RRSPs and RRIFs

Question 1

Offsetting Deduction

Answer 1

An Offsetting Deduction is available to taxpayers who are withdrawing an RRSP over contribution, provided that the overcontribtution follows these rules:

1. The Contribution has never be deducted on a tax return.
2. the withdrawal is made in the same year or following year as the overcontribution, or in the same of following year in which the NOA is received.
3. the overcontribution has never been designated as a qualifying withdrawal for the purpose of certifying a PSPA; and
4. no part of the over contribution occurs because of the direct transfer of an excess RPP payment to the taxpayer’s RSP or RRIF.

Question 2

Who can contribute to an RSP

Answer 2

Anyone with earned income can contribute to an RSP in their own name, up until the end of the year in which they turn 71 years of age. Taxpayers who turn 71 of age can contribute to make RSP contributions during that year, but they must collapse the RRSp by the end of the year.

Effective Jan 1 2007, the age of maturity or conversion age for RRSPs, RPPs and DPSPs was increased from 69 to 71.

There is no minimum age for contribution, provided that the taxpayer earned income.

Non-residents who have income that is subject to tax in Canada may also be able to contribute to an RRSP.

Question 3

RRSP Loans

Answer 3

Prior to 1991, there was no opportunity to carry forward unused RRSP contribution room, so a taxpayer at that time might want to take out a loan to make an RRSP contribution before he forfeited the contribution room. However, now the taxpayer can carryforward his unused RRSP contribution room indefinitely.

Interest on RRSP loans is not tax deductable, unlike loans used for other investment purposes. If a taxpayer does take out a loan for an RRSP contribution room, the lender may require him to use the refund to pay part of the loan. However, he is not required to do so by the Income tax Act.

Prior to 1996, if a taxpayer made a contribution to his RRSP, he had to add back RRSP contributions in calculating minimum tax and could have become subject to the alternative minimum tax (AMT). As of 1997, the requirement to add back RRSP contributions in calculating minimum tax was eliminated.

Question 4

Group RRSP

Answer 4

A group RRSP is an RRSP that is sponsored by an employer, union, or professional association for the benefit of their member’s of employees. Contributions can be made through payroll deductions, and this gives the employee the advantage of lower tax deductions on his paycheque because the employer takes the tax-deductable RRSP contributions into account.

The Group RRSP is managed by an FI, securities dealer, or insurance company on behalf of the group. Group RRSPs offer only a limited number of investment choices, often just a selection of mutual funds that are offreed by the managing securities dealer or insurance company.

Question 5

Matured RRSP vs unmatured RRSP

Answer 5

Matured RSP: an RRSP that has been used to purchased a registered annuity.

Unmatured RRSP: an RRSP that is not a matured RRSP and is not paying retirement income.

Question 6

Which sources of funds can be transferred into a RRIF?

Answer 6

A taxpayer can directly transfer property to a RRIF from:

1. any RRSP that has not started to provide income (an unmatured RRSP)
2. an RRSP that has started to provide retirement income (matured RRSP), including commutation payments from an RSP annuity; and
3. the unmatured RSP of his spouse or common-law partner if he is entitled to that property as a result of a breakdown in their relationship.

In addition, any taxpayer who receives refund of premiums from the unmatured RRSP of a deceased spouse of common law partner may transfer part or all of that refund into a RRIF.

If a taxpayer is a member of a registered pension plan, funds of an RPP cannot be transferred directly into a RIF. If the taxpayer terminates his membership in the plan, he may be able to transfer his pension entitlement into a locked-in RSP or locked-in retirement account (LIRA) and from there he could transfer the funds into a locked in retirement income fund (LRIF).

Question 7

Mandatory conversion of RSP to RIF

Answer 7

You have to terminate all of your RRSPs by December 31 in they year in which you turn 71.

If you want to avoid paying tax on the full amount, you must:

• transfer the funds into a RIF
• use the funds to purchase a registered annuity before that date.

Question 8

RIF payment based on spouse’s age

Answer 8

If, at the beginning of the year, the annuitant of a qualifying or non-qualifying RIF is under 71 years of age, or the spouse or common-law partner is under 71 years of age and the annuitant elected to have the minimum amount based on the age of the spouse or common law partner, the minimum amount is calculated as:

–RIFs FMV at beginning of year / (90 - the age at the beginning of the year)

If at the beginning of the year, you are over 70 years of age, or your spouse/common law partner is over 70 years of age and you elected to have the minimum based on the age of your spouse, the minimum amount from a RRIF is calculated as:

–RRIFs FMV at the beginning of the year x the minimum withdrawal for the age at the beginning of the year.

