at your top tax rate. Since the plan matures at age 71, the other option is to roll it into a Registered Retirement Income Fund (RRIF) and take income from the RRIF during the following year or you can purchase an annuity.

What is an RRIF?

A Registered Retirement Income Fund (RRIF) is similar to an RRSP except that you are required to withdraw a minimum amount each year. The minimum is established by Canada Customs and Revenue Agency and depends on your age. At age 71, for example, you must withdraw 7.38% of the funds remaining in the plan, while at age 81, the minimum withdrawal is 8.99% and at age 91, it is 14.73%. By the time you get to age 94, you will have to withdraw 20% of your remaining RRIF funds each year.
There's nothing to prevent you from taking more than the minimum out of your RRIF. In fact, you can withdraw the entire amount at any time, but you will then have to declare the funds as part of your income that year and pay tax on them. And, of course, the amounts you withdraw from your RRIF each year must also be declared as income.
You can set up a RRIF any time before the end of the year that you turn 69. But the earlier you establish your RRIF, the earlier you will have to start depleting your retirement funds.

What is a Life Income Fund (LIF)?

When your Locked-In Retirement Account (LIRA) matures, you have the option of converting it to a Life Income Fund (LIF). This operates in the same way as a RRIF, except there is both a minimum and maximum annual withdrawal amount. The minimum withdrawal is based on the minimum withdrawal for a RRIF, while the pension regulatory authority sets the maximum for a LIF. The objective is to make sure your LIF provides you with an income for the rest of your life. A LIF must be converted to an annuity by the end of the year in which you turn 80.

What is an annuity?

An annuity is a contract with a life insurance company to provide periodic income for life. The purchase price of the annuity contract depends on your age, the amount, death benefit and rates of interest. Annuities are not flexible investments and once purchased, cannot be reversed.

What is the RRSP contribution limit?

The amount you're allowed to deduct for tax purposes is often referred to as your "contribution room" or "deduction room." The limit for any tax year is 18% of your earned income from the previous year, minus any "pension adjustment", up to a dollar maximum of $20,000. The dollar maximum is scheduled to increase again to $21,000 in 2009 and $22,000 for 2010. The exact amount you're entitled to contribute for the tax year — which will include any unused contribution room carried forward from previous years — is shown in a separate section of the Notice of Assessment or Notice of Reassessment you received from the Canada Customs and Revenue Agency after you filed last year's tax return.
You can find out the amount of RRSP contributions you are allowed to deduct for your income taxes by calling the Canada Customs and Revenue Agency TIPS service at 1-800-267-6999. The service is available from the middle of September to April 30.
You will be asked for your Social Insurance Number, your month and year of birth, and the total income you reported on line 150 of your income tax return for the previous year.

What is book value?

Book value is also known as the original cost value. The book value of your investment within your RRSP or RRIF is the original cost of your investment. Book value is affected by: new investments, withdrawals, switches within the plan and distributed dividends.

How long can I carry forward my unused RRSP room?

If you have RRSP contribution room this year but you can't use it all, you may carry forward unused room to following years indefinitely. On your Notice of Assessment, Canada Customs and Revenue Agency will calculate this year's contribution room, plus unused amounts carried forward from previous years, to show you the total amount of contributions you could deduct for the current year. Anything you don't use this year will automatically be added to the new contribution room that will become available for the next taxation year

If you exceed the $2,000 over-contribution amount, you will be subject to a 1% penalty tax per month on the amount the over-contribution exceeds $2,000.

How are mutual funds taxed?

A mutual fund earns income throughout the year from the different securities in its portfolio. The mutual fund is subject to income tax on this income, unless it distributes it to investors. Investors can choose to receive the distribution as a cash payment or re-invest the distribution in additional units of the fund. The latter is done automatically unless advised otherwise.

How am I taxed when I redeem mutual fund units?

The sale of mutual fund units will generate either a capital gain or loss. The amount of a capital gain or loss is the gross proceeds from the redemption, less the adjusted cost base, less any related redemption charges. 50% of capital gains are taxable. Realized capital losses may be used to offset other capital gains, but are not deductible against any other types of income. Excess capital losses not used in the year realized may be carried back 3 years or carried forward indefinitely.

How are switches between mutual funds taxed?

For tax purposes, switches are treated in the same manner as if a mutual fund had been redeemed and the cash was used to buy another mutual fund. The same rules apply for calculating gains and losses when mutual funds are switched (as when they are redeemed.)

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