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.