An excess amount is an amount paid in a year that is more than the minimum amount that had to be paid from the RRIF. An excess amount is subject to withholding tax.

Question 9

Using spouse’s age for calculating RRIF payments. What if spouse dies?

Answer 9

If the taxpayer’s spouse dies, the minimum amount will continue to be based on the age of the deceased spouse would have attained at the beginning of each year had she not died.

Question 10

Annuitant of an RRSP

Answer 10

The beneficiary of an RRSP is the capital and income beneficiary and is referred to as the annuitant of an RRSP.
A taxpayer can be the annuitant of an RRSP until December 31 of the year they turn 71. On maturity, the funds in the RRSP must be:
-reported as the annuitant’s taxable income;
-transferred into a RIF
-transferred to an insurance provider for the purchase of an annuity.

Question 11

Purchasing annuity with RSP funds

Answer 11

If purchased at 71, annuity payments cannot be deferred and must start the following year. The full amount of each annuity payment is taxable.

Question 12

RIF - what happens at death. Beneficiary designation options.

Answer 12

A taxpayer who wishes his surviving spouse to benefit from his RRIF after his death has several options:
1. he can name his estate as the beneficiary on the RIF, and his spouse as the beneficiary of his estate. In this case, the full amount of his RIF would be included in his income on his final tax return and his estate would have to pay the resulting taxes. His spouse would receive the balance of the RIF via the estate without paying additional tax.

2. He can name his spouse as the beneficiary of the RIF. In this case, a designated benefit would be paid to his spouse and the amount of the RIF would not be taxable on his final return. Instead, the spouse can either take the full amount into her income, or she could transfer to her own RSP, RIF or annuity. She would only be taxed on payments as she receives them.
3. He can name his spouse as the successor annuitant of the RIF. The RIF continues and spouse becomes the successor annuitant. The amount of the RIF would not be included in the deceased final income tax return. His spouse will be required to make withdrawals from the rIF and these withdrawals would be included in her income for the year.

Question 13

Exceptions to the attribution rule

Answer 13

Any funds withdrawn from a spousal RRSP within 3 years of contribution date will not be attributed back to the contributing spouse if the taxpayer and her spouse used the funds to purchase an eligible annuity that cannot be commuted for a minimum of 3 years.

Question 14

Eligible Retiring allowance calculation

Answer 14

A taxpayer who is less than the age of 71 years of age at the end of the year and who receives a payment of termination from employment in respect of long service may transfer directly or indirectly to an RSP or RPP:

• up to $2000/year per service before 1996, plus
• $1500 for each year before 1989 in which the employee did not earn any vested benefits from an RPP or DPSP.

Question 15

A retiring allowance does not include

Answer 15

• vacation pay
• a superannuation or pension benefits
• an amount paid because an employee dies
• a benefit received for counselling services that is not required to be included in the employees income

Question 16

A retiring allowance may include

Answer 16

• recognition of long services
• loss of employment income
• lieu of payment of damages or pursuant to an order or judgement of a competent tribunal.

Question 17

An indirect transfer vs direct transfer

Answer 17

Indirect:
Is one where the ownership of the property transfers to the annuitant or beneficiary, rather than passes directly to the trustee of the registered plan. If transfer is made indirectly, the beneficiary must report the designated benefit as income, but can claim an offsetting deduction for the contribution, as long as the contribution is made within the year the payment is receive, or within 60 days of the end of that year.

Direct transfer:
is one where the ownership of the property passes directly to the trustee of the registered plan.

Question 18

What is a designated benefit from a RIF?

Answer 18

• an amount paid from a RIF to the spouse of the RSP annuitant as a consequence of the death of the annuitant.
• an amount paid from an annuitant’s RIF to a financially dependant chid or grandchild of the annuitant who was at the time of death, financially dependent up the annuitant.

A “designated benefit” cannot be paid to any other beneficiary.

If the designated benefit is paid to the annuitant’s spouse or common-law partner or to a dependent child or grandchild where the dependancy resulted from a physical or mental disability, the recipient will be able to transfer the eligible amount on a tax deferred basis to:

• his own RSP as long as, at the end of the year, he has not yet attained the conversion age 71
• his own RIF
• insurance provider to purchase annuity.

If the designated benefit is paid to a surviving dependent child or grandchild where the dependancy was strictly financial, the eligible amount can only be used to buy a registered term certain annuity for that child, where the payments end by December 31st of the year before the child’s 18th birther.