Unit 9 Flashcards
Deferred Profit Sharing Plans (DPSPs)
A DPSP is a plan in which an employer sets aside a portion of its profits for the benefit of some or all of its
employees.
Defined Benefit Pension Plans (DBPPs)
Average Pensionable Earnings x Accrual Rate x Years of Service
Defined Contribution Pension Plans (DCPPs)
A DCPP, also known as a money purchase plan, defines the contribution that an individual and his or her
employer will make each year before the employee’s retirement. The amount that the employee will receive
at retirement is not guaranteed and there is no retirement formula.
Pension Income Splitting
The advantage of pension income splitting is that 1/2 of the pension income
that would have been taxed in the hands of the pensioner can be taxed in the hands of the spouse or
common-law partner.
If the spouse or common-law partner is in a lower tax bracket, the couple will save on
taxes.
Non-Registered Savings Plans
Money that is deposited into non-registered savings plans has already been taxed. As such, withdrawals will
not be subject to tax, as taxes were already withheld.
RRSP Contributions
Making RRSP Contributions
A registered retirement savings plan (RRSP) is a type of registered savings plan set up under the Income Tax
Act and registered with the Canada Revenue Agency. An RRSP is not an investment; you cannot buy an RRSP.
Instead, an RRSP is a registered investment vehicle within which investors can deposit various types of
investments. In order to contribute to an RRSP, an individual must have earned income.
RRSP Contribution Limits
- 18% of the investor’s previous year’s earned income, up to the maximum annual RRSP contribution limit
PLUS - Any unused RRSP contribution limit as of the end of the previous year
MINUS - Net changes with respect to the investor’s pension adjustment (PA)
MINUS - Any past service pension adjustment (PSPA)
PLUS - Any pension adjustment reversal (PAR)
Annual RRSP Contribution Limit
RRSP contribution room can be calculated each year based on the lesser of
- 18% of previous year’s earned income
- the maximum annual RRSP contribution limit
Carry Forward of Unused RRSP Room
If an individual does not contribute the maximum to their RRSP, they can carry forward the remainder of the
annual contribution to another year.
RRSP Overcontribution
In order to protect individual investors who may miscalculate their maximum contribution limit, investors are
allowed to over-contribute to their RRSPs by up to $2,000. This is a lifetime maximum, not an annual
allowance.
RRSPs & Tax Deductions
Your clients can deduct RRSP contributions from their total income. This reduces the amount of income tax they pay.
RRSPs & Tax Deferral
The growth of money invested inside an RRSP is not subject to tax until it is withdrawn. In other words, the tax
payable on investment growth is deferred until the future.
Since income earned inside an RRSP is taxsheltered, RRSP investments grow much faster than non-registered investments held outside an RRSP.
Types of RRSPs
RRSP account types can be categorized as managed, group, self-directed, or spousal.
Managed RRSPs
Managed RRSPs are the most common type of RRSPs. This type of account is opened in the name of one
individual who acts as the contributor and annuitant, also known as the beneficiary. Managed RRSPs typically
hold a single type of investment, such as guaranteed investment certificates (GICs), Canada Savings Bonds
(CSBs), or mutual funds.
Group RRSP Advantages
- Since contributions are made from pre-tax payroll deductions, reducing taxable income at the source, the tax benefit is immediate.
- Group RRSPs are transferable to another RRSP if you leave the employer.
- Easier and less costly administration compared to a registered pension plan.
- Employer contributions are optional.
- Contributions and withdrawals may be made at any time unless restricted by the employer.
- Group sponsored plans can offer lower fees as
compared to individual plans.
Self-Directed RRSPs
With a self-directed RRSP, the investor selects from a wide variety of investment options. Unlike a managed
account, which may only allow an investor to hold mutual funds offered by the plan sponsor/administrator; a
self-directed RRSP allows an investor to mix-and-match any combination of investments, such as stocks,
mutual funds, bonds, or investment-grade bullion. Investors can customize the plan to meet their needs.
Spousal RRSPs
A spousal RRSP allows one spouse to be the contributor while the other spouse is the annuitant. Historically,
spousal RRSPs were set up to allow couples to split their RRSP contribution such that their income at
retirement was more evenly balanced. This would have the effect of minimizing their income tax liability. The
tax benefit of a spousal RRSP is maximized when the higher income spouse or common-law partner
contributes to a spousal RRSP where the lower income spouse or common-law partner is the annuitant.
Spousal RRSP Attribution Rule
The Canada Revenue Agency has special attribution rules regarding withdrawals from spousal RRSPs. If your client’s spouse or common-law partner makes a withdrawal from a spousal plan in the year in which they
contribute to that spousal plan, or in the preceding two calendar years (also known as 2+ years), the
withdrawal is taxed in the contributor’s hands. After that time period, any withdrawals are taxed in the annuitant’s hands.
Terminating an RRSP
Terminating an RRSP
A registered retirement savings plan (RRSP) can be terminated at any time, provided it is not a locked-in plan.
However, the primary purpose of an RRSP is to provide individuals with a tax-deferred retirement savings
option using before-tax dollars. Although your client would benefit from allowing their RRSP deposits to earn interest that compounds over many years, they do have the flexibility to withdraw money early and/or wait until the RRSP matures.
Your client may decide to withdraw money from their RRSPs before they mature, for any reason. Although a lump sum withdrawal is an option, the federal government has created two programs that allow investors to
use RRSP savings to buy a home or to pay for training or education.
Lump Sum RRSP Withdrawals
All money withdrawn from an RRSP is subject to income tax. The Canada Revenue Agency requires that the
financial institution that sponsors the RRSP apply a withholding tax before any funds are deposited into a
person’s bank account.
Home Buyer’s Plan (HBP) Withdrawals
Home Buyer’s Plan (HBP) Withdrawals
The Home Buyer’s Plan (HBP) allows individuals to make tax-free withdrawals from their RRSPs in order to
purchase a principal residence. An individual can withdraw up to $35,000 from their RRSP under the HBP for any qualified withdrawal made after March 19th, 2019.
Lifelong Learning Plan (LLP) Withdrawals
The Lifelong Learning Plan (LLP) allows individuals to make tax-free withdrawals from their RRSPs in order to
finance full-time training or education for themselves, their spouses or common-law partners. The maximum
total withdrawal is $20,000, subject to a yearly maximum of $10,000.
RRSP Maturity Options
- withdraw the funds as a lump sum
- purchase a registered life annuity
- purchase a registered term annuity
- transfer the RRSP funds to a registered retirement income fund (RRIF)
RRSP Maturity Options
- withdraw the funds as a lump sum
- purchase a registered life annuity
- purchase a registered term annuity
- transfer the RRSP funds to a registered retirement income fund (RRIF)
