Module 2 Flashcards
What are the key characteristics of a Registered Retirement Savings Plan (RRSP)?
An RRSP is an individual retirement savings plan registered with CRA that allows for tax-deductible contributions and tax-deferred investment growth. Withdrawals are taxable unless they qualify under the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP). Contributions must stop by the end of the year in which the taxpayer turns 71.
What are the key characteristics of a Group RRSP?
A Group RRSP is a collection of individual RRSPs administered together by an employer. Contributions are deducted from employees’ pay before tax, providing immediate tax savings. Employers may contribute, but these are considered employee earnings for tax purposes. Group RRSPs are not subject to pension standards legislation.
What is a Spousal RRSP and how does it work?
A Spousal RRSP allows an individual to contribute to an RRSP in their spouse’s name, helping to split retirement income. The contributing spouse claims the tax deduction, but withdrawals are taxed in the recipient spouse’s hands, provided the funds remain invested for at least three years.
How are funds transferred from a prior pension plan to a Group RRSP?
Employees can transfer funds from a previous RPP or personal RRSP into a Group RRSP. If the funds are locked-in due to pension standards legislation, they must be held separately in a Locked-In RRSP (LIRA) and must be used for retirement income.
What are the key characteristics of a Deferred Profit-Sharing Plan (DPSP)?
A DPSP is an employer-sponsored retirement plan where only the employer makes contributions, which are tied to company profits or a fixed formula. Contributions are tax-deferred until withdrawal. Only profit-making companies can sponsor a DPSP, and pension standards legislation does not apply.
How is an individual’s RRSP contribution limit determined?
The RRSP contribution limit is 18% of the previous year’s earned income, up to an annual maximum set by the CRA. This limit is reduced by pension adjustments from participation in an RPP or DPSP.
How is ‘earned income’ defined for RRSP contribution limits?
Earned income includes employment income, self-employment income, rental income, royalties, taxable support payments, and other income sources. Investment income and pension payments are not included.
How does the ITA treat employer contributions to a Group RRSP?
Employer contributions to a Group RRSP are considered taxable earnings to employees, meaning they are subject to CPP, EI, and other payroll taxes.
What is the maximum an employer can contribute to a DPSP for an employee?
The DPSP contribution limit is the lesser of 18% of the employee’s compensation for the year or half the DC pension plan limit set by CRA. Employer contributions do not attract payroll taxes.
What are the tax implications of withdrawing funds early from a Group RRSP or DPSP?
Early withdrawals from a Group RRSP or DPSP increase taxable income and are subject to withholding taxes. Exceptions include HBP and LLP withdrawals from a Group RRSP, provided they are repaid on schedule. DPSPs do not qualify for these programs.
What factors influence employer decisions on eligibility for Group RRSPs and DPSPs?
Employers may set eligibility based on tenure, job level, participation in an RPP, or a waiting period. Significant shareholders cannot join a DPSP under ITA rules.
How do employers determine contribution levels for Group RRSPs and DPSPs?
Contributions are often matched to employee contributions, set as a fixed percentage of earnings, or linked to company profits (DPSPs only). Employer contributions to a DPSP can be discretionary.
How do vesting rules differ between Group RRSPs and DPSPs?
In a Group RRSP, employer contributions are immediately vested. In a DPSP, employers can set a vesting period up to 24 months, after which employees own the employer’s contributions.
What are common rules around in-service withdrawals from Group RRSPs and DPSPs?
Employers may suspend contributions for a period (e.g., 6 months) after a Group RRSP withdrawal. DPSPs can prohibit in-service withdrawals.
What are the tax-effective options for converting Group RRSP funds into retirement income?
Options include Life Annuities, Registered Retirement Income Funds (RRIFs), Fixed-Term Annuities, and Advanced Life Deferred Annuities (ALDAs). Locked-in RRSPs require conversion to a LIF or LRIF.
What are retirement income options for DPSP members?
DPSP members can transfer funds to an RRSP/RRIF, purchase an annuity, or take periodic payments over 10 years. Lump-sum withdrawals are taxable and generally not recommended.
Why might an employer prefer a Group RRSP/DPSP over a DC pension plan?
Fewer regulations, lower costs, more flexibility in contributions, and simpler administration.
What are the advantages of a Group RRSP for employees?
Payroll deduction convenience, immediate tax savings, employer matching, and investment options.
Why might an employer contribute to a DPSP instead of a Group RRSP?
No payroll taxes on employer contributions, vesting schedule options, and profit-sharing incentives.
What are the advantages of a DPSP compared to a DC pension plan from an employee’s perspective?
More accessible funds, no locking-in rules, and discretionary employer contributions.
What are the fiduciary responsibilities of a Group RRSP or DPSP sponsor?
Prudent selection of providers, ongoing monitoring, adherence to CAP Guidelines, and proper governance.
What are the differences between a DC pension plan and Group RRSP/DPSPs?
DC pension plans are subject to pension standards legislation, while Group RRSPs/DPSPs are more flexible and have fewer regulatory requirements.
Why are DPSPs unavailable to non-profits?
Only profit-making companies can sponsor DPSPs, as they are designed for profit-sharing purposes.
What is a Locked-In Retirement Account (LIRA)?
A LIRA is an RRSP that holds locked-in pension funds, which can only be used for retirement income.
Why are CAP Guidelines important?
CAP Guidelines provide best practices for plan governance and investment options in capital accumulation plans.
What is the tax treatment of employer vs. employee contributions?
Employer contributions to a Group RRSP are taxable earnings; DPSP contributions are tax-free but reduce RRSP contribution room.
What happens if an RRSP is not converted by age 71?
All funds must be withdrawn as a taxable lump sum, or converted into an RRIF or annuity.
